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The expenditure plan, including related documentation and program officials’ statements, satisfied four legislative conditions, partially satisfied four legislative conditions, and did not satisfy one legislative condition. The nine legislative conditions and the level of satisfaction are summarized below. Legislative condition 1: Define activities, milestones, and costs for implementing the program (partially satisfied). The SBInet expenditure plan included general cost information for proposed activities and some associated milestone information, such as beginning and ending dates. DHS estimates that the total cost for completing the acquisition phase for the southwest border is $7.6 billion for fiscal years 2007 through 2011. However, the plan and related documentation did not include sufficient details about the activities, milestones, or costs for implementing the program. Although the plan stated that about $790 million will be spent in the Tucson sector in Arizona for such elements as fencing, ground sensors, radars, cameras, and fixed and mobile towers, the plan did not specify how the funds will be allocated by element and did not provide specific dates for implementation. In addition, the plan did not include activities, milestones, or costs for the northern border. According to DHS, work on the northern border is not to begin before fiscal year 2009. Legislative condition 2: Demonstrate how activities will further the goals and objectives of the SBI, as defined in the SBI multiyear strategic plan (not satisfied). The SBInet expenditure plan included a section that describes SBI and SBInet goals; however, the expenditure plan and related documentation did not link individual activities with SBI’s goals, as called for by the legislative condition. Further, the December 2006 SBI strategic plan contained three strategic goals, one of which addresses border control. SBI and SBInet senior officials told us all SBInet activities link back to the overall goal of controlling the border and that the linkage between program goals and activities is intuitive. However, the SBInet expenditure plan did not link specific activities to more detailed SBI strategic plan goals, such as the annual performance goals. Legislative condition 3: Identify funding and organization staffing (including full-time equivalents, contractors, and detailees) requirements by activity (satisfied). The SBInet program is managed by the SBInet Program Management Office (PMO). The PMO plans to execute SBInet activities through a series of concurrent task orders and to rely on a mix of government and contractor staff. The PMO plans to nearly triple its current workforce, from approximately 100 to 270 personnel, by September 2007 in order to support and oversee this series of concurrent task orders. As of December 2006, SBInet officials told us that they have assigned lead staff for the task orders that have been awarded. Legislative condition 4: Report on costs incurred, the activities completed, and the progress made by the program in terms of obtaining operational control of the entire border of the United States (partially satisfied). The SBInet expenditure plan and related documentation discussed how approximately $1.5 billion will be allocated to SBInet activities. For example, about $790 million is allocated for the Tucson Border Patrol sector and $260 million for the Yuma sector in Arizona. However, the plan did not include costs incurred to date mainly because SBInet activities are in the early stages of implementation and costs had not yet been captured by DHS’s accounting system (e.g., the SBInet systems integration contract was awarded in September 2006 and the first two task orders were awarded in September and October 2006). Moreover, the expenditure plan did not include a baseline measure of miles under control of the border. While the plan did not discuss progress made to date by the program to obtain control of the border, related program documents, such as the bimonthly SBI reports to Congress, included information on the number of miles under control in the southwest border. According to the November 2006 bimonthly report, as of August 2006, 284 miles of the southwest border are under control. Legislative condition 5: Include a certification by DHS’s Chief Procurement Officer (CPO) that procedures to prevent conflicts of interest between the prime integrator and major subcontractors are established and a certification by DHS’s Chief Information Officer (CIO) that an independent verification and validation agent is currently under contract for the project (satisfied). On November 30, 2006, DHS’s CPO certified that the prime integrator had established procedures to prevent conflicts of interest between it and its major subcontractors and that DHS is developing a process to monitor and oversee implementation of the prime integrator’s procedures. Also, on November 30, 2006, DHS’s Deputy CIO certified that the SBInet program had contracted with a private company as the interim independent verification and validation (IV&V) agent. However, this company is also responsible for performing program activities, including requirements management and test and evaluation activities and thus is not independent of all the program’s products and processes that it could review. The Deputy CIO certified that a permanent IV&V agent is to be selected by February 28, 2007, and that CBP is to provide information sufficient to determine that this independence issue has been resolved. Legislative condition 6: Comply with all applicable acquisition rules, requirements, guidelines, and best systems acquisition management practices of the federal government (partially satisfied). SBInet is using, at least to some extent, several acquisition best practices. The extent to which these practices are in use varies, and outcomes are dependent on successful implementation. However, one acquisition requirement not followed was that the SBInet systems integration contract did not contain a specific number of units that may be ordered or a maximum dollar value. According to the Federal Acquisition Regulation (FAR), indefinite quantity contracts must specify the maximum quantity of supplies or services the agency will acquire. This may be stated as a number of units or as a dollar value. SBI and SBInet officials told us that the contract already contains a maximum quantity of “6,000 miles of secure U.S. border” and that this was sufficient to satisfy the FAR requirement. We disagree because the statement in the contract about the 6,000 miles of secure border merely reflects the agency’s overall outcome to be achieved with the supplies or services provided but does not specify the maximum quantity of supplies or services the agency may acquire. We believe that a maximum quantity or dollar value limit should be included in the contract in order to ensure that it is consistent with the FAR requirement. SBInet’s acquisition approach calls for considerable concurrency among related planned tasks and activities. The greater the degree of concurrency among related and dependent program tasks and activities, the greater a program’s exposure to cost, schedule, and performance risks. SBI and SBInet officials told us that they understand the risks inherent in concurrency and are addressing these risks. However, they have yet to provide evidence that shows they have identified the dependencies among their concurrent activities and that they are proactively managing the associated risk. Further, the program office did not fully define and implement key acquisition management processes, such as project planning, requirements management, and risk management. According to the SBInet Program Manager, this is due to the priority being given to meeting an accelerated program implementation schedule. However, the program office has begun implementing a risk management process and, according to the Program Manager, plans to develop a plan for defining and implementing the remaining processes by the spring of 2007. Legislative condition 7: Comply with the capital planning and investment control review requirements established by the Office of Management and Budget (OMB), including Circular A-11, part 7 (partially satisfied). As required by OMB, the plan and related documentation provided a brief description of SBInet and addressed the program’s management structure and responsibilities for most of the program office’s directorates. In addition, the program office developed a draft privacy impact assessment and established an earned value management (EVM) system to manage the prime integrator’s progress against cost and schedule goals. However, an OMB-required EVM system had not been fully implemented because the baselines against which progress can be measured for the two task orders that had been issued, as of December 4, 2006, were not yet established. Further, the program office had not yet developed a system security plan or determined SBInet’s compliance with the DHS enterprise architecture. Legislative condition 8: Include reviews and approvals by DHS’s Investment Review Board (IRB), the Secretary of Homeland Security, and OMB (satisfied). DHS’s IRB approved the plan on November 22, 2006; the Secretary of Homeland Security approved the expenditure plan on November 22, 2006; and OMB approved the plan on December 4, 2006. Legislative condition 9: Include a review by GAO (satisfied). On December 7, 2006, we briefed the House of Representatives Committee on Appropriations staff and on December 13, 2006, we briefed the Senate Committee on Appropriations staff regarding the results of our review. The legislatively mandated expenditure plan for SBInet is a congressional oversight mechanism aimed at ensuring that planned expenditures are justified, performance against plans is measured, and accountability for results is ensured. Because the SBInet expenditure plan lacked sufficient details on such things as planned activities and milestones, anticipated costs and staffing levels, and expected mission outcomes, Congress and DHS are not in the best position to use the plan as a basis for measuring program success, accounting for the use of current and future appropriations, and holding program managers accountable for achieving effective control of the southwest border. Under the FAR, indefinite quantity contracts such as the SBInet contract must contain the specific number of units that may be ordered or a maximum dollar value. However, the SBInet contract merely contains the maximum number of miles to be secured. While SBInet officials consider this sufficient to satisfy the FAR requirement, a maximum quantity expressed in units other than the overall outcome to be achieved or expressed as a dollar value limit would help ensure that the contract is consistent with this requirement. DHS’s approach to SBInet introduces additional risk because the program’s schedule entails a high level of concurrency. With multiple related and dependent projects being undertaken simultaneously, SBInet is exposed to possible cost and schedule overruns and performance problems. Without assessing this level of concurrency and how it affects project implementation, SBInet runs the risk of not delivering promised capabilities and benefits on time and within budget. To help ensure that Congress has the information necessary to effectively oversee SBInet and hold DHS accountable for program results, and to help DHS manage the SBInet program and ensure that future SBInet expenditure plans meet the legislative requirements, we recommend that the Secretary of Homeland Security direct the U.S. Customs and Border Protection Secure Border Initiative Program Management Office Executive Director to take the following three actions: ensure that future expenditure plans include explicit and measurable commitments relative to the capabilities, schedule, costs, and benefits associated with individual SBInet program activities; modify the SBInet systems integration contract to include a maximum quantity or dollar value; and re-examine the level of concurrency and appropriately adjust the acquisition strategy. In written comments on a draft of this report, DHS generally agreed with our findings and conclusions, but did not agree with our assessment that the SBInet contract does not contain specific numbers of units that may be ordered or a maximum dollar value. In addition, DHS stated that CBP intends to fully satisfy each of the legislative conditions in the near future to help minimize the program’s exposure to cost, schedule, and performance risks. DHS’s written comments are reproduced in appendix II. With respect to our recommendations, DHS concurred with two of our recommendations and disagreed with one. Specifically, DHS concurred with our recommendation for future expenditure plans to include explicit and measurable commitments relative to capabilities, schedule, costs, and benefits associated with individual SBInet program activities. According to DHS, future SBInet expenditure plans will include actual and planned progress, report against commitments contained in prior expenditure plans, and include a section that addresses and tracks milestones. DHS also concurred with our recommendation to re-examine the level of concurrency and appropriately adjust the acquisition strategy. In its written comments, DHS stated that CBP is constantly assessing the overall program as it unfolds, and adjusting it to reflect progress, resource constraints, refinements and changes in requirements, and insight gained from ongoing system engineering activities. DHS also stated that CBP recognizes the risk inherent in concurrency and has added this to the program’s risk management database. DHS did not agree with our recommendation to modify the SBInet integration contract to include a maximum quantity or dollar value. According to DHS, the quantity stated in the contract, “6,000 miles of secure U.S. border,” is measurable and is therefore the most appropriate approach to defining the contract ceiling. We do not agree. Under the FAR, an agency may use an indefinite delivery/indefinite quantity contract, such as that used for SBInet, when it is not possible to determine in advance the precise quantities of goods or services that may be required during performance of the contract. Though these types of contracts are indefinite, they are not open-ended. The FAR requires that indefinite quantity contracts contain a limit on the supplies or services that may be ordered, stated in terms of either units or dollars. This limit serves a variety of purposes, including establishing the maximum financial obligation of the parties. In our view, the purported maximum used in the SBInet contract, “the full panoply of supplies and services to provide 6,000 miles of secure U.S. border,” does not allow anyone to calculate with any degree of certainty what the maximum financial obligation of the parties might turn out to be since the contract does not make clear the total amount of supplies or services that would be required to secure even 1 mile of U.S. border. In order to ensure that the SBInet contract is consistent with the FAR, we continue to believe that it should be modified to include a maximum quantity, either units or a dollar value, rather than the total amount of miles to be secured. We are sending copies of this report to the Chairman 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, the Commissioner of Customs and Border Protection, and the Director of the Office of Management and Budget. Copies of 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 further questions about this report, please contact Richard Stana at (202) 512-8816 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. Pub. L. No. 109-295, 120 Stat. 1355, 1359-60. The Appropriations Act required an expenditure plan to establish a security barrier along the border of the United States of fencing and vehicle barriers and other forms of tactical infrastructure and technology. In response to this requirement, DHS submitted a plan on December 4, 2006, titled “SBInet Expenditure Plan,” that defines SBInet as “the component of SBI charged with developing and installing the technology and tactical infrastructure solution for border control.” The Appropriations Act also required GAO to review the expenditure plan. 1. detect illegal entries into the United States; 2. identify and classify these entries to determine the level of threat involved; 3. efficiently and effectively respond to these entries; and 4. bring events to a satisfactory law enforcement resolution. The initial focus of SBInet will be on southwest border investments and areas between the ports of entry that CBP has designated as having the highest need for enhanced border security due to serious vulnerabilities. Figure 2 shows the topography, interstate highways, and some major secondary roads along the southwest border. DHS estimates that the total cost for completing the acquisition phase for the southwest border is $7.6 billion from FY2007 through FY2011. $5.1 billion is for the design, development, integration and deployment of fencing, roads, vehicle barriers, sensors, radar units, and command, control, and communications and other equipment. $2.5 billion is for integrated logistics and operations support during the acquisition phase for the southwest border. DHS expects to have control of the southwest border by October 2011. DHS officials have yet to provide draft implementation plans by southwest border sectors and years for FY2007-FY2011. The expenditure plan does not include activities, milestones, or costs for the northern border. According to DHS, work on the northern border is not projected to begin before FY2009. Provide a brief description of the investment and its status in the CPIC review, including major assumptions made about the investment. contribute to achievement of cost, schedule, and performance goals. The expenditure plan and other documentation address the management structures and responsibilities. Specifically, the program office includes six line and four staff directorates reporting to the SBInet Program Manager. The management structure also includes the use of integrated project teams that consist of subject matter experts from a variety of disciplines required to effectively manage an acquisition project. The draft Program Management Plan, dated September 18, 2006, identified responsibilities for five of the six program office line directorates, and for two of the four staff directorates. The plan also identified responsibilities for some, but not all, divisions within each of the directorates. For example, the plan describes the responsibilities of the Mission Engineering Directorate, but it does not describe the responsibilities for the five divisions within the Directorate. We have not yet seen any documentation that describes the qualifications of the program office staff. Provide a summary of the investment’s risk assessment, including how 19 OMB- identified risk elements are being addressed. The program office has defined and begun implementing a risk management process, and developed a risk database that addresses 13 of the 19 OMB-identified risk. The risk elements that are not addressed include privacy and technical obsolescence. Provides a summary of the investment’s status in accomplishing baseline cost and schedule goals through the use of an earned value management (EVM) system or operational analysis, depending on the life-cycle stage. The program office is currently relying on the prime integrator’s EVM system to manage the prime contractor’s progress against cost and schedule goals. The prime integrator’s EVM system has been independently certified as meeting established standards. However, the EVM system has not yet been fully implemented because the baselines against which progress can be measured for the two task orders that have been issued to date has not yet been established. According to program officials, these baselines will be established for the program management task order and the Project 28 task order in mid-December 2006 and mid-January 2007, respectively. and CPIC process. The expenditure plan did not include a discussion of the program office’s activities in regard to the DHS enterprise architecture. Moreover, according to program officials, the program office has not yet determined if SBInet is aligned with the architecture. According to these officials, SBInet is to be reviewed by the Enterprise Architecture Center of Excellence, which is the DHS entity that determines enterprise architecture alignment, by the end of December 2006. Provides a description of an investment’s security and privacy issues. Summarizes the agency’s ability to manage security at the system or application level. Demonstrates compliance with the certification and accreditation process, as well as the mitigation of IT security weaknesses. The expenditure plan did not include a discussion of security and/or privacy. According to a program office security specialist, the program office has not yet developed a system security plan because it is too early in the system development life cycle. A system security plan is to be developed as a part of the system certification and accreditation process. Regarding privacy, the program office developed a draft privacy impact assessment dated October 2006. The assessment addresses several, but not all, of OMB’s criteria. Legislative Condition #8: Includes Approvals by IRB, DHS Secretary and OMB (Satisfied) The expenditure plan, including related documentation and program officials’ statements, satisfied the condition that the plan be reviewed and approved by DHS’s Investment Review Board, the Secretary of Homeland Security, and OMB. DHS’s Investment Review Board approved the plan on November 22, 2006. The Secretary of Homeland Security approved the expenditure plan on November 22, 2006. OMB approved the plan on December 4, 2006. The SBInet PMO provided draft versions of the expenditure plan and supporting documentation. We conducted our review from October 11, 2006, to December 5, 2006. program officials’ statements, has satisfied four, partially satisfied four and not satisfied one of the nine conditions legislated by the Congress. Satisfying the legislative conditions is important because the expenditure plan is intended to provide Congress with the information needed to effectively oversee the program and hold DHS accountable for program results. Satisfying the legislative conditions is also important to minimize the program’s exposure to cost, schedule, and performance risks. DHS’s approach to SBInet introduces additional risk because the program’s structure entails a high level of concurrency and lacks a maximum quantity or dollar value for the integration contract. The current expenditure plan offers a high-level and partial outline of a large and complex program that forms an integral component of a broader multi-year initiative. However, Congress and DHS need additional details of planned milestones, anticipated interim and final costs, and staffing to be reasonably assured that the current risk to the project’s cost, schedule, and ultimate effectiveness is minimized. ensure that future expenditure plans include explicit and measurable commitments relative to the capabilities, schedule, costs, and benefits associated with individual SBInet program activities; re-examine the level of concurrency and appropriately adjust the acquisition strategy; and modify the SBInet systems integration contract to include a maximum quantity or dollar value. DHS, SBI and SBInet officials also provided clarifying information that we incorporated as appropriate in this briefing. expenditure plan and supporting documentation, comparing them to relevant federal requirements and guidance, and applicable best practices. We reviewed draft versions of the expenditure plan, including versions 1.0 (November 15, 2006); 2.0 (November 27, 2006); and 2.1 (November 29, 2006). We also reviewed the final version of the plan submitted to Congress on December 4, 2006. We interviewed DHS, CBP, SBI, and SBInet program officials and contractors. We did not review the justification for cost estimates included in the expenditure plan. In addition, we did not independently verify the source or validity of the cost information. guidance (OMB-A-11) to determine whether the information complies with the capital planning and investment controls. We conducted our work at CBP headquarters in the Washington, D.C., metropolitan area from October 2006 to December 2006, in accordance with generally accepted government auditing standards. In addition to the person named above, Robert E. White, Assistant Director; Deborah Davis, Assistant Director; Richard Hung, Assistant Director; E. Jeanette Espínola; Frances Cook; Katherine Davis; Gary Delaney; Joseph K. Keener; Sandra Kerr; Raul Quintero; and Sushmita Srikanth made key contributions to this report.
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In November 2005, the Department of Homeland Security (DHS) established the Secure Border Initiative (SBI) program to secure U.S. borders and reduce illegal immigration. One element of SBI is SBInet, the program responsible for developing a comprehensive border protection system. By legislative mandate, DHS developed a fiscal year 2007 expenditure plan for SBInet to address nine legislative conditions, including a review by GAO. DHS submitted the plan to the Appropriations Committees on December 4, 2006. To address the mandate, GAO assessed the plan against federal guidelines and industry standards and interviewed appropriate DHS officials. The SBInet expenditure plan, including related documentation and program officials' statements, satisfied four legislative conditions, partially satisfied four legislative conditions, and did not satisfy one legislative condition. Satisfying the legislative conditions is important because the expenditure plan is intended to provide Congress with the information needed to effectively oversee the program and hold DHS accountable for program results. Satisfying the legislative conditions is also important to minimize the program's exposure to cost, schedule, and performance risks. SBInet's December 2006 expenditure plan offered a high-level and partial outline of a large and complex program that forms an integral component of a broader multiyear initiative. However, the plan and related documentation did not include explicit and measurable commitments relative to capabilities, schedule, costs, and benefits associated with individual SBInet program activities. In addition, the SBInet systems integration contract did not contain a specific number of units that may be ordered or a maximum dollar value as required by Federal Acquisition Regulation. Further, DHS's approach to SBInet introduces additional risk because the program's schedule entails a high level of concurrency among related planned tasks and activities.
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To determine the primary reason for the low collection rates and significant write-offs of CFP debt, we obtained and reviewed OSM’s audited financial statements, annual reports, and other financial information related to its CFP collection activities, and we analyzed OSM’s CFP receivables and related accounts and information for fiscal years 1997 through 2000. We interviewed OSM officials for their perspective on the results of our review and analysis of this information. To determine whether adequate processes exist to collect CFP debt, we acquired an understanding of OSM’s CFP debt collection policies and procedures, as well as applicable federal laws and regulations. We were provided access to OSM’s Civil Penalty Accounting Control System database. The database contained a universe of 490 cases that had CFP receivables balances reduced to zero by collection or write-off (closed cases) during fiscal years 1999 and 2000 or were outstanding (open cases) CFP receivables balances as of September 30, 2000. We further stratified the database into cases representing debts greater than or equal to $100,000 (high-dollar cases) and those representing debts less than $100,000. We selected for review all nine high-dollar cases and a random statistical sample of 175 cases with initial receivable amounts less than $100,000. We did not independently verify the completeness or accuracy of financial data or test information security controls over the systems used to compile these data because such verification was not necessary for the purposes of this request. OSM was unable to provide documentation of collection specialists’ actions for 120 of the 184 CFP cases selected. As a result of this scope limitation, we could not project our findings to the entire universe of cases nor conclude on the overall adequacy of OSM’s past and present debt collection processes. Our findings therefore relate only to the applicable attributes in the 64 cases for which OSM had documentation of collection specialists’ actions. We interviewed OSM officials to obtain explanations for significant trends we observed and for findings and instances of noncompliance with its policies and procedures we identified during our review of the available cases. To determine what role, if any, OMB and Treasury play in overseeing and monitoring the government’s collection of civil debt, we interviewed OMB and Treasury officials. We performed our review primarily in Denver, Colorado, from January 2001 through August 2001 in accordance with U.S. generally accepted government auditing standards. Prior to our December 14, 2001, briefing to your office on the results of our work, we provided Interior, OSM, Treasury, and OMB with a draft of our detailed briefing slides for review and comments, which contained recommendations to the Acting Director of OSM. The comments received are discussed in the “Agency Comments and Our Evaluation” section of this report, on the “Agency Comments” slide, and are incorporated in the report as applicable. OSM’s letter is reprinted in appendix II. The Surface Mining Control and Reclamation Act of 1977 (SMCRA) established OSM to administer and enforce a nationwide program to protect society and the environment from the adverse effects of surface coal mining operations and to promote the reclamation of unreclaimed mining areas. Under Titles IV and V of SMCRA, OSM administers and enforces nationwide surface mining laws. Title IV of SMCRA authorizes OSM to collect quarterly Abandoned Mine Land (AML) reclamation fees. SMCRA also requires that coal mine operators obtain permits from OSM or the responsible state regulatory authority before undertaking any mining activity. These permits identify parties that actively mine coal and become the basis for OSM to generate Coal Reclamation Fee Reports (Form OSM-1), which are used to collect AML fees. Title V of SMCRA authorizes OSM to enforce environmental and reclamation standards for coal mining. Violations of these standards, referred to as “on the ground” (mine site) violations, typically involve harm to the environment. Section 518 of SMCRA authorizes OSM to assess CFP for violations of Titles IV and V. OSM is to issue a Notice of Violation to (1) Title IV violators for unpaid reclamation fees or for not filing a Form OSM-1 and (2) Title V violators for noncompliance with environmental and reclamation standards. If the violation is not corrected within a specified time, OSM is to issue a Failure to Abate Cessation Order, which requires that mining operations cease and the violation be abated immediately. OSM’s assessment unit is to review each violation cited to determine the appropriate CFP amount to assess for a violation and bases its determination on a point system directly related to the cited mine operator’s history of previous violations, including the seriousness of such violations, damage caused, negligence involved, and good faith in attempting to achieve compliance. Once the assessment amount is determined, OSM is to issue a Notice of Proposed Assessment (NOPA) to the mining operator. The assessment amount in the NOPA becomes the official CFP assessment when OSM issues a Final Order. The Final Order is to be issued within 30 days of the operator’s receipt of the NOPA, unless the operator appeals. Under SMCRA, CFP can be assessed only after the cited mine operator has had an opportunity to have a public hearing, which may include a potentially lengthy appeals process. Since 1995, OSM has recorded proposed assessments as CFP receivables when (1) payment is made for the full amount of the assessment when the NOPA is issued, (2) a Final Order (First Demand Letter) is issued, (3) a payment plan is entered into, or (4) a final appeal decision has been made. The occurrence of any one of these events is to result in the establishment of an account receivable. If a payment is not made in 15 days after OSM mails the Final Order, OSM is to issue a Second Demand Letter. The Second Demand Letter is to be followed 15 days later by a Final Demand Letter. Thus, all three demand letters are to be sent within 30 days. OSM is to classify CFP debt as delinquent if payment is not received within 30 days of the Final Order. Once a CFP receivable is established, OSM is to enter the CFP debt into the Civil Penalty Accounting and Control System, and a collection specialist begins collection activity. Upon receipt of the Citation File, the collection specialist is to create a Collection Specialist Case File (CS File), or an Entity File if the violator has multiple CFP debts, to document collection actions taken on the CFP debt. The collection specialist then is to perform (1) a full compliance check on the entity to identify all outstanding debt or (2) skip tracing activity to locate the debtor and obtain the mailing address and telephone numbers of the entity involved. The collection specialist also is supposed to call the debtor and document each attempt at contact with the debtor. If a debtor is unable to pay the debt in full, the collection specialist may offer an installment agreement or, under certain conditions, a compromise settlement. For either an installment agreement or a compromise settlement, the collection specialist is supposed to research the debtor’s ability to pay, document his or her determination of the debtor’s ability to pay, and have that determination reviewed and approved by other OSM staff. If the debt remains unpaid, the collection specialist can refer the debt to the Solicitor if, for example, (1) the debt needs to be consolidated with debts previously referred to Solicitor, (2) the debtor files for bankruptcy, or (3) the debtor strongly disputes responsibility for the debt or raises a legal challenge that will likely result in litigation. The collection specialist can also refer the CFP debt to Treasury for collection and offset if (1) the debtor does not respond to direct collection efforts by paying in full, (2) the debtor cannot be located, (3) the debtor defaults on a payment agreement and does not correct the default, or (4) the debt has been delinquent for 180 days or more. If CFP debt remains uncollected after referrals to the Solicitor and Treasury, the Solicitor or Treasury can recommend that the debt be written off. The collection specialist would then terminate collection activity on the debt and write off the receivable. Reasons for the termination of collection activity and write-off of the CFP debt include (1) substantial amounts are uncollected, (2) the debtor cannot be located, (3) the cost of collection will exceed the amount recoverable, (4) the statue of limitations has expired, or (5) the case is without merit or there is insufficient evidence. The Department of Justice must approve the write-off of any CFP debt that is greater than or equal to $100,000. During fiscal year 2000, OSM began writing off CFP debt referred to the Solicitor that was delinquent more than 2 years and classifying it as currently not collectible (CNC). In January 2000, OSM established formal guidance to write off such debts. In March 2001, OSM established formal guidance to write off other active debt that is referred to Treasury and has been delinquent more than 2 years. OSM also is to include all unpaid CFP debt in its Applicant Violation System to track the debt’s status once the debt becomes delinquent. OSM has a history of low collection rates for its CFP debt. In 1987, we reported that the financial quality of OSM’s CFP debts made them difficult to collect. We noted that for fiscal year 1986, OSM reported about $158 million in CFP receivables, of which $155 million was reported as delinquent. OSM also designated about 52 percent of the CFP receivables as uncollectible at that time. In 1989, we reported that OSM had $38 million in CFP receivables as of September 30, 1988, after removing about $136 million of CFP receivables from fiscal years 1986 through 1988 that were deemed uncollectible and for which collection activities were terminated. Of this CFP receivables balance, OSM reported approximately 99 percent as delinquent and designated about 90 percent as uncollectible. After writing off about $10.8 million of CFP debts during fiscal year 2000, including about $9.3 million, about 86 percent of the $10.8 million, of debts more than 10 years old, OSM reported a CFP receivables balance of approximately $1.3 million as of September 30, 2000. Of this year-end receivable balance, OSM reported more than 92 percent as delinquent and designated about 88 percent as uncollectible. Our review of OSM’s CFP receivables information revealed that the poor financial condition of CFP debtors is the primary reason for low collection rates and significant write-offs. In 1989, we reported on the poor financial quality of OSM’s CFP debt and the difficulties the agency faces in collecting CFP receivables from mining companies that are not financially viable. Specifically, we reported that OSM might never experience a high rate of collection for CFP debt because the majority of its CFP receivables were associated with inactive mine sites or mining operators who were either bankrupt or no longer mining and the debt had to be written off. We also reported that OSM’s overall annual collection rates combined for both Titles IV and V CFP receivables were approximately 1 percent for the 3 years from fiscal year 1986 through fiscal year 1988, which were about the same as those for the 4 years from fiscal year 1997 through fiscal year 2000. During our fieldwork, OSM officials stated that the collection rates should not be calculated using the beginning receivables balances because such balances included a significant amount of old CFP receivables, including principal assessments and interest, that remained uncollected from prior years and which OSM eventually wrote off. Even though we recalculated OSM’s combined annual collection rates without the beginning balances, the modified annual collection rates remained low at approximately 5 percent for the 4 years from fiscal year 1997 through fiscal year 2000. After we recalculated OSM’s collection rates using its modified method for the 3 years ended in fiscal year 1988, we found that the annual collection rates were similar to the rates calculated for the 4 years ended in fiscal year 2000. We also previously reported in 1987 that most of OSM’s CFP delinquencies were several years old and therefore difficult to collect. As industry statistics show, the likelihood of recovering amounts owed decreases dramatically as the age of the delinquency increases. During our review of the high-dollar debts, for example, we observed that eight out of the nine high-dollar debts averaged approximately 19 years in total processing time—from the issuance of the citation to the point at which the debt was eventually written off. Our current analysis of OSM’s information clearly shows that the conditions we reported in 1987, regarding low collection rates, and in 1989, regarding older debt not being collected, still exist. Our analysis also showed that 77 percent and 95 percent of all CFP debt that was available to be collected were written off for the 3 years ended in fiscal year 1988 and the 4 years ended in fiscal year 2000, respectively. OSM officials stated that viable companies correct violations before they incur large civil penalties. Companies that are in weak financial condition often fail to correct the initial violation and therefore receive cessation orders and incur large penalties. As a result, these CFP debts are often deemed uncollectible and eventually are written off. Over the 4 years covering fiscal years 1997 through 2000, OSM: wrote off about $37.1 million in CFP receivables (plus another $12.6 million in fiscal year 1996); annually estimated between 88 and 99 percent of its reported CFP recorded fewer CFP assessments each year, dropping from about $2.8 million in fiscal year 1997 to about $591,000 in fiscal year 2000, of which the principal portion of new CFP assessments went from $680,320 for 111 new debts in fiscal year 1997 to $180,370 for 22 new debts in fiscal year 2000; and collected about $616,000 in CFP receivables. As a result of the significant amounts written off, collections received, and fewer recorded number and dollar value of assessments over the 4 years, OSM’s reported CFP receivables balance decreased from about $27 million as of October 1, 1996, to about $1.3 million as of September 30, 2000. According to OSM’s records for the 4 years from fiscal year 1997 through fiscal year 2000, approximately $35 million, 94 percent of the $37.1 million of CFP debt, for which collection activity was terminated and the receivables were written off, was delinquent more than 2 years. OSM records indicated the following reasons that most CFP debts were written off. $22.8 million was written off after the Solicitor’s or Treasury’s recommendation because they were unable to collect, including debt from companies that had filed for bankruptcy, were bankrupt, or were no longer mining; $4.6 million was written off after OSM classified the CFP debt as currently not collectible after being delinquent more than 2 years; $3.7 million was written off after compromise settlements were reached and companies defaulted on the CFP debts; and $3.4 million was written off after the statute of limitations for the violation had expired, for which OSM stated that the CFP debt was over 5 years old, a suit was not filed, and the government can no longer file a suit for collection. OSM believes that low CFP collection rates do not fairly indicate the effectiveness of the CFP program. OSM’s Strategic Plan states that the purpose of the CFP program is to maximize compliance with mining laws. OSM officials said that, although collecting CFP is an important objective, maximizing revenue from CFP collections is less important to management than achieving compliance with mining laws. OSM routinely writes off or accepts an offer-in-compromise for large dollar amounts of Title IV CFP debt when the agency has met its enforcement objectives. For example, even though its records continue to reflect low collection rates, OSM officials stated that 72 percent of notices of violations from fiscal years 1997 through 2000 were abated and 99 percent of Title IV reclamation fees were collected during fiscal year 2000. OSM officials also stated that with the decline in the numbers and amounts of new Title IV and V CFP debts in fiscal year 2000, they expect the number and amount of new CFP assessments to remain low for the following reasons. OSM now actively works with companies to prevent problems from occurring. Changes in the mining industry have resulted in better mining practices and fewer violations. OSM’s oversight of state regulatory programs now focuses on results rather than activities, such as issuing citations. OSM compliance auditors work with companies to resolve Title IV SMCRA violations before issuing a citation. While the lack of documentation of collection specialist actions prevented us from determining the overall adequacy of OSM’s past and present CFP debt collection processes, we did, however, find instances in which OSM did not follow certain of its debt collection policies and procedures. Thus, we believe these CFP debt collection processes can be strengthened in those areas. We also found that limitations in OSM’s legal authority to deny permits to certain applicants with unabated violations reduce the agency’s ability to achieve its program objective of maximizing compliance with surface mining laws. Of the 184 CFP cases selected to test the extent to which OSM followed its debt collection policies and procedures, documentation of OSM collection specialists’ activity for 120—almost two-thirds—was unavailable. During fiscal years 1994 and 1995, OSM scanned into an optical imaging system the collection specialists’ case files for which they had completed their collection actions. The original documentation was destroyed after OSM used the scanned documents to archive these records. In 1998, the read/write feature of the imaging system broke, and the vendor went out of business. OSM officials stated that the system could not be repaired or replaced and the contents of the scanned documents were no longer available. An OSM official stated that almost all original documentation of collection specialists’ activities has been maintained since fiscal year 1997 and that OSM is working on guidance that calls for archiving documents for 5 years and imaging only key documents. The testing of the 64 of the 184 CFP debts with available documentation provided evidence that OSM has maintained the collection specialists’ documentation for the debts where collection activity is still ongoing since the imaging problem in 1998. In addition to preventing us from determining the extent to which OSM did or did not follow its CFP debt collection policies and procedures, the lack of documentation prevented us from appropriately projecting findings to the universe of CFP debt from the selected cases for which adequate documentation was available. Consequently, we were unable to determine the overall adequacy of OSM’s CFP debt collection process. Although the lack of documentation precluded us from determining the overall adequacy of OSM’s past and present CFP debt collection processes, we did identify instances in which OSM did not comply with its own debt collection policies and procedures, including the following: Of the 24 CFP debts that were delinquent more than 2 years and referred to the Solicitor or Treasury, 17 had not been written off as currently not collectible. Of these 17 CFP debts, 15 were referred to the Treasury and were not written off as currently not collectible until we brought them to OSM’s attention in April 2001. OSM subsequently established specific formal guidance for writing off such debts that are more than 2 years old and had been referred to the Treasury. Of the 32 CFP debts that were delinquent less than 2 years, 4 were incorrectly written off as currently not collectible. In response, OSM stated that the debts were prematurely written off in error even though the collection actions being pursued by the Solicitor were not affected for three of the debts and the fourth debt was subsequently recommended to be written off by the Solicitor since the company was defunct and the owner was deceased. All five CFP debts with installment agreements issued between fiscal years 1994 and 1997 lacked the required documentation to support OSM’s determination that the debtor was unable to immediately pay in full. However, in August 2000, OSM began requiring management approval of payment agreements and developed an installment agreement worksheet to be used by the collection specialist. The worksheet requires that such supporting documentation be maintained. Of the nine high-dollar delinquent debts, two were written off and the cases terminated without the required approval of the Department of Justice. After we informed OSM officials, they reclassified the debts as currently not collectible because the debts were more than 2 years old. Section 510(c) of SMCRA prohibits the issuance of mining permits to applicants who are responsible for unabated violations: “Where . . . information available to the regulatory authority indicates that any surface coal mining operation owned or controlled by the applicant is currently in violation of this Act . . . the permit shall not be issued.” An unpaid CFP debt is considered an unabated violation. One purpose of this provision is to induce violators to correct violations and pay CFP. In 1997, the U.S. Court of Appeals for the D.C. Circuit invalidated an OSM regulation that blocked the issuance of a permit to any surface coal mining operation owned or controlled by either the applicant or a person who owns or controls the applicant that is currently in violation of SMCRA (upstream owners or controllers). The court ruled that the regulation was inconsistent with the authority conferred on OSM by section 510(c) of SMCRA. This ruling limits OSM’s ability to deny permits to certain applicants associated with SMCRA violations. OSM officials stated that since the court decision, OSM and the states have issued permits to three applicants who would have been denied permits under the regulation the court invalidated. OSM further stated that the denials would have been based on an upstream owner or controller violation, when at the time of the applications for new permits, the upstream owners or controllers were linked to unabated violations. These unabated violations included unpaid principal portions of CFP receivables balances totaling approximately $31,600 and another $122,697 of unpaid abandoned mine land fees and reclamation costs. For example, OSM stated that its Knoxville office issued a new surface mining permit in December 2000 to an applicant that consisted of three 30- percent shareholders and one 10-percent shareholder. The shareholders were also managers of the limited liability company. Three of the shareholders had unabated SMCRA violations. One of the 30-percent shareholders was issued two cessation orders in 1984 and was also convicted by a Tennessee jury of a criminal offense of continuing to conduct mining operations without a permit and failing to stop after notification by authorities. The shareholder’s federal violations were corrected, but the principal portion of the CFP, approximately $7,800, remained unpaid. Another of the 30-percent shareholders and the 10-percent shareholder are principals (shareholders/officers) in a company that owns 33.3 percent of another company that was an operator for a third company that was issued a notice of violation in 1994 and a cessation order in 1995. The violations were corrected, but the principal portion of the CFP, approximately $23,800, remained unpaid. This limitation on OSM’s authority to deny the issuance of permits to applicants whose upstream owners or controllers have unabated SMCRA violations may reduce OSM’s ability to achieve compliance with SMCRA, including correction of violations and collection of unpaid CFP. OMB and Treasury are provided with information useful in performing their debt oversight roles through OSM’s reporting of CFP receivables and referral of CFP debt to Treasury for collection. With respect to reporting of CFP receivables, OSM reports total receivable amounts in its audited financial statements that include its CFP receivables. In addition, OSM reports annual CFP collections and the year-end CFP receivable balance in the financial management section of its annual report, which it submits to OMB and Treasury. In accordance with the requirements of the Debt Collection Improvement Act of 1996, OSM annually reports CFP receivables information, including annual collection activity, delinquent debt, and estimated amounts deemed uncollectible, to Treasury as part of the Report of Receivables Due from the Public. In discussions with OMB officials, they emphasized that OMB’s oversight is broad and consists of monitoring and evaluating governmentwide credit management, debt collection activities, and federal agency performance. OMB also stated that it is the specific responsibility of the agency Chief Financial Officer and program managers to manage and be accountable for the debt collection of their agency’s credit portfolios in accordance with applicable federal debt statutes, regulations, and guidance. OMB added that it is the (1) role of each agency to specifically monitor and collect its civil penalty debt regardless of dollar magnitude and (2) responsibility of each agency’s Office of the Inspector General to provide oversight through audit of the agency’s debt collection activities. Regarding the referral of CFP debt to Treasury, the Debt Collection Improvement Act of 1996 also requires that federal agencies transfer eligible nontax debt or claims delinquent more than 180 days to Treasury for collection actions. Treasury officials stated that they rely on agencies to determine what debt should be referred to Treasury for collection and offsets, as required by the act, and OSM does refer delinquent CFP debts to Treasury for collection action. The poor financial condition of CFP debtors is the primary reason that a significant amount of OSM’s CFP receivables continue to be delinquent and, in most cases, are deemed uncollectible and eventually written off. While a lack of documentation of its collection specialists’ activities precluded us from determining the overall adequacy of OSM’s past and present debt collection processes and the poor financial condition of CFP debtors makes substantial improvements in collection rates problematic, OSM could strengthen its debt collection process by better adhering to certain of its own CFP debt collection policies and procedures. We also found that OSM’s inability to prevent upstream owners and controllers of companies with unabated SMCRA violations from obtaining new mining permits could reduce the effectiveness of OSM’s CFP program. We recommend that the Secretary of the Interior direct the Acting Director of the Office of Surface Mining to take the following actions: Evaluate the potential significance of the court decision to limit OSM’s ability to deny new permits to applicants whose upstream owners and controllers have unabated SMCRA violations. If a change in SMCRA is needed to expand OSM’s authority to deny new permits to applicants whose upstream owners and controllers have uncorrected violations or unpaid CFP, work with the Congress to determine the appropriate legislative action to take. Monitor to ensure effective implementation of OSM’s new guidance on the write-off of CFP debt that is referred to either the Solicitor or Treasury and delinquent more than 2 years by classifying the debt as currently not collectible and maintenance, in cases involving installment agreements, of documentation used to determine a debtor’s inability to immediately pay CFP debt in full. Reinforce to its CFP collection and management personnel the need to fully adhere to CFP debt collection policies and procedures for obtaining the required approval from the Department of Justice to terminate collection efforts and write-off delinquent CFP debt greater than or equal to $100,000. In commenting on a draft of our detailed briefing slides, OSM agreed with our recommendations and stated that it will continue to explore all policy, regulatory, and legislative options with the potential to improve its ability to keep applicants responsible for uncorrected violations and unpaid debt from receiving permits to mine coal. OSM, OMB, and Treasury also provided additional technical comments and suggestions that were incorporated as appropriate. We are sending copies of this report and briefing slides to the Chairman of your Subcommittee as well as to the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs. We will also provide copies to the Secretary of the Interior, the Acting Director of the Office of Surface Mining, the Secretary of the Treasury, and the Director of the Office of Management and Budget. Copies will also be made available to others upon request. If you have any questions about this report, please contact me at (202) 512- 3406 or Steven Haughton, Assistant Director, at (202) 512-5999. Additional key contributors to this assignment were John Lord, William Wright, David Grindstaff, Richard Cambosos, Mike LaForge, Miguel Lujuan, and Robin Hodge. write-offs of civil fines and penalties (CFP) debt at the Department of Interior’s (Interior) Office of Surface Mining (OSM). You requested that we determine the primary reason for the low collection rates and significant write- offs of OSM’s CFP debt, whether adequate processes exist at OSM to collect CFP debt, and what role, if any, the Office of Management and Budget (OMB) or the Department of Treasury play in overseeing OSM’s collection of CFP debt. The primary reason for the low collection rates for and significant write- offs of CFP debt is the poor financial condition of certain CFP debtors. A lack of certain documentation prevented us from determining the overall adequacy of OSM’s past and present CFP debt collection process, but such processes can be strengthened. In addition, the extent of OSM’s legislative authority could reduce the effectiveness of OSM’s ability to achieve its program objective of maximizing compliance with surface mining laws. OMB and Treasury are provided with information useful in performing CFP debt oversight roles. However, OMB stated that it has broad oversight responsibility and that each agency has specific responsibility to monitor, manage, and collect CFP debt while it is the responsibility of the agency’s Office of the Inspector General to provide oversight through the audit of the agency’s debt collection activities. Treasury stated that it relies on agencies to determine what debt should be referred to Treasury for collection actions, as required by the Debt Collection Improvement Act of 1996 (DCIA) and OSM does refer delinquent CFP debts to Treasury. established OSM to administer and enforce a nationwide program to protect society and the environment from the adverse effects of surface coal mining operations and to promote the reclamation of unreclaimed mining areas. Title IV of SMCRA authorizes OSM to collect quarterly abandoned mine land (AML) reclamation fees. SMCRA also requires coal mine operators to obtain permits from OSM, or the responsible state regulatory authority, prior to any mining activity. These permits identify parties actively mining coal and become the basis for OSM to generate Coal Reclamation Fee Reports (Form OSM-1), that are used to collect AML fees. reclamation standards for coal mining. Failure by coal mine operators to comply with these standards are referred to as “on the ground” (mine site) violations and typically involve harm to the environment Section 518 authorizes OSM to assess CFP for violations of Title IV and V of SMCRA. OSM is to issue a Notice of Violation (NOV) to violators for (1) Title IV unpaid reclamation fees or for not filing an OSM-1 report and (2) Title V noncompliance with SMCRA from inspections of mining operations. requires that mining operations cease and the violation be abated immediately, if the violation is not corrected within a specified time period. OSM’s assessment unit is to review each citation to determine the appropriate penalty amount to be assessed for a violation based on a point system directly related to the history of previous violations, including the seriousness of such violations, extent of damage, negligence and good faith in attempting to achieve compliance. After OSM determines the amount of the assessment, it is to issue a Notice of Proposed Assessment (NOPA) that becomes the official civil penalty debt in a “Final Order” that is to be issued within 30 days of receipt of the NOPA, unless appealed. has been given an opportunity for a public hearing, which may include a potentially lengthy appeals process. Since 1995, OSM records a proposed assessment as a CFP receivable when any one of the following events occur that establish an amount owed to OSM: payments are made for the full amount of the assessment when a a Final Order (First Demand Letter) is issued, a payment plan is entered into, or the final appeal decision has been made. Order which is to be followed by a Final Demand Letter in 15 more days. Thus, all 3 demand letters are required to be sent in a 30-day period. OSM is to classify CFP debt as delinquent if the payment is not received within 30 days of the Final Order. Once a CFP receivable is established, OSM is to input the CFP debt into the Civil Penalty Accounting and Control System (CPACS) and a Collection Specialist (CS) begins collection activity. Specialist Case File” (CS File) or an “Entity File” if the violator has multiple CFP debts, to document collection actions taken on the CFP debt. Then the CS is to perform a “full compliance check” to identify all outstanding debt or “skip tracing” to locate a debtor. The CS also is to call the debtor and document each time there is an attempt or actual contact with the debtor. If the debtor is unable to pay the debt in full, the CS may offer an installment agreement or under certain conditions, a compromise settlement. Both are to be researched to determine the debtors ability to pay, documented as to the decision rendered, and reviewed and approved by other OSM staff. refer the CFP debt to the Interior Office of the Solicitor (Solicitor) if, (1) the debt needs to be consolidated with debts previously referred (2) the debtor files for bankruptcy, or (3) the debtor strongly disputes responsibility for the debt or raises a legal challenge showing a high likelihood for litigation. refer the CFP debt to Treasury for collection and offset if (1) the debtor does not respond to direct collection efforts by (2) the debtor cannot be located, (3) the debtor defaults in a payment agreement and does not correct the default, or (4) the debt has been delinquent for 180 days. (1) substantial amounts are not collected, (2) the debtor can not be located, (3) the cost of collection will exceed the amount recoverable, (4) the statute of limitations have expired, or (5) the case is without merit or there was insufficient evidence. The Department of Justice must approve the write off of all CFP debts greater than or equal to $100,000. In November 2000, OMB Revised Circular A-129 to make it mandatory that agencies write off debts over two years old unless documented and justified to OMB in consultation with Treasury. track the debts status once the debt becomes delinquent. OSM has a history of low collection rates for its CFP debt. In 1987, we reported2 that the financial quality of OSM’s CFP debts make them difficult to collect. We noted that for FY 1986, OSM reported about $158 million in CFP receivables, of which $155 million was reported as delinquent. OSM designated about 52 percent of these CFP receivables as uncollectible at that time. In 1989, we reported3 that OSM had $38 million in CFP receivables, as of September 30, 1988, after terminating collection activities from FY 1986 to FY 1988 on CFP debts totaling about $136 million that it considered uncollectible. Of this CFP receivable balance, OSM reported about 99 percent as delinquent and designated about 90 percent as uncollectible. Debt Collection: Interior’s Efforts to Collect Delinquent Royalties, Fines, and Assessments (GAO/AFMD-87-21BR, June 1987). Department of Interior: Collection of Civil Penalty Fees (GAO/AFMD-89-73, August 1989). including about $9.3 million, or about 86 percent of the $10.8 million, of debts more than 10 years old, OSM reported a CFP receivable balance of approximately $1.3 million as of September 30, 2000. Of this year-end receivable balance, OSM reported more than 92 percent as delinquent and designated about 88 percent as uncollectible. Obtained and reviewed OSM’s audited financial statements, annual reports, and other financial information that relate to its CFP collection activities. Analyzed OSM’s CFP receivables and related accounts and information for FY 1997 through FY 2000. Obtained an understanding of OSM’s CFP debt collection policies and procedures, and applicable federal rules and regulations. Obtained access to OSM’s CPACS database of 490 cases for which the CFP receivable balances were reduced to zero by collection or write- off (closed) during FYs 1999 and 2000 or that had outstanding (open) CFP receivable balances as of September 30, 2000. Stratified the database into cases equal to or greater than $100,000 (high dollar debts) and less than $100,000. In order to review OSM’s CFP debt collection process we selected the following 184 open or closed cases all 9 high-dollar debts and a random statistical sample of 175 CFP cases with initial receivable amounts less than $100,000. OSM was not able to provide documentation of collection specialist actions for 120 of the 184 cases we selected for our review.4 Due to the lack of documentation for a significant portion of our sample, we were not able to project our findings to the entire universe of cases (discussed later). As a result of this scope limitation, we were unable to conclude on the overall adequacy of OSM’s past and present CFP debt collection processes and have thus presented our findings as they relate to the applicable attributes in the 64 cases for which OSM had documentation. We are 95 percent confident that the actual proportion of cases for which OSM has no documentation of collection specialist actions is 64.4 percent (plus or minus 5.6 percent). Interviewed OSM officials to obtain explanations for observed trends, and identified findings and exceptions to policies and procedures. Interviewed OMB and Treasury officials to determine what role, if any, OMB and Treasury play in overseeing and monitoring the government’s collection of civil debts. We did not independently verify the completeness or accuracy of financial data or test information security controls over the systems used to compile these data because that verification was not necessary for the purposes of this request. Provided Interior, OSM, OMB, and Treasury with a draft of our detailed briefing slides, which contained recommendations to the Acting Director of OSM for review and comment. The comments received are discussed on the “Agency Comments” slides or incorporated into the slides as applicable. Performed our work primarily in Denver, CO between January 2001 and August 2001 in accordance with U.S. generally accepted government auditing standards. and the difficulties the agency faces in collecting CFP receivables from mining companies that are not financially viable. In 1989, we reported that OSM may never experience a high rate of collection because the majority of its CFP receivables related to inactive mine sites or mining operators who were either bankrupt or no longer mining. We also reported that OSM’s overall annual collection rates combined for both Title IV and V CFP receivables was approximately one percent for the 3-year period for FY 1986 through 1988,5 which is about the same rate collected for the 4-year period for FY 1997 through FY 2000. The annual collection rates, as per the method used in our1989 report, were calculated by dividing reported collections made each year by the sum of the beginning receivable balance from each year and net assessments for each year, including principal and interest. should not be calculated using the beginning receivable balances because such balances included the significant amount of old CFP receivables, including principal assessments and interest, that remained uncollected from prior years of which OSM eventually wrote off. Even though we recalculated OSM’s combined annual collection rates without the beginning receivable balances, the revised annual collection rates remained low at approximately 5 percent6 for the 4-year period ended in 2000. After we recalculated OSM’s collection rates using its modified method for the 3-year period ended in 1988, we found that the annual collection rates were similar to the rates calculated for the 4-year period ended in 2000. The modified annual collection rates, based on OSM’s methodology, were calculated by dividing the reported collections made each year by the net assessments for each year. years old and therefore, were difficult to collect. As industry statistics have shown, the likelihood of recovering amounts owed decreases dramatically with the age of delinquency. During our limited review, we observed that 8 of the 9 high-dollar debts averaged approximately 19 years for the total processing time from the issuance of the citation to the point at which the debt was eventually terminated (written off). Based on our analysis of information provided to us by OSM, collection rates remain low and older debts are still not collected. Our analysis also showed that 77 and 95 percent of all CFP debt that was available to be collected7 were written off for the 3-year period ended in FY 1988 and the 4-year period ended in FY 2000, respectively. All available CFP debts consisted of the CFP receivable balances for the beginning of FY 1986 and FY 1997 plus all net assessments recorded during the 3-year period ended in FY 1988 and the 4-year period ended in FY 2000, respectively. incur large civil penalties and that companies that are typically not in good financial condition often do not correct the initial violation and therefore receive cessation orders and incur large civil penalties. This has lead to these CFP debts being deemed uncollectible and eventually written off. Over the 4-year period covering from FY 1997 through FY 2000, OSM has written-off about $37.1 million in CFP receivables (plus another $12.6 million in FY 1996), annually estimated between 88 and 99 percent of its reported CFP recorded less CFP assessments each year, going from about $2.8 million in FY 1997 to $591,000 in FY 2000,8 and collected about $616,000 in CFP receivables. The principal portion of new CFP assessments went from $680,320 for 111 new debts in FY 1997 to $180,370 for 22 new debts in FY 2000. numbers and dollars of assessments over the 4 year period, OSM’s reported CFP receivables balance has decreased from about $27.3 million as of October 1, 1996, to about $1.3 million as of September 30, 2000. According to OSM data, from FY 1997 through FY 2000, about $35 million or 94 percent of the $37.1 million of CFP debt that collection activity was terminated and receivables were written off was delinquent more than 2 years. OSM wrote off most of the CFP debts for the following reasons $22.8 million for inability to collect, including companies that have filed for bankruptcy, are bankrupt, or are no longer mining. $4.6 million that was classified as currently not collectible after being delinquent for more than 2 years, $3.7 million after a compromise was reached, and $3.4 million due to expiration of statute of limitations. OSM does not believe that low collection rates and significant write-offs are a fair indication of the effectiveness of the CFP program. The agency’s Strategic Plan states that the purpose of its CFP program is to maximize compliance with mining laws. OSM officials stated that, while collecting CFP is an important objective for OSM, maximizing revenues from the collection of CFP is not as important to management as achieving compliance with mining laws. OSM routinely writes off or accepts an offer-in-compromise of large dollar amounts on Title IV CFP debt when its enforcement objectives have been met. For example, even though collection rates on CFP debts remained low, OSM officials stated that 72 percent of notices of violations between FY 1997 and 2000 were abated and 99 percent of Title IV reclamation fees were collected during FY 2000. OSM officials also stated that with the decline in the number and amount of new Title IV and V CFP debts in FY 2000, they expect the number and amount of new CFP assessments to remain low in the future because OSM is now actively working with companies to prevent problems The mining industry has undergone change resulting in better mining practices and fewer violations, OSM has changed the way it oversees state regulatory programs to focus on results instead of activities such as issuing citations, and OSM compliance auditors work with companies to resolve Title IV SMCRA violations before issuing a citation. effectiveness of OSM’s ability to achieve its program objective of maximizing compliance with surface mining laws. out of the 184 cases that we selected for testing. During FYs 1994 and 1995, OSM scanned CS files, for cases that CS had completed its collection process, into an optical imaging system and destroyed the original documentation. OSM destroyed the original documentation after it used the scanned documents to archive these files. However, the read/write feature of the imaging system broke in 1998 and the vendor went out of business. OSM officials stated that the system’s feature could not be repaired or replaced; thus, those documents were no longer available. An OSM official stated that since the imaging problem, they have maintained most original documentation and are working on guidance for archiving documents for 5 years and only imaging key documents. We are 95 percent confident that the actual proportion of cases for which OSM has no documentation of collection specialist actions is 64.4 percent (plus or minus 5.6 percent). past and present debt collection processes, we identified several instances where OSM did not comply with its own debt collection policies and procedures,10 including the following 17 out of 24 CFP debts that were delinquent more than 2 years and referred to the Solicitor or Treasury were not written off as CNC. Fifteen of the CFP debts were referred to Treasury and due to oversight, were not written off as CNC until we brought it to OSM’s attention, wherein, OSM subsequently established specific formal guidance for the write-off of such types of debts. 4 out of 32 CFP debts that were delinquent less than 2 years were incorrectly written off as CNC. Because of the scope limitation discussed earlier, we were not able to project our findings to the entire universe of cases. However, we are presenting the results of the cases we did review. These results should not be used as a basis for concluding about the adequacy of OSM’s debt collection process. 5 of 5 CFP debts involving installment agreements issued between 1994 and 1997 did not have documentation supporting the debtor’s inability to immediately pay in full. However, in August 2000, OSM began requiring management approval of installment agreements and developed an installment agreement worksheet to be used by CS that requires that such documentation be maintained. 2 out of the 9 high-dollar delinquent debts were written off and the cases terminated without the required approval from the Department of Justice. After we informed OSM officials of this situation, they subsequently reclassified the debts as CNC since the debts were over 2 years old. applicants who are responsible for unabated violations. An unpaid CFP debt is treated as an unabated violation. One of the purposes of a denial of a new permit is to induce violators to correct violations and pay CFP. Section 510(c) reads: Where….information available to the regulatory authority indicates that any surface coal mining operation owned or controlled by the applicant is currently in violation of this Act….the permit shall not be issued. regulation that blocked the issuance of a permit to any surface coal mining operation owned or controlled by either the applicant or by a person who owns or controls the applicant that is currently in violation of the SMCRA (upstream owner or controller). The court ruled that the regulation was inconsistent with the authority conferred on OSM by section 510(c) of SMCRA. As a result, Section 510(c) of SMCRA limits OSM’s ability to deny permits to certain applicants associated with SMCRA violations. permits to three applicants where “they would have been denied” under the regulations the court invalidated. OSM further stated that the denials would have been based on an upstream owner or controller violation, where at the time of the applications for new permits, the upstream owners or controllers were linked to unabated violations, including the unpaid principal portion11 of the CFP receivable balances totaling approximately $31,600, plus another $122,697 of unpaid AML fees and reclamation costs. For example, OSM stated that its Knoxville office issued an applicant a new surface mining permit in December 2000. The applicant was comprised of three 30 percent and one 10 percent shareholders, who were also managers of the limited liability company. Three of the shareholders had unabated violations. OSM provided only the principal portion of the CFP receivable and stated that the interest, administrative costs, penalties, and post judgements portions were not readily available and that generally, the total CFP receivable amounts were equal to double the principal portion. One of the 30 percent shareholders was issued 2 COs in 1984, and was convicted by a Tennessee jury of a criminal offense of continuing to conduct surface coal mining operations without a permit and failing to stop after being notified by the authorities. The federal violations have been corrected, but the principal portion of CFP totaling approximately $7,800 remains unpaid, and One of the other 30 percent shareholders and the 10 percent shareholder are principals (shareholders/officers) in a company that owns 33.3 percent of another company that was an operator for a third company that was issued a NOV and CO in 1994 and 1995, respectively. The violations have been corrected, but the principal portion of CFP totaling approximately $23,800 remains unpaid. This limitation in OSM’s ability to deny the issuance of permits to applicants whose upstream owners or controllers have unabated SMCRA violations may reduce OSM’s ability to achieve compliance with SMCRA, including the correction of violations and the collection of unpaid CFP. OSM reports total receivable amounts in its audited financial statements, which includes CFP receivable amounts. In addition, OSM reports annual CFP collections and the year-end receivables balance in the financial management section of its annual report, which is submitted to OMB and Treasury. In accordance with requirements of the Debt Collection Improvement Act of 1996 (DCIA), OSM annually reports CFP receivables information, including annual collection activity, delinquent debt, and estimated uncollectibles, to Treasury as part of the Report of Receivables Due from the Public. OMB and Treasury are provided with information useful in performing CFP debt oversight roles. However, in discussions with OMB officials, they emphasized that OMB’s oversight is broad and consists of monitoring and evaluating government-wide credit management, debt collection activities, and federal agency performance. OMB also stated that it is the specific responsibility of the agency Chief Financial Officer and program managers to manage and be accountable for the debt collection of their agency’s credit portfolios in accordance with applicable federal debt statutes, regulations, and guidance. OMB further added that it is the role of each agency to specifically monitor and collect their civil penalty debt regardless of dollar magnitude and the responsibility of each agency’s Office of the Inspector General to provide oversight through audit of agency’s debt collection activities. DCIA requires federal agencies to transfer eligible non-tax debt or claims over 180 days delinquent to Treasury for collection action. Treasury officials stated that they rely on the agencies to determine what debt should be referred to Treasury for collection action, as required by DCIA. OSM’s policy is to refer CFP debt to Treasury for collection action. OSM continues to experience significantly delinquent, and in most cases, uncollectible CFP receivables that are eventually written off. While a lack of documentation of certain collection specialist actions prevented us from determining the adequacy of OSM’s past and present debt collection processes and the poor financial condition of CFP debtors makes substantial improvement in collection rates problematic, opportunities exist for OSM to strengthen its debt collection processes through better adherence to certain of its own debt collection policies and procedures. Additionally, OSM’s inability to prevent owners and controllers of companies with unabated violations from obtaining new mining permits could reduce the effectiveness of its CFP program. maintaining documentation used to determine debtor’s inability to immediately pay CPF debt in full for cases involving installment agreements. reinforce to its CFP collection and management personnel the need to fully adhere to CFP debt collection policies and procedures for obtaining the required approval from the Department of Justice to terminate collection efforts and write off delinquent CFP debt greater than or equal to $100,000. recommendations and stated that it will continue to explore all policy, regulatory, and legislative options with the potential to improve its ability to keep applicants responsible for uncorrected violations and unpaid debt from receiving permits to mine coal. OSM stated that during our May 17, 2001, exit conference, we acknowledged that the instances of non-compliance with debt collection policies and procedures we found did not have a material impact on collections. In addition, OSM also stated that there is ample evidence that OSM’s current procedures are effective and controls are sound, which it stated, was based on 64 cases out of only 81 cases with outstanding CFP receivables as of the end of FY 2000. of 184 open and closed CFP cases from a total of 490 cases. Although we did state at the exit conference that the instances of non-compliance may not have affected OSM’s ability to collect the CFP debts, the fact remains that these instances have resulted in misstatements in OSM’s reported CFP receivables. Further and more importantly, because of the lack of documentation of the collection specialists’ actions for the majority of the sampled cases, we are unable to assess whether there were material instances of non-compliance with OSM’s past and present debt collection policies and procedures. OSM then stated that the primary reason for the low collection rates was the poor financial condition of CFP debtors, not the poor quality of CFP debt. We agree that the primary reason for the low collection rates was the poor financial condition of certain CFP debtors instead of poor financial quality of CFP debts. Poor financial quality of CFP debts is typically caused by the poor financial condition of the related debtors. As a result, we revised our report and slides except where we refer to our 1987 report that described this issue as poor financial quality. OSM stated that our high level summarized report obscures important aspects of the program, by not including the number of debts collected, differentiating between Title IV and V debts, measuring collection rates by age of debt, and focusing on the current process. In particular, OSM stated that collection rates should be calculated only on the principal portion of the net assessments recorded as CFP receivables. A comparison of the collection rates for the 3-year period ended in FY 1988, based on the second modified calculation method, could not be made since the principal portions of net assessments recorded during the 3-year period were not available. provided in its response, the other suggestions were not incorporated because they did not agree with the detailed information provided to us during our review. In addition, the suggestions focused primarily on the principal portion of CFP debts, which as we stated, overstates collection rates. Furthermore, it does not change our conclusion as to the primary reason for OSM’s low collection rates and its significant amount of CFP debts that were written off, which continued to represent a significant amount of the CFP receivables available for collection from the 3-year period ended in FY 1988 and the 4-year period ended in FY 2000. The following are our comments on the Office of Surface Mining’s letter dated October 1, 2001. 1. Although we did state at the exit conference that the instances of noncompliance may not have affected OSM’s ability to collect the CFP debts, the fact remains that these instances have resulted in misstatements of OSM’s reported CFP receivables. Further and more importantly, because of the lack of documentation of the collection specialists’ actions for two-thirds of the sampled cases, we are unable to assess whether there were material instances of noncompliance with OSM’s past and present debt collection policies and procedures. 2. The draft briefing slides already discussed the policies and procedures established by OSM to write-off cases over 2 years old as currently not collectible and we included OSM’s management approval of payment agreements and development of an installment agreement worksheet in the briefing slides. The steps taken by OSM to address the identified areas of noncompliance are also discussed in the report. 3. We agree that the primary reason for the low collection rates was the poor financial condition of certain CFP debtors. Poor financial quality of CFP debts is typically caused by the poor financial condition of the related debtors. As a result, we revised our report and slides except where we refer to our 1987 report that described this issue as poor financial quality. 4. We incorporated several of OSM’s suggested CFP detail related to the number of debts collected, differentiating between Title IV and V debts, measuring collection rates by age of debt, and focusing on the current process into our briefing slides and reports. However, the other suggestions were not incorporated because they did not agree with the detailed information provided to us during our review. In addition, the suggestions focused primarily on the principal portion of CFP debts, which as we stated at the May 17, 2001, exit conference, overstates OSM’s overall collection rates. Further, it does not change our conclusion as to the primary reason for OSM’s low collection rates and the significant amount of CFP debts that were written off during both the 3 years ended in fiscal year 1988 and the 4 years ended in fiscal year 2000. 5. OSM modified its calculation method from the one discussed in the briefing slides. OSM recalculated its combined annual collection rates at approximately 11 percent—4 percent for Title IV and 17 percent for Title V—based on only the principal portion of the net assessments from the CFP receivables for the 4 years ended in fiscal year 2000. Both modified calculation methods used by OSM inappropriately overstate its annual collection rates. Each method uses only the new CFP net assessments or just the principal portion of new CFP debts and inappropriately excludes current CFP debts that are a part of the beginning receivable balances and earned interest and late charges on the current debts that were recorded during the 4 years ended in fiscal year 2000. Regardless of the method used to calculate collection rates, the main point remains that each collection rate is low and when the same method was applied for both the 3 years ended in fiscal year 1988 and the 4 years ended in fiscal year 2000, the collection rates were similar and did not show any significant increase from one period to the other.6. The “Primary Reason” section of the briefing slides and report were revised and include the changes in the number and amount of the new CFP principal assessments from fiscal year 1997 to fiscal year 2000. 7. As stated in the “Scope and Methodology” section, we selected a total of 184 open and closed CFP cases from a total of 490 cases. And as stated in GAO Comment no. 1, the lack of documentation of the collection specialists’ actions for two-thirds of the sampled cases prevented us from determining whether there were material instances of noncompliance with OSM’s past and present debt collection policies and procedures. 8. See “Agency Comments and Our Evaluation” section.
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This report focuses on debt collection processes and procedures used by the Department of the Interior's Office of Surface Mining (OSM). GAO discusses (1) the primary reasons for the growth in civil monetary penalties owed to OSM; (2) whether OSM's receivables for civil monetary penalties have financial accountability and reporting issues similar to those of its other receivables; (3) whether adequate processes exist to collect this debt; and (4) what roles, if any, the Office of Management and Budget and the Treasury Department play in overseeing and monitoring OSM's collection of civil monetary penalties debt.
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DOD’s personal property program is managed centrally by the Military Traffic Management Command headquarters and administered locally by about 200 military service and DOD transportation offices around the world. The program relies on more than 1,200 domestic commercial carriers and 150 freight forwarders for international shipments to provide household goods transportation and storage services for military personnel and their families when they relocate. The military services pay shipment and storage-related costs from their military personnel accounts and loss and damage claims and personal property shipment office expenses through their operations and maintenance accounts. The program has remained virtually unchanged for nearly 40 years. It involves a complex process of qualifying carriers, soliciting rates, distributing moves, evaluating transportation providers’ performance, paying invoices, and settling claims. Among the program’s many challenges is ensuring that the moving industry provides adequate year-round capacity, especially during the summer peak-moving season when most service members, as well as the general public, schedule their moves. In prior reports, both DOD and GAO have identified problems related to the loss and damage claims process and the low quality of service from movers. In designing and implementing its evaluation plan, the Transportation Command also noted that weaknesses in the current program’s data management system precluded DOD from being able to track shipments in transit and from being able to extract reliable data on the number and types of shipments managed annually and their associated costs. In response to the long-standing problems, DOD has undertaken a number of pilot program studies to find ways to improve the process of shipping service members’ household goods. In August 1996, the Deputy Under Secretary of Defense (Logistics) tasked the Transportation Command with evaluating alternative approaches to the current program and recommending changes in the program based on the results of its evaluation. The Transportation Command identified three ongoing or planned pilot programs to include in its evaluation and began to collect data for its analysis from one of them in 2000. These three pilot programs shared some common features, such as testing performance-based service contracts and providing full replacement (rather than depreciated) value for loss or damage. Each one also had some distinctive features, such as allowing service members to participate in selecting their movers and contracting out installation personal property shipment office functions to private-sector move manager companies. The three pilot programs are summarized below. Further information on each program, as well as DOD’s current personal property program, is provided in appendix II. The Military Traffic Management Command’s Reengineered Personal Property Program operated from the military services’ and the Coast Guard’s installations located in North Carolina, South Carolina, and Florida. It used military installation personal property shipment office personnel, as the current program does, and developed a new data management system that tracked both the movement of individual shipments and information on the number and cost of shipments. The Department of Defense’s Full Service Moving Project operated from the military services’ and the Coast Guard’s installations located in the National Capital Region (the Washington, D.C., metropolitan area), Georgia, and North Dakota. It contracted the management of shipments to private-sector companies and offered optional relocation services, such as referrals for rental assistance and purchase and sale of real estate services, to personnel participating in the pilot program. The Navy’s Service Member Arranged Move Pilot Program operated from Navy installations located in the states of California, Connecticut, Virginia, and Washington. It designated current staff within the installation personal property shipment offices as “move coordinators” to provide assistance, allowed participants to pre-select transportation providers, and paid for moves through government purchase cards. In June 2002, the Transportation Command submitted a report containing its evaluation results and proposed three recommendations to the Deputy Under Secretary of Defense (Logistics). After reviewing the results and receiving comments from the military services, DOD submitted its report, dated November 12, 2002, to Congress. DOD’s report contained the same three recommendations contained in the Transportation Command’s report. DOD also provided cost estimates for implementing the recommendations. The three recommendations were to reengineer the liability/claims process by adopting commercial practices of minimum valuation, simplifying the filing of claims, and providing direct settlement with the carrier; change the acquisition process to implement performance-based implement information technology improvements, which could interface functions across such areas as personnel, transportation, financial, and claims. In its report to Congress, DOD estimated that reengineering the liability/claims process and changing the acquisition process to implement performance-based service contracts would increase the current program’s estimated $1.7 billion cost by 13 percent. Implementing the information technology improvements to enhance its data management capabilities and to provide training to users was estimated at an additional $4 million to $6 million. DOD also estimated that efforts to implement the changes to the current program would be completed by the first quarter of fiscal year 2005. DOD has developed a plan of action and milestones for designing the new personal property program. This initial effort identifies several teams, which are exploring the following issues: the acquisition/solicitation process, quality assurance, the liability/claims process, information systems technology, and electronic billing and payment. Four of these issues address the recommendations included in DOD’s November 2002 report to Congress. The plan identifies a list of essential activities needed to carry out the responsibilities required to build the future personal property program. It also includes time lines and identifies a process to monitor problems and delays. However, it does not include monitoring costs and benefits during the implementation phase and the extent the proposed changes are being achieved within an acceptable and a predefined range. Further, it does not include evaluating the extent the benefits from the pilot programs will be achieved after the new program is implemented to determine whether the anticipated improvements were achieved at a reasonable cost. The three recommendations in DOD’s report to Congress offer solutions to several of the current program’s long-standing problems, such as the liability/claims process and the low quality of service. These problems have been identified in DOD and GAO’s prior reports, as well as in surveys conducted as part of the pilot program evaluation. The inability to monitor shipments and shipping information has been long recognized and was highlighted as an additional problem during DOD’s evaluation. If implemented, the first recommendation (i.e., reengineering the liability/claims process by adopting commercial practices of minimum valuation, simplifying the filing of claims, and providing direct settlement with the carrier) has the potential to help reduce the length of time it currently takes to resolve claims for lost, destroyed, or damaged household goods because the carrier recovery time would be eliminated for most moves, increase the reimbursement rates military personnel receive for their losses, and reduce DOD’s claims-related costs. The second recommendation (i.e., changing the acquisition process to implement performance-based service contracts) has the potential to help improve the generally low quality of service that DOD currently receives from the moving industry. The third recommendation (i.e., implementing information technology improvements, which could interface functions across areas such as personnel, transportation, financial, and claims) has the potential to improve the program’s ability to reliably monitor and collect data on the status and costs of shipments so that accurate reporting can be provided to DOD and Congress. As part of its evaluation, the Transportation Command cited that one of the long-standing problems with military household goods shipments is the liability/claims process, including the (1) length of time it takes to resolve claims, (2) low reimbursement rates, and (3) high cost of claims that DOD must pay. In a study conducted in 1999, the Military Traffic Management Command reported that 146 days are expended between the time a claim is filed by a service member to recovery of costs from the carrier by the government. During this period, military personnel file their claims for lost, destroyed, or damaged household goods with their respective military service’s claims offices and receive settlements (this occurs, on average, within 23 days), and then these offices file the claims against the carriers to recover the costs (this step is completed within the 146 day period). In the Transportation Command’s pre-evaluation survey completed in 2000, responses from military personnel who had recently moved indicated that one of the lowest performance ratings involved the time required to settle a claim. Based on the Transportation Command’s evaluation of the claims process under the pilot programs, one of the results from implementing the pilot programs was the 146 day average required under the current program to settle claims and recover costs was reduced to an average of 30 days since the service member filed directly with the carrier and the military services did not have to recover costs. Under each pilot program, military personnel settled claims directly with the carriers. Service members who were not satisfied with offers made by the carriers could file their unresolved claims directly with DOD. Military services worked these claims with the carriers and if a claim was justified, the service member received just settlement under the pilot programs (i.e., if the items were lost or destroyed, the member received full replacement value, while damaged items were repaired). In its pre-evaluation survey, the Transportation Command found that military personnel cited low reimbursement amounts that typically do not cover the loss or damage of household goods as a major concern during their moves. Under the current program, a carrier’s liability is limited to $1.25 per pound multiplied by the shipment weight. Personnel receive only the depreciated value of lost, destroyed, or damaged items, up to a maximum of $40,000 per move. When arranging their moves under the current program, military personnel can buy increased insurance coverage from their carrier, up to a full replacement value limit of $3.50 per pound times the shipment weight, at a cost of 85 cents per $100 of the stated value of the shipment. However, only military personnel making moves within the continental United States can buy this additional coverage; it is not available to those moving to or from overseas posts. Another option that military personnel have to increase their protection for loss and damage is to buy additional coverage from private-sector sources. Unlike the current program, the pilot programs provided full replacement value for lost and destroyed goods, with maximum amounts ranging from $63,000 to $75,000. Damaged items were repaired. Two of the three pilot programs reported that their cost per pound times the shipment weight rates were $3.50 for $63,000 maximum coverage and $6.00 for $75,000 maximum coverage, respectively. The remaining pilot program did not give a cost per pound, stating only that its maximum coverage rate was $72,000. DOD has reported that, historically, approximately 35 percent of all moves result in loss or damage claims. A 1997 Military Traffic Management Command survey of 3,000 moves revealed that while 65 percent of shipments had loss or damage, only 35 percent resulted in claims being filed. DOD pays approximately $100 million a year in claims but recovers only 60 to 65 percent of the amounts paid to military personnel from the moving industry. These figures understate the actual loss and damage, since all military personnel do not file claims, apparently because the process takes a long time and reimbursement rates do not always cover the losses. DOD incurs these losses due to the structure of its current program. The military claims offices assist service members by arranging to pay their claims and then submitting the claims to the respective movers for reimbursement. As indicated above, DOD receives only partial reimbursement from the moving industry. If the recommendation is implemented, DOD expects to reduce a substantial portion of the estimated $100 million it currently pays in claims each year to service members and eliminate much of the 35 to 40 percent in losses it incurs from settling claims with the moving industry because service members will be settling claims directly with their carriers. DOD also expects additional savings because fewer demands would be placed on military claims officials to manage the claims process. DOD believes that these savings will help offset the higher costs of providing full replacement value to service members for any loss and damage incurred during the shipment and storage of their personal property. Our work has shown that another long-standing problem with the current personal property program is the poor quality of moving services provided to military personnel. The high number of loss and damage claims that military personnel file underscores this problem. According to the two pre-evaluation surveys cited in the Transportation Command’s evaluation, around 55 to 65 percent of respondents reported suffering some loss or damage of household goods during a recent move. Moreover, in the pre-evaluation survey conducted by the Transportation Command, the top four factors identified by service members as being of greatest importance to them in the moving process were the quality of packing, the care in handling personal property, the condition of their property upon receipt at the end of the move, and the receipt of fair payment for any losses or damages they suffered. In individual comments obtained during the pre-evaluation survey, the Transportation Command reported that some service members also cited the lack of professionalism and quality of customer service on behalf of moving crews as a concern. The problem stems primarily from the current program placing greater emphasis on costs (i.e., the lowest bids) than on the quality of service that carriers provide when moving shipments of military household goods. While the current program established its Total Quality Assurance Program to measure quality, data collected to develop scores for each carrier includes three measures (timeliness of pickup, timeliness of delivery, and reported loss and damage), which are not collected for all household goods shipments. The best indication of quality, customer satisfaction, is not measured in the current program. The problem of quality is further exacerbated by the program’s use of a 20 year-old tariff schedule that carriers use in developing their bids. This tariff contains lower rates than the current commercial tariff used during the pilot programs. Unlike the current program, the pilot programs screened carriers that wanted to participate in their programs by emphasizing the quality of carriers’ prior performance rather than the amount of their bids. For example, the Full Service Moving Project contracted a financial services company to conduct a financial and performance assessment of potential movers. The pilot program emphasized best value and placed more emphasis on performance (70 percent) than cost (30 percent) in determining which providers were awarded shipments. The pilot programs showed that these types of contracts could allow the government to pre-screen carriers for financial viability and, more importantly, to institute and maintain a quality assurance process to reduce losses and improve service. In addition to prescreening carriers for quality control purposes, the pilot programs also surveyed military personnel who participated in the programs and used the results to distribute future shipments to carriers that received the best performance scores. To address concerns about the obsolete tariff schedule, the pilot programs adopted current commercial tariffs for carriers to use in establishing their bids. The pilot programs also showed that the solicitation process could be streamlined by eliminating detailed statements of work and that the pilot programs could place responsibility for successful performance on carriers, allowing the government to focus on outcomes, rather than processes. Finally, the pilot programs demonstrated that using these types of performance-based service contracts did not have an adverse effect on small business participation, a major concern of the moving industry. On the basis of the total dollar value of shipments, each pilot program exceeded the Small Business Administration’s goal of 23 percent participation for the industry. Specifically, 48 percent of the Military Traffic Management Command’s Reengineered Personal Property Program’s revenues, 74 percent of the Full Service Moving Project’s revenues, and 100 percent of the Navy’s Service Member Arranged Move’s revenues went to small businesses. Another ongoing problem with the current personal property program is its inability to provide reliable data on the status of in-transit shipments or on the number and associated costs of shipments managed by DOD each year. Because of the lack of reliable data on shipments and costs, program managers have no way of knowing the actual costs of moving military personnel’s household goods. In addition, they have no access to real-time tracking data that they could use to manage transportation and storage costs and to help cut down on the need for temporary storage by reducing the number of failed deliveries. Two of the pilot programs included features to address the problems associated with the current program’s stand-alone data management system. The pilot programs each developed a Web-based data management system to enhance the visibility of individual shipments and provide more reliable data on shipments and costs. For example, the Military Traffic Management Command’s Reengineered Personal Property Program’s data management system provided in-transit visibility. This made it possible to track the status of individual shipments and gave real-time access to those sections of the shipment records that various parties involved in the relocation process needed for data entry or status review. The pilot program’s data management system provided a complete picture of the service member’s move from start (the move application process) to finish (the claims submission and resolution process). In addition, the data management system demonstrated the potential to provide information to personnel in various functional areas involved in the service members’ relocation process (such as personnel, transportation, financial, and claims). Finally, the data management system demonstrated the potential to provide data for planning and budgeting purposes on the types of shipments made annually across DOD and their costs. The Full Service Moving Project’s data management system was developed but not fully implemented because the military services terminated their participation in the pilot program due to its high costs. While the Navy’s pilot program developed a database near the end of the Transportation Command’s evaluation, the database was not fully implemented nor assessed as part of the evaluation. Our analysis indicated that DOD’s three recommendations are supported by the results of the Transportation Command’s evaluation of the three pilot programs. The Transportation Command adopted a sound methodology to conduct its evaluation, and it adjusted this methodology when circumstances warranted. The results of the Transportation Command’s evaluation are based on data collected from a limited number of geographical areas. While the shipments included in the evaluation do not represent all shipment types managed annually by DOD, we believe that the evaluation results provide sufficient information to allow DOD to initiate actions to improve its current personal property program within budget constraints. We found that the Transportation Command used a methodologically sound approach to evaluate the results of the three pilot programs and make its recommendations. Before it started the evaluation process, the Transportation Command considered some lessons learned that had emerged from our review of the Hunter Pilot Program in 1999, and it followed through with several of them. For example, it obtained assistance from a contractor to design an evaluation plan that met professional standards. The Transportation Command identified four aspects, or factors, of the property program that served as the focus of its evaluation (i.e., quality of life, total costs, small business participation, and process improvements). The evaluation plan also prescribed that only one quality of life survey be administered to each participating service member in order to avoid survey “fatigue” that can result from subjecting a person to multiple surveys, and thus avoid the resulting potential for questionable results. In designing the evaluation plan, the Transportation Command incorporated a number of important evaluation features. These features included assessing the four factors consistently across all three pilot programs, ensuring that the evaluation received data from the pilot programs during the same time period to avoid the need to make adjustments due to potential changes in carrier operations and costs, conducting a survey of service members using the current program to establish a baseline from which to measure the pilot program results, and developing a method to provide estimates of what DOD would have paid for comparable shipments under the current program for those shipments completed under the pilot programs. The Transportation Command made appropriate adjustments to the evaluation plan when it learned that the three pilot programs would not be underway at the same time and that they would not provide all of the information originally outlined in the plan. For example, the Full Service Moving Project began later and terminated earlier than was expected, the Navy’s Service Member Arranged Move Pilot Program failed to conduct a quality of life survey and collect cost data as outlined in the evaluation plan, and none of the three pilot programs provided costs associated with individual process improvements. The Transportation Command included qualitative analytical techniques so that it could include as much information on each pilot program as possible in its evaluation while also dealing appropriately with data limitations. The Transportation Command also shifted the evaluation focus from the individual pilot programs to specific features from the three programs, such as full replacement value for loss and damage and the screening process for carrier participation. Our work indicated that the Transportation Command’s analysis of data collected from the three pilot programs supports the three recommendations that DOD included in its report to Congress. The Transportation Command’s analysis of household goods shipment data from the pilot programs showed that the average amount of time that service members and DOD spend to settle claims and recover costs from carriers fell dramatically in all three pilot programs. In comparison with the current program’s 146-day average, it took only 30 days, on average, to settle a claim under the Reengineered Personal Property Program and the Full Service Moving Project and fewer than 14 days under the Navy’s program. Survey results indicated that full replacement (rather than depreciated) value, direct claims settlements, and anticipated improvements in the claims process accounted for the highest increases in satisfaction. Based on experiences during the pilot programs, DOD believes that direct claims settlement between service members and carriers should reduce claims costs DOD currently incurs. Under the current program, DOD must collect from the carriers after it has paid the service members’ claims. DOD expects that this step will be eliminated in most instances because it is anticipated that service members will be resolving most of their claims directly with their carriers. The Transportation Command’s analysis of process improvement data, interviews and observations during site visits, and survey results from the pilot programs supported DOD’s recommendation to use performance- based service contracts to improve the quality of services that the moving industry provides to the military. The process of prescreening carriers desiring to participate in the pilot programs on the basis of their financial viability and past performance helped to eliminate poor performers. Furthermore, the pilot programs’ use of post-move surveys allowed them to get immediate and continuous feedback on the carriers’ performance and to use this information to distribute future work to those carriers with the highest performance ratings and best value. In addition, two of the pilot programs reduced the amount of paperwork associated with soliciting proposals and approving carriers. Finally, the Transportation Command’s review and observations of two of the pilot programs’ Web-based data management systems supported DOD’s recommendation to overhaul the current personal property program’s computer system (the Transportation Operational Personal Property Standard System). The Transportation Command found that the Reengineered Personal Property Program’s data management system significantly improved communications between the various DOD offices and the moving industry. The system gave real-time access to shipment records to DOD’s personal property shipment offices, certifying officers, prepayment auditors, military service headquarters, and military service claims offices and finance centers, as well as moving industry participants. Similar results occurred with the Full Service Moving Project’s Best Value Distribution Database system, but the military services terminated their participation in this pilot program before the system’s full potential could be demonstrated. While the shipments included in the evaluation do not represent all the shipment types managed annually by DOD, we believe that the evaluation results provide sufficient information to allow DOD to initiate actions to improve its current personal property program. Our review found that the estimates DOD reported to Congress might understate the total initial cost for implementing the information technology improvements recommendation and contain a questionable adjustment for costs associated with the claims and contracting process recommendations. Also, DOD did not quantify the risk associated with implementing these latter recommendations within its projected 13 percent increase over the current program’s cost. Therefore, the ability to implement changes to the existing program within the cost estimates reported to Congress is uncertain. Based on our discussions with Military Traffic Management Command officials and review of available documents, we concluded that the total initial cost to implement the information technology improvements recommendation will more likely be $7 million rather than the $4 million to $6 million estimate that DOD previously reported to Congress. In its response to a draft of this report, DOD maintained that the costs to implement a new Web-based data management system would fall within its initial cost estimate of $4 million to $6 million. DOD’s projected cost estimate includes $5 million for development and implementation of the new system and $500,000 each for user training and system verification and validation testing. At a minimum, based on these projected cost estimates, the initial cost to implement the information technology improvements recommendation would more likely be $6 million. While we concur with the premise of two of the three adjustments used to develop the 13 percent cost increase to implement the remaining recommendations, we are less assured in the extent to which the projected savings related to the third adjustment may occur. We found that the first two adjustments were based on historical data. However, we question the rationale DOD used to develop the third adjustment, as the savings associated with this adjustment are based on assumed cost reductions resulting from changes in program operations. Also, these reductions lack the same quality of evidentiary support as DOD provided for the other two adjustments. DOD believes it took a conservative approach in developing the savings in each of the three adjustments; therefore, it assumes that the proposed changes to claims and the contracting process can be achieved within the 13 percent increase over the current program’s costs. Due to the long- standing problems with this program and the high pilot program costs that contributed to the military services’ early termination of participating in one of the pilot programs, we believe that by quantifying the risk associated with this projection, DOD could provide the military services and Congress information needed to develop and review future budget requests for this program. Further, without carefully monitoring costs during the implementation process and assessing costs and benefits from a period succeeding full implementation of the recommendations, DOD will not have the information needed to determine if anticipated improvements in the program are being achieved at a reasonable cost. Currently, DOD is beginning planning efforts to implement the recommendations. These efforts do not include monitoring and evaluating costs and benefits during the implementation phase and post implementation of the recommendations in a new program. The information DOD has provided on costs to implement the information technology improvements recommendation varies. Information provided during our review indicated that the total initial cost to improve the current data management system would be higher than the $4 million to $6 million DOD included in its report to Congress. DOD worked with the contractor who developed the Reengineered Personal Property Program’s Web-based data management system to develop an estimate of the cost to expand the capabilities tested during the pilot program. Also included in this estimate were funds to provide training for users of the new system. Based on our discussions with officials from the Military Traffic Management Command and our review of available documents, we concluded that these costs would more likely be $6 million, as the data management system development cost was projected to be $5 million with an additional $1 million for user training. The need for this training as part of a new personal property program was identified during DOD’s evaluation of the pilot programs. We increased our overall projections for the cost of the new system to $7 million when we learned that DOD planned to continue spending at least another $1 million annually for independent verification and validation testing and contractor support. This latter expense was identified to us during discussions following DOD’s submission of its report to Congress. In its response to a draft of this report, DOD maintained that the costs to implement a new Web-based data management system would fall within its initial cost estimate of $4 million to $6 million. It projected a cost of $5 million for system development and implementation and $500,000 each for user training and initial system validation. At a minimum, based on these projected cost estimates, the initial cost to implement the information technology improvements recommendation would more likely be $6 million. Because we did not assess the sufficiency of DOD’s original estimates of $1 million each for training and validation testing, we are unable to assess the impact of the reduction on the improvements in information technology across DOD. Based on our discussion with DOD officials, we learned that the plan is to implement this recommendation regardless of the status of the other two recommendations because managers and users of the program need more reliable information to manage the program’s shipments and their costs. Funds to implement this recommendation would come from the military services’ operations and maintenance accounts. The soundness of the three adjustments the Military Traffic Management Command used to develop its estimated 13 percent increase over the current program costs to implement the remaining recommendations—the claims process and performance-based service contracts—varies. We found that two of these adjustments are based on reasonable assumptions and are supported by historical experience and by data. The savings associated with the third adjustment are based on assumed cost reductions resulting from changes in program operations and lack the same quality of evidentiary support as DOD provided for the other two adjustments. Therefore, we are less assured in the extent to which the savings associated with this adjustment may occur. Finally, we found that in its report to Congress, DOD did not quantify the risk of achieving these recommendations within the projected 13 percent increase. This information is important to the military services as they develop their military personnel and operations and maintenance budget requests and to Congress as it assesses the reasonableness of these requests. In developing the 13 percent estimate, the Military Traffic Management Command determined that three adjustments to the average costs for the pilot programs were required to develop the cost for the full rollout of a new personal property program. The first two adjustments (i.e., reducing the average weight of shipments and reducing costs to adjust for a mix of small and large businesses) were made to offset differences between the pilot programs’ shipments and those more typically managed across DOD. The third adjustment was made to reduce the pilot programs’ costs to reflect anticipated savings based on economies of scale. In developing these adjustments, the Military Traffic Management Command worked with a contractor and consulted with officials from the military services and moving industry associations. While we believe that the shipment weight and small business mix adjustments are reasonable, we question the extent to which the economies of scale or program efficiencies adjustment may be achieved. For the weight adjustment, the Military Traffic Management Command determined that the average weights of moves in the two pilot program areas were higher than those experienced in typical departmentwide moves. As a result, the Military Traffic Management Command reduced the pilot programs’ average weights to reflect the lower, more typical weights to be used in calculating a total cost for a departmentwide program. This adjustment resulted in a 12 percent drop in average costs. We found the approach of using historical data to more accurately reflect the typical shipment weights to be reasonable. Next, the Military Traffic Management Command further lowered the pilot programs’ average costs because the pilot programs had higher small business participation rates than the departmentwide average, and small businesses are typically more expensive than large businesses. Small businesses accounted for 48 percent of the cost of all moves under the Reengineered Personal Property Program and 73 percent under the Full Service Moving Project. In addition, small businesses were 14 percent more expensive per shipment in the Reengineered Personal Property Program and 74 percent more expensive in the Full Service Moving Project than what each pilot program paid to large businesses. In developing its departmentwide estimate, the Military Traffic Management Command used a small business participation target rate of 30 percent. This 30 percent target rate is higher than the Small Business Administration’s 23 percent goal for government agencies conducting business with this industry. On the basis of this lower participation rate, the Military Traffic Management Command reduced the pilot programs’ average costs further by 8 percent. We agree that this adjustment in costs based on differences in the pilot programs’ small business participation rate and the new 30 percent goal is a reasonable way to reflect the differences between the pilot programs’ costs and the departmentwide-projected costs. We found that the third adjustment that the Military Traffic Management Command made—to reduce the cost of departmentwide shipments because of economies of scale or program efficiencies—was not adequately supported based on either historical experience or data that DOD later provided. The Military Traffic Management Command reduced the pilot programs’ average costs by 5 percent on the assumption that the pilot programs’ shipments involved only a limited number of providers; the pilot programs only included a limited number of shipments while the current program manages over 600,000 shipments annually; more accurate and timely management data that includes service member counseling, reduced losses, and storage and indirect costs will result in a more efficient program; and overhead and operating costs will be spread due to a larger volume of shipments. While recognizing that some changes may result from these anticipated program efficiencies, the effect of these changes on potential cost savings is uncertain at this time. The Military Traffic Management Command did not provide the same level of evidentiary support that it provided on the other two adjustments. Further, we believe that only time will determine if DOD’s assumption for this adjustment, in particular, proves to be correct. We found that DOD has not provided a level of assurance to the military services and Congress that its projected 13 percent increase over the current program’s cost can be achieved. Quantifying the risk associated with this projection could provide the military services assurance of the viability of the projected 13 percent increase as they prepare budgets to support the increased cost for this program. Congress could also use this information as it reviews DOD’s requests for additional funds to implement changes in this program. The need for this type of information is further supported based on the long-standing problems associated with the current program and the fact that shipment and storage costs under the pilot programs were significantly higher than those that DOD estimated it would have paid under its current program in the same geographical areas. These costs ranged from 31 to 32 percent higher under the Reengineered Personal Property Program and from 51 to 54 percent higher under the Full Service Moving Project. These higher-than- anticipated costs contributed to the military services’ decision to terminate their participation in the Full Service Moving Project before its test period ended. While DOD did not quantify the risk, per se, it believes a conservative approach was taken in developing the savings in each of the three adjustments. As a result, DOD assumes that the proposed changes to the claims and contracting processes can be achieved with its projected increase of 13 percent over the current program’s budget. We still believe that the Military Traffic Management Command could have quantified the risk and provided this additional information to the military services and Congress as additional assurance of the likelihood of implementing the two recommendations within its projected 13 percent increase. The need for this information is further supported based on the long-standing problems DOD has experienced in this program, the fact that the military services terminated participation in one of the pilot programs due to the high cost increases, and the need to determine whether the proposed additional funds from military personnel and operations and maintenance accounts will be sufficient to implement the recommendations. In addition to the information that could be gained from quantifying the risk of its cost projection, we believe that only by careful monitoring during the implementation phase will DOD be able to ensure that the proposed changes are being achieved within an acceptable and a predefined range. Further, while we believe that the evaluation results support implementing plans to enhance the current program, it should be noted that the pilot programs’ shipments included in the evaluation were not typical of all types of shipments managed annually. Therefore, DOD was precluded from projecting the extent to which the recommended improvements can be achieved DOD-wide. Unless a subsequent evaluation is undertaken after the recommendations have been implemented, DOD will not be able to assess the extent to which the projected benefits are being achieved for military personnel, their families, and DOD, and whether the benefits are being achieved at a reasonable cost. Selecting an evaluation period to include the peak-moving season would also provide DOD with the information its needs to determine if the proposed changes can be achieved during the summer, when the demand for moving services by DOD and the private sector is at its highest. The three recommendations DOD developed from its evaluation of the current and pilot programs, if implemented successfully, could enhance the quality of life for relocating service members and their families; reduce claims-related costs to DOD; and resolve problems related to the reliability of management information on the status of shipments and on the quantity, types, and costs of shipments that DOD and the military services manage annually. Delaying implementation of the recommendations only prolongs problems military personnel, their families, and DOD experience under the current program. DOD has not quantified the risk associated with achieving its projected 13 percent increase over the current program’s costs to implement the claims process and performance-based service contract recommendations. Without quantifying the risk, the military services and Congress cannot be assured that these recommendations can be achieved within this estimate or whether additional funding or trade-offs may be needed. Further, without careful monitoring during the implementation phase, DOD will not be able to ensure that the proposed changes are being achieved within an acceptable and a predefined range. Because the pilot programs’ shipments included in the evaluation were not typical of all types of shipments managed annually, it was not possible for DOD to project the extent to which the recommended improvements can be achieved departmentwide. Without evaluating the program following implementation of the recommendations, DOD will be unable to assess the extent to which the projected benefits for military personnel, their families, and DOD are being achieved and, if so, whether they are being achieved within a reasonable cost. Also, if DOD does not select an evaluation period that includes the peak-moving season, it will not have the information needed to determine if the proposed changes can be achieved in the summer, when the demand for moving services is at its highest. To improve the personal property program for military personnel, their families, and program administrators, we recommend that the Secretary of Defense direct the Commander, U.S. Transportation Command, to initiate actions to implement the three recommendations contained in DOD’s report to Congress within budget constraints, provide the military services and Congress additional information to quantify the risk associated with achieving the projected 13 percent cost estimate before the claims process and performance-based service contracts recommendations are implemented to provide the military services with information needed for budgeting purposes, monitor costs for all recommendations during the implementation phase to ensure that the proposed changes are being achieved within an acceptable and a predefined range, and assess the effects of the three recommendations on the personal property program (to be carried out after the summertime peak-moving season once the recommendations have been implemented) to determine whether the anticipated improvements in the program are being achieved at a reasonable cost. In commenting on a draft of this report, DOD concurred with three of our four recommendations. For the first of these recommendations, DOD stated that it is developing a plan to implement those recommendations it reported to Congress and anticipates its recommendations will be implemented by the end of the first quarter of fiscal year 2006, assuming the military services receive the additional funds needed to fund program enhancements. In response to our recommendation to monitor costs during the implementation phase, DOD stated that rolling out the new program will require monitoring of costs to determine if the moving industry partners are submitting bids that will allow DOD to enhance this program within the projected 13 percent cost increase. Further, DOD plans to include a process to conduct a rate reasonableness analysis upon receipt of the rates. For rates found to be outside the range of reasonableness, carriers will be given one opportunity to resubmit their rates. DOD plans to only use those rates determined to be reasonable in the new program. DOD also plans to include metrics, target/benchmark performance indicators, and a methodology for data collection in an updated program of action and milestone plan. For our recommendation, i.e., assess the effects of the three DOD recommendations on the personal property program to determine whether the anticipated improvements in the program are being achieved at a reasonable cost, DOD plans to collect data needed to determine if anticipated improvements have been achieved on a continuing basis. DOD plans to use customer satisfaction surveys in developing carrier performance ratings, which will be established quarterly, with the exception of the peak season, when performance ratings will be established monthly. If properly implemented, we believe the proposed DOD actions will sufficiently address these recommendations. DOD partially concurred with the remaining recommendation, i.e., provide the military services and Congress with additional information to quantify the risk associated with achieving the projected 13 percent cost estimate to provide the military services with information needed for budgeting purposes. DOD continues to believe that the 5 percent reduction it made to pilot programs’ average costs to adjust for economies of scale/program efficiencies was reasonable and very conservative and that the program can be implemented within the projected 13 percent increase over current program costs. DOD also reported that one of the military services validated the 13 percent cost increase following our audit. Further, DOD stated that it did not see value added in providing the military services or Congress a formal risk assessment but will continue to work with the military services as execution progresses to make sure they have all information required for budget purposes. Additionally, while not part of this recommendation, DOD also said it did not concur with our finding that the cost estimate for implementing its information technology improvements recommendation would be $7 million. In reviewing the response, we found that DOD still did not provide any data to support its assumption of a 5 percent cost savings from economies of scale/program efficiencies. DOD stated that the new program will be about 200 times larger than the pilot programs and that the resulting increase in volume will lower the cost per unit, a standard and accepted law of economics. While we agree that the cost may decrease, it may also increase or remain unchanged. Moreover, the cost may decrease by less than 5 percent. Without specific data showing the per move costs will decrease as the scale of operations increase, we continue to question the basis for DOD’s assumption of a 5 percent reduction. We believe that the validation effort completed by one of the military services, along with the calculations and assumptions DOD used in developing the 13 percent cost estimate, does not provide the military services and Congress with information needed to reliably develop and review budget requests to fund enhancements to the current program. We continue to believe that DOD needs to qualify this estimate with a measure of the risk associated with implementing its recommendations. Without providing the range of possible cost increases and the risk regarding the likelihood of achieving this 13 percent projection within that range, DOD may encounter a repetition of its experience with one of the pilot programs, which had to be terminated because actual costs exceeded projected costs. Absent this risk information, the military services will have to wait until after the transportation providers submit their bids in order to learn whether the recommendations can be implemented within the 13 percent projection. Should the bids result in costs that exceed this estimate, DOD and the military services will need to make adjustments to ensure that the recommendations are implemented within funding limits. Therefore, we continue to believe that our recommendation has merit. Our finding that the implementation of the information technology improvements recommendation would likely cost $7 million rather than the $4 million to $6 million that DOD projected was based on information we received from DOD during the audit. Specifically, we calculated that the costs to develop and implement the new system would be about $5 million and that training for users of the enhanced system would cost an additional $1 million. DOD had identified the need for this training during its evaluation of the pilot programs. After DOD submitted its report to Congress, it identified another potential cost—an additional $1 million for independent verification and validation testing of the system. Our $7 million estimated included all three of these cost elements. In its response to a draft of this report, DOD maintained that its costs estimate would fall within its initial cost estimate of $4 million to $6 million, including $5 million for system development and implementation and an additional $500,000 each for user training and system verification and validation testing. At a minimum, based on these projected cost estimates, the initial cost to implement the information technology improvements recommendation would more likely be $6 million. However, since we did not originally assess the sufficiency of the $1 million estimates for training and testing, we are unable to assess what impact DOD’s reduction for these costs to $500,000 would have on the implementation of the system across DOD. We have reflected DOD’s changes in the body of our report. DOD’s comments are reprinted in appendix III. DOD also provided technical comments, and we revised our report to reflect them where appropriate. We performed our review from April 2002 through February 2003 in accordance with generally accepted government auditing standards. Appendix I contains the scope and methodology for this report. DOD’s comments are reprinted in their entirety in appendix III. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Commander, U.S. Transportation Command; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be made available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-8365 or Lawson Gist, Jr., at (202) 512-4478 if you or your staff have any questions concerning this report. Key contributors to this assignment were Robert L. Self, Jacqueline S. McColl, Arthur L. James, Jr., Charles W. Perdue, and Nancy L. Benco. To assess the extent to which the recommendations in the Department of Defense’s (DOD) November 2002 report to Congress addressed major problems in the personal property program, we took the following steps: To identify the major problems facing the current personal property program, we reviewed DOD and GAO reports addressing this program. These reports identified problems associated with quality of service and claims. We also conducted interviews with personal property program officials and their contractors to gain an understanding of the current data management system’s limitations and the long-standing problems involving the lack of reliable information on shipments and their costs. To determine whether the proposed recommendations in DOD’s report to Congress addressed the major problems of the current program, we tracked the recommendations back to the U.S. Transportation Command’s report on its evaluation results and assessed the extent to which the recommendations are linked to and have the potential to address problems. To assess whether the recommendations in DOD’s report to Congress were supported by DOD’s evaluation findings and should be implemented, we took the following steps: To determine if the Transportation Command developed a methodologically sound evaluation plan, we assessed the command’s efforts against the findings and recommendations contained in our report on the Army’s Hunter Pilot Program results and against professional standards we would use if conducting a comparable evaluation. These sources addressed issues such as (1) seeking advice in designing a methodologically sound evaluation plan, (2) developing the evaluation plan prior to testing, (3) identifying factors to be assessed and the data required for analyses to develop findings and recommendations, (4) limiting quality of life surveys to only one for each participant to preclude survey “fatigue,” and (5) conducting simultaneous testing of the pilot and current programs. To determine if the Transportation Command implemented an effective evaluation strategy during the data collection phase of its evaluation, we reviewed the pilot programs’ efforts to collect data for the four factors as prescribed in the Transportation Command’s evaluation plan. We also assessed the adjustments the Transportation Command made in its evaluation strategy to address issues that could affect the soundness of the results. An example of the issues addressed included developing a constructed cost methodology to provide better estimates of what DOD would have paid under the current program for shipments made by the pilot programs. To assess the Transportation Command’s development of findings and recommendations to improve the current personal property program, we reviewed the evaluation techniques (quantitative and qualitative analyses) used to analyze data collected for the four factors. Further, we assessed the extent to which the Transportation Command adjusted the evaluation techniques to make up for differences in the way that the pilot programs provided data for the evaluation. To assess the methodology that DOD used to develop cost estimates for implementing the recommendations, we took the following steps: To determine the reliability of the cost estimates for the pilot programs and for the proposed recommendations, we reviewed the cost projection methodologies used by the Transportation Command and by the Military Traffic Management Command. To determine the reliability of pilot program shipment-related costs used in the report, we reviewed the data collection efforts used by each pilot program for the transportation and storage of household goods included in the Transportation Command’s evaluation. Further, we reviewed the constructed cost methodology used to develop the estimates of what DOD would have paid to make comparable shipments under the current program in the pilot programs’ test areas. To determine the reasonableness of the assumptions and sources of data used to develop cost estimates for implementing recommendations for the personal property program, we met with officials from the Military Traffic Management Command and their contractor to discuss the methodology. We also reviewed the contents of their briefing on the cost estimate work for implementing changes to the claims process and performance-based service contracts and additional information the Military Traffic Management Command provided on the costs to implement information technology improvements. We did not make an assessment of whether the anticipated benefits to be derived from implementing the three recommendations would warrant the additional costs DOD projects will be required to fund these improvements. Furthermore, we did not independently test the reliability of data DOD extracted from its data system to develop costs. We found that the department placed proper caveats on their use of such data, and in the case of comparing pilot programs’ shipment costs to current program costs, developed a constructed cost methodology to address current program data management system weaknesses. During this and prior reviews of DOD’s evaluation efforts, we met with officials and obtained documents from the Office of the Assistant Deputy Under Secretary of Defense (Transportation Policy), Washington, D.C.; the U.S. Transportation Command, Scott Air Force Base, Illinois; the Military Traffic Management Command, Alexandria, Virginia; the Department of Defense Inspector General, Full Service Moving Project, and Hay Group (Transportation Command Contractor), Arlington, Virginia; American Management Systems (Transportation Command contractor), PricewaterhouseCoopers (Military Traffic Management Command contractor), and Systems Research and Applications (Military Traffic Management Command contractor), Fairfax, Virginia; Logistics Management Institute (Military Traffic Management Command contractor), McLean, Virginia; the Navy’s Service Member Arranged Move Pilot Program, Mechanicsburg, Pennsylvania; The Gallup Organization (Full Service Moving Project contractor), Omaha and Lincoln, Nebraska; and Parsifal Corporation (Military Management Traffic Command contractor), Palm Bay, Florida. In addition to these agency meetings and documents, we drew upon information contained in a testimony statement, in reports, and in status briefings resulting from our prior reviews of this program. Our work for this review was performed from April 2002 through February 2003 in accordance with generally accepted government auditing standards. The Transportation Command evaluated three pilot programs to assess alternative approaches that might address long-standing problems with its current personal property program. The following tables provide features of the current program and the three pilot programs. As the tables show, the pilot programs had several features that provided enhancements to military personnel and their families and to DOD that are not offered by the current program. Table 1 compares claims-related features. Specifically, the pilot programs provided full replacement value rather than depreciated value for loss and damage and guaranteed claims settlement with 45 to 60 days of filing the claims. Table 2 compares the quality of service-related features. Some of the comparable features included emphasizing performance over cost in selecting transportation providers and prescreening of transportation providers. Table 3 compares data reliability-related features. As noted, only one of the pilot programs had a data management system that provided reliable information to track individual shipments in transit and provide overall data on shipments and their associated costs. Additional information on the current program and on each pilot program and its unique features follows. The current DOD personal property program, valued at over $1.7 billion annually, moves more than 600,000 shipments each year for military personnel and their families from the military services, Defense agencies, and the Coast Guard. DOD is the moving industry’s single largest customer. Managed centrally by the headquarters office of the Military Traffic Management Command and administered locally by about 200 military and DOD transportation offices around the world, this program relies on over 1,200 domestic commercial carriers and more than 150 forwarders for international traffic to provide moving and storage services. When loss and damage occur, military personnel can submit claims to their respective military service claims office. Based on depreciated values, the reimbursement rate is $1.25 per pound multiplied by the shipment weight, with a maximum amount of $40,000 per move. Military personnel have up to 2 years after receiving their shipments to file claims but must submit notice of loss and damage within 70 days of delivery. The current program does not have a specified time period in which the claims are to be settled. The current program provides counseling services and arranges the shipment and storage of household goods and unaccompanied baggage through government representatives, who are available to assist military personnel and their families at the origin and destination points of their moves. The current program does not have a real-time tracking system for shipments nor does it provide a single point of contact to manage the entire moving process; therefore, military personnel may interact with several people at the origin and destination offices during their relocation. The current system is not designed to select transportation providers on the basis of quality service; rather, transportation providers offering a minimally acceptable level of quality are generally selected based on the lowest rates. The program uses the Total Quality Assurance Program to develop quality scores for each transportation provider. Each local military installation distributes its traffic using a traffic distribution roster. Transportation providers are placed on the rosters for each channel (origin and destination areas) by order of rate level and quality score. Transportation providers who participate in the domestic part of the current program submit their rates as a percentage of the government tariff, which is nearly 20 years old. The providers who participate in the international part of the current program submit single factor or fixed rates per hundredweight of the shipments. The current program does not use customer satisfaction surveys as a means to evaluate transportation provider performance. To remain in the program, a provider must maintain a minimally acceptable level of quality– a 90 percent score. Three factors are measured: on-time pickup, on-time delivery, and reported loss and damage to determine if points should be deducted from transportation providers and allocation of shipments should be reduced or terminated. The current program does not provide service members with real-time visibility of shipments during the relocation process. Personnel at origin and destination personal property shipping offices enter information on shipments to their respective Transportation Operational Personal Property Standard Systems. However, data in these individual systems does not include all shipments that occur during the year, and the systems are not accessible to all parties involved in the relocation process. Destination personal property shipment offices are forwarded information on shipments via the current system; however, payment data on these shipments is maintained in a separate system. In addition to not providing information on all aspects of individual shipments, the current program’s data management system does not provide DOD and the military services information about the types of shipments and related costs for planning and budgeting purposes. The following are examples of the current system’s limitations: the format of the system makes compiling data from multiple sites difficult; not all data is captured promptly; and not all data and costs are captured/updated in the system. Under the current program, the military services reimburse carriers and forwarders for shipment-related costs from military personnel accounts. Personal property shipment office expenses and claims filed with the government are funded from the military services’ operations and maintenance accounts. Sponsored by the Military Traffic Management Command, the Reengineered Personal Property Program included outbound shipments for military and Coast Guard personnel departing from installations located in North Carolina, South Carolina, and Florida (excluding Tyndall Air Force Base). The pilot program ran concurrently with the existing program at these installations. The pilot program’s goal was to include 50 percent of eligible moves from the above installations to continental United States and European locations. The remaining shipments were to be moved under the existing program. The Reengineered Personal Property Program was initiated in January 1999 and operated for 12 months before data was submitted to the Transportation Command for evaluation. Reimbursement for loss and damage claims was increased from depreciated value to full replacement value, and the dollar amounts per move increased from $40,000 under the current program to $63,000 under the Reengineered Personal Property Program. Additionally, the pilot program provided direct claims settlement between military personnel and their transportation providers and a requirement that transportation providers settle claims within 60 days of receiving claims forms from military personnel. Like the current program, the Reengineered Personal Property Program relied on personnel in the personal property shipping offices to provide counseling services and arrange for shipment and storage of household goods and unaccompanied baggage. A central contact point in these offices was not designated to manage the entire moving process; therefore, military personnel may have interacted with several people at the origin and destination offices during the relocation process. However, to improve customer service, the program’s Pilot Transportation Operational Personal Property Standard System provided real-time worldwide tracing capability. Greater emphasis was placed on performance in awarding shipments to transportation providers. Evaluation of financial status, elimination of high-risk companies, and consideration of providers’ past performance, rather than lowest bid, played the dominant role in selecting initial transportation providers to participate in this pilot program. Transportation providers who participated in the pilot program submitted their bids for various origin and destination routes as a discount from the commercial tariff. Prices were fixed for a year, with no provision for rate increases during the contract period. Awards were made only to transportation providers whose offers conformed to the solicitation and represented the best overall value to the government. The Military Traffic Management Command evaluated company performance quarterly and compliance with terms and conditions of the contracts annually. Subsequent performance reviews were conducted based on customer satisfaction surveys and claims data. After transportation providers received their minimum guarantee of business for the year ($25,000), future awards were offered to the best performers. Feedback was provided monthly to transportation providers, and those that became poor performers were no longer offered household goods and unaccompanied baggage shipments. The Reengineered Personal Property Program provided the transportation provider’s toll-free number to military personnel to enhance visibility over their shipments throughout the relocation process. The Reengineered Personal Property Program implemented its central, Web-based Pilot Transportation Operational Personal Property Standard System in part to address problems associated with visibility of and availability of information on shipments during the relocation process. The pilot program’s data management system provided real-time access to both shipment and payment records. Access to the various modules of the system was granted to personal property shipment office personal at origin and destination locations, transportation providers, invoice certifying officers, prepayment auditors, military service headquarters, and military service claims offices and finance centers, based on each party’s need for the information. The system’s design allowed for entry of current address and telephone numbers of military personnel to improve the process of delivering household goods to a new residence. Data reliability was enhanced under the Reengineered Personal Property Program, but one problem noted during the evaluation was the need for military personnel to ensure that their contact information (phone number and address) was current during the relocation process. This had an effect on deliveries of household goods and the quality of life survey contractor’s ability to reach military personnel to ascertain their opinions about their relocation experience. In addition to providing information on all aspects of individual shipments, the Reengineered Personal Property Program’s data management system demonstrated the potential to provide DOD and the military services with information about the types of shipments and related costs managed annually for planning and budgeting purposes. The Reengineered Personal Property Program achieved stronger transportation provider commitment with long-term contracts, and it used contractor support to conduct quality of life surveys with military personnel moving under the pilot program and to perform audits of each invoice submitted by transportation providers. Like the current program, the military services reimbursed carriers and forwarders for shipment-related costs from their military personnel accounts. Transportation office expenses and any claims filed with the government were funded from the services’ operations and maintenance accounts. Sponsored by the Office of the Assistant Deputy Under Secretary of Defense (Transportation Policy), the Full Service Moving Project included outbound shipments for military and Coast Guard personnel and DOD civilian departing from locations in the National Capital Region, Georgia (excluding Robins Air Force Base), and Minot Air Force Base, North Dakota. The pilot program’s goal was to include 90 percent of the moves from these locations to continental United States and to European and Asian-Pacific locations. The remaining shipments were to be moved under the current program. The Full Service Moving Project began in January 2001 and continued until its early termination in September 2001. Due to continuing delays in implementing this pilot program and DOD’s decision to terminate the pilot program in September 2001, the Full Service Moving Project had limited operational experience before submitting data to the Transportation Command. Reimbursement for loss and damage claims was increased from depreciated value to full replacement value, with the dollar amounts increasing from $40,000 per move under the current program to $75,000 per move under the Full Service Moving Project. Additionally, the pilot program provided for direct claims settlement between military personnel and their transportation providers and a requirement that the responsible party (transportation providers or move managers) settle claims within 45 days of receiving claim forms from military personnel. Unlike the current program and other pilot programs, the Full Service Moving Project tested the use of private-sector relocation companies (move managers) for outsourcing traditional transportation services (counseling and arranging for the shipment and storage of household goods and unaccompanied baggage) performed by origin and destination personal property shipping offices. The pilot program’s goal was to provide a single point of contact (move manager) for military personnel and transportation providers to contact throughout the relocation process. The Full Service Moving Project made major changes to the existing transportation provider approval, rate solicitation, and traffic distribution processes. The pilot program emphasized best value and placed more weight on performance (70 percent) than cost (30 percent) in determining which transportation providers would be awarded shipments. The pilot program contracted with a financial services company to conduct financial and performance assessments of transportation providers and move manager companies that wanted to participate in the pilot program. For approved transportation providers, rates were established for a 1-year cycle. The providers submitted their rates as a discount from the commercial tariff for domestic shipments and negotiated single rate factors for the overseas locations. Approved move managers were awarded 2-year contracts with 1-year options. The move management companies competitively bid their fees as flat rates, depending on whether they were responsible for claims settlement or the transportation provider carried this liability. Also, different fees were established for domestic and international shipments. The Full Service Moving Project used survey data from all personnel participating in the pilot program to determine future percentages of shipments that would be allocated to the transportation providers. The pilot program also planned to use survey data on move manager performance to determine future participation in the pilot program and incentive payments. The Full Service Moving Project’s Web-based Best Value Distribution Database maintained the transportation providers’ quality and cost scores based on survey information and costs associated with prior shipments. Move managers used this data to assign future shipments. However, in some instances (i.e., for group moves, when meeting small business requirements, when there was a lack of transportation provider capacity to handle shipments offered, for multiple shipments to a single transportation provider, and for international shipments to areas without an established rate), move managers were told to deviate from the information provided by the data management system. One of the goals of incorporating move managers into the relocation process was to provide real-time information to military personnel and to transportation providers regarding the status of household goods shipments. The move managers, unlike the current program’s personal property shipping office personnel, were responsible for the entire relocation process from the point of origin in establishing entitlements, arranging for transportation providers, and handling other personnel- related issues, to the destination in overseeing deliveries, approving storage, and either settling claims or assisting military personnel with issues involving settling claims with the transportation providers if the liability fell with the providers. Working with both military personnel and transportation providers, the move managers used contact information to keep military personnel informed of their shipments’ status and to coordinate the delivery of the shipments at the destination. Additionally, as part of the pilot program, all participants were provided a toll-free number to maintain visibility over their shipments throughout the process. In addition to move managers, the Full Service Moving Project’s Web- based Best Value Distribution Database was implemented to address problems associated with visibility of shipments during the relocation process. The pilot program’s data management system had access to both shipment and payment records via interface with US Bank’s PowerTrack and the move managers’ systems. Access to the pilot program’s data management system was granted to move managers, invoice certifying officers, military service headquarters, and military service claims offices and finance centers, based on each party’s requirements. Move managers were responsible for keeping the status of the shipments current in the pilot program’s data management system. However, the move managers did not always update this information in the system. Further, the ability of the move manager to contact the service member was directly affected by the information provided by the member. The Full Service Moving Project’s Web-based Best Value Distribution Database was anticipated to provide DOD and the military services information on the types of shipments and related costs managed annually for planning and budgeting purposes. Unlike the Reengineered Personal Property Program where various parties in the relocation process entered data into that pilot program’s data management system, the majority of the data in the Full Service Moving Project’s data management system was predicated on the move managers gathering and entering the information. The Full Service Moving Project achieved stronger transportation provider commitment with long-term contracts and faster payment of invoices; it offered binding cost estimates for shipments; it used contractor support to conduct quality of life surveys with military personnel moving under the pilot program and to perform audits of each invoice submitted by the transportation providers; and it offered optional relocation referral assistance for activities such as the purchase and sale of service members’ residences. Move managers were required to perform prepayment audits and business rules were established for an automatic payment method. Payment methodology was predicated on the move manager entering the expected invoice into PowerTrack and the transportation provider submitting a notice of delivery and invoice. Payment timeliness was also driven by the timeliness of documentation submitted by the transportation providers. On some invoices, the contracting representative had to review and certify payment in PowerTrack. This occurred when the match showed a difference of more than $1.00. For this pilot program, the military services reimbursed carriers and forwarders for shipment-related costs from military personnel accounts. These accounts were also used to fund move manager expenses. Any claims that might have been filed with the government would have been funded from the military services’ operations and maintenance accounts. Sponsored by the Navy, the Service Member Arranged Move Pilot Program included only domestic outbound intrastate and interstate shipments for Navy personnel moving from its installations located at Puget Sound, Washington; San Diego, California; Norfolk, Virginia; New London, Connecticut; and Whidbey Island, Washington. One of this program’s objectives was to offer Navy military personnel a set of moving choices to meet their specific needs. This pilot program was one of three choices offered. Military personnel moving from the above locations could choose to move under the current personal property program, move their own household goods, or participate in the pilot program. The pilot program was initiated in April 1997 and began operations in January 1998. Because the Navy decided not to scope the Service Member Arranged Move Pilot Program comparable to other pilot programs (i.e., operational at multiple military services) and the pilot program did not provide data as outlined by the Transportation Command’s evaluation plan, its inclusion in the Transportation Command’s evaluation was limited to a qualitative assessment. Reimbursement for loss and damage claims was increased from depreciated value to full replacement value, with the dollar amounts per move increasing from $40,000 under the current program to $72,000 under the Service Member Arranged Move Pilot Program. Additionally, the pilot program provided direct claims settlement between military personnel and their transportation providers and a requirement that transportation providers settle claims within 60 days of receiving claims forms from military personnel. Like the current program, the Service Member Arranged Move Pilot Program also relied on personnel in the personal property shipping offices to provide counseling services and arrange shipment and storage of household goods and unaccompanied baggage. However, the shipping office personnel at the origin installations participating in this pilot program served as the single point of contact coordinating the service members’ moves and remained available throughout the move to handle all issues, including claims. Unlike those participating in the current program and other pilot programs, service members participating in this pilot program identified the transportation provider they desired to handle their household goods shipments after they completed their reviews of participating providers’ vendor quality books (containing provider information and marketing materials) and of surveys completed by previous pilot program participants. The personal property office coordinator assigned to the service member had to concur with the member’s request, and the coordinator made actual arrangements with the carrier. Staff in the program management office and personal property shipping offices participating in the Service Member Arranged Move Pilot Program initially screened transportation providers that wished to participate in the pilot program based on providers’ performance rather than low cost. Letters of agreement were adopted to streamline the contracting process and improve the quality of the move for Navy personnel. According to pilot program officials, these letters of agreement provided commercial best practices and enabled lessons learned from prior pilot program efforts and industry to be incorporated into the Navy pilot program. Actual contract awards were made on a case-by-case basis based on the best value decision for each move. Transportation providers used commercial tariffs in developing their bids for each move. Transportation providers approved to participate in the pilot program submitted their bids for various origin and destination channels using commercial tariffs. Bids were rejected if they did not fall within acceptable percentage discounts. Feedback was provided monthly to transportation providers, and those that became poor performers were no longer offered household goods and unaccompanied baggage shipments. Subsequently, service members who were planning their upcoming moves relied on information contained in a nine-question survey that other service members had completed after their moves and claims process ended. Service members who volunteered to participate in this pilot program had to manually review carrier books, which included documents provided by the carriers and prior surveys completed by service members who had been moved by the carriers. According to pilot program officials, six carriers were terminated or canceled from the pilot program–four for providing poor service and two for price gouging. The Service Member Arranged Move Pilot Program relied upon the shipping office personnel, who served as the single point of contact coordinating the service members’ moves, to maintain visibility of shipments during the relocation process. In addition, the pilot program provided both the personal property shipping office’s and transportation provider’s toll-free numbers, as well as a pager to service members to enhance the members’ visibility of their shipments during the relocation process. The Service Member Arranged Move Pilot Program did not initially develop an alternative data management system to capture data on shipments and payment records. By the end of the pilot program, the Navy had developed a database to capture shipment data; however, the system was not fully implemented or evaluated. Unlike the other pilot programs, the Navy pilot program used local personal property program personnel rather than third parties to review all invoices for payment. Navy personnel who participated in the pilot program completed their own surveys, mailing the paper forms to their respective personal property program offices. The Service Member Arranged Move Pilot Program was designed to offer all shipments to small businesses, to provide direct claims settlements between Navy personnel and the transportation providers, to make faster payments to transportation providers through government purchase cards, and to establish a stronger commitment from transportation providers by offering long-term contracts. Like the current program, the Navy reimbursed carriers and forwarders for shipment-related costs from its military personnel account. Personal property shipment office expenses were funded from the Navy’s operations and maintenance account. While information on claims filed with the government was not provided, under this pilot program such expenses would also be funded from the operations and maintenance account. Defense Transportation: Final Evaluation Plan Is Needed to Assess Alternatives to the Current Personal Property Program. GAO/NSIAD-00-217R. Washington, D.C.: September 27, 2000. Defense Transportation: The Army’s Hunter Pilot Project Is Inconclusive but Provides Lessons Learned. GAO/NSIAD-99-129. Washington, D.C.: June 23, 1999. Defense Transportation: Plan Needed for Evaluating the Navy Personal Property Pilot. GAO/NSIAD-99-138. Washington, D.C.: June 23, 1999. Defense Transportation: Efforts to Improve DOD’s Personal Property Program. GAO/T-NSIAD-99-106. Washington, D.C.: March 18, 1999. Defense Transportation: The Army’s Hunter Pilot Project to Outsource Relocation Services. GAO/NSIAD-98-149. Washington, D.C.: June 10, 1998. Defense Transportation: Reengineering the DOD Personal Property Program. GAO/NSIAD-97-49. Washington, D.C.: November 27, 1996.
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The Department of Defense (DOD) spends more than $1.7 billion each year to move and store over 600,000 household goods shipments when relocating military personnel. It conducted and evaluated several pilot program studies aimed at fixing its problem-plagued program and, in 2002, issued a report to Congress with three recommendations. The 1997 Defense Appropriations Act Conference Report directed GAO to validate the results achieved by the pilot programs. In response, GAO examined the extent to which DOD's recommendations to Congress (1) offer solutions to long-standing problems in the current program and (2) are supported by the evaluation's findings and should be implemented. GAO also assessed the soundness of methodologies used by DOD to develop cost estimates to implement the recommendations. The recommendations in DOD's report to Congress have the potential to resolve several long-standing problems found in the current personal property program, which manages the transportation and storage of household goods. The recommendations, if implemented, would (1) reengineer the claims process to reduce the length of time it currently takes to resolve claims for lost, destroyed, or damaged household goods and increase the reimbursement rates that military personnel currently receive for their losses; (2) use performance-based service contracts to improve the generally low quality of service that DOD currently gets from the moving industry; and (3) put in place new information technology with interface capabilities to enable program managers and users to monitor in-transit shipments and track the number and cost of shipments processed each year. The recommendations in DOD's report to Congress are supported by the Transportation Command's evaluation of the pilot programs' findings and should be implemented within budget constraints. DOD's approach in conducting the evaluation was methodologically sound: It developed an evaluation plan to guide its work and adjusted the plan when necessary to address differences in the pilot programs' approaches. While the shipments included in the evaluation do not represent all shipment types managed annually by DOD, GAO believes that the evaluation results provide sufficient information to allow DOD to initiate actions to improve its current personal property program. GAO found that the soundness of methodologies used to develop DOD's cost estimates varied. Therefore, DOD's ability to implement changes to the existing program within the cost estimates DOD reported to Congress is uncertain. GAO found that the estimate to implement the information technology recommendation was $7 million rather than the $4 million to $6 million estimate DOD reported to Congress. In developing cost estimates for the remaining recommendations, DOD did not provide the same level of evidentiary support for one of the three adjustments it used to align the pilot programs' costs to current program costs. As a result, GAO questions the extent to which these recommendations can be implemented within DOD's estimated 13 percent increase over current program costs. While DOD believes it used a conservative approach in developing this 13 percent estimate, it has not quantified the risk associated with the projection, which could provide the military services and Congress information needed to develop and review future budget requests for this program. Without providing the range of possible cost increases and the risk regarding the likelihood of achieving this 13 percent projection within that range, DOD may find a repeat of what occurred during the pilots, where the military services terminated participation in one of the pilot programs due to costs exceeding projections. GAO also found that without carefully monitoring costs during the implementation phase and assessing costs and benefits from a period succeeding full implementation of the recommendations, DOD would not have the information needed to determine if anticipated improvements in the program are being achieved at a reasonable cost.
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Warfighters need to be confident that military medical personnel can take care of them if they are wounded on the battlefield. However, Gulf War reports pointed out that medical personnel were unprepared to provide combat casualty care. These reports questioned the Department of Defense’s (DOD) ability to meet its wartime medical mission, particularly in providing care to the predicted number of casualties. A major area of concern was that many military medical personnel lacked sufficient training or experience in wartime skills, such as trauma care. Few military medical personnel receive hands-on training for trauma care, which includes treating actual patients who have incurred severe injuries. Instead, most medical readiness training is provided through formal classroom instruction and field exercises. In peacetime, medical personnel have little chance to practice their battlefield trauma care skills because most patient care provided in military treatment facilities bears little resemblance to injuries treated in wartime. For example, the most common wounded-in-action injury is an open penetrating wound, whereas the most common peacetime diagnosis is a single live birth. In fact, none of the 50 most frequent peacetime diagnoses at military medical centers match a wounded-in-action condition. Appendix I describes the top five wounded-in-action injuries, nonbattlefield injuries, and diseases and the top five diagnoses seen in military treatment facilities in fiscal year 1997. DOD lessons learned after the Gulf War highlighted that many medical personnel had little to no experience in taking care of severely injured patients. For example, of the 16 surgeons on the Navy hospital ship USNS Mercy, only 2 had recent trauma surgical experience. Also, none of the over 100 corpsmen at a surgical support company had ever seen actual advanced trauma life support given to a trauma patient. In addition, an Army report highlighted that surgical teams identified to complement the rapid movement of troops during the war and provide emergency surgical services consisted of physicians who were not surgeons, such as obstetrician/gynecologists. An Army trauma surgeon deployed to the area believed that an obstetrician could not have provided lifesaving definitive surgery. In 1992 and 1993, we issued reports on medical readiness weaknesses identified during the Gulf War. These reports highlighted that some medical personnel were not trained to take care of combat casualties. For example, although Navy nurses and physicians who were deployed to the war were described as experienced and competent, many of them had never treated trauma patients, and most had not completed training in combat casualty care. The prolonged buildup of forces over a 6-month period allowed Navy personnel to perform medical training, such as refresher resuscitative skills, mass casualty drills, and triage procedures. Also, one report noted that a slot for an Army thoracic (chest) surgeon was filled by a gynecologist who admitted that he was not qualified for the position because he had never opened a human chest cavity. A July 1995 Congressional Budget Office report on restructuring military medical care, prepared at the request of the House Committee on National Security, indicated that the military services may need to establish affiliations with level I civilian trauma centers to improve wartime medical training and broaden exposure to wounded-in-action injuries. Level I centers provide total care for the most severely injured trauma patients.Many injuries seen in these centers are similar to the injuries seen in war. Only 2 of DOD’s 115 military hospitals are level I trauma centers. These centers are Brooke Army Medical Center and Wilford Hall Medical Center, both located in San Antonio, Texas. In March 1995, Congress held hearings on DOD wartime and peacetime medical requirements, including medical readiness training weaknesses. In February 1996, Congress enacted the National Defense Authorization Act for Fiscal Year 1996 (P.L. 104-106). Section 744 of the act required that the Secretary of Defense implement a demonstration program to evaluate the feasibility of providing shock trauma training for military medical personnel in civilian hospitals. DOD has about 100,000 active duty medical personnel, including general and other surgeons, nonsurgical physicians, physician assistants, nurses, and enlisted medical personnel. Various teams of these personnel provide medical care to wounded soldiers on the battlefield. The most critical time for treatment of severe battlefield trauma is within the first hour of injury. Historical data from past conflicts shows that medical treatment, including nonsurgical, makes a significant contribution to the decrease in loss of lives and limbs during this critical period. Initial care of a wounded soldier is provided by self-aid or a fellow soldier administering first aid. The first medically trained team that responds to battlefield injuries—known as first responders—includes enlisted medical personnel, such as combat medics, field corpsmen, and independent duty corpsmen, and a physician assistant or a physician. These personnel move with the combat units they support and provide medical care limited to emergency procedures that prevent death, such as establishing an airway, controlling hemorrhaging, administering intravenous fluids, and stabilizing wounds and fractures. Forward surgical teams, which consist of physicians (especially surgeons), nurses, and medical technicians, also provide care for those severely injured on the battlefield. These teams provide emergency surgical procedures that prevent death, loss of limb, or body function. The size of the team is determined by the predicted number and type of casualties. Military physicians must meet basic civilian education and residency requirements as well as military training requirements to provide medical care during wartime. After 4 years of medical school, physicians receive specialized training in graduate medical education or residency programs. Residents in a surgical specialty are required to perform a rotation in trauma and critical care to become board-certified general surgeons. This rotation provides the resident experience with hands-on management and treatment of severely injured trauma patients. Much of this trauma training occurs in civilian facilities because DOD has only two level I trauma centers that receive severe trauma patients. After physicians complete residency training, no formal DOD or service hands-on training program exists for sustaining trauma care skills. Although there is no requirement in the civilian sector for continuing hands-on experience, the American College of Surgeons suggests that surgeons treat about 50 severe trauma cases per year to remain adequately trained in trauma care. Enlisted medical personnel, such as combat medics and field corpsmen, receive initial medical readiness training in both basic military and life support skills. The military skills courses teach technical, tactical, and leadership training necessary for personnel to function as part of a medical team in a war environment, and the basic life support course teaches necessary medical skills. For example, the entry-level course for Army medics includes about 150 hours of classroom training devoted to basic emergency medical skills and a field exercise at the conclusion of the class. However, the medics do not receive hands-on trauma experience at a hospital or on board an ambulance. Before deployment, both military physicians and enlisted medical personnel are required to take courses on combat casualty care, which focuses on the military casualty management system and casualty care in a battlefield environment. These courses consist of classroom instruction, animal laboratories, and field training and include the principles of trauma life support. These courses also do not provide hands-on exposure to actual trauma patients. The Office of the Assistant Secretary of Defense for Health Affairs is responsible for the overall supervision of health and medical affairs within DOD. In addition to issuing policy, Health Affairs controls and monitors the services’ medical readiness programs and resources, including medical training programs. Health Affairs has established a number of organizations to help oversee medical readiness. For example, in June 1996, Health Affairs formed the Defense Medical Readiness Training and Education Council, which is responsible for developing joint medical readiness training policy and overseeing the services’ medical training programs, including trauma care. In August 1996, Health Affairs organized the Combat Trauma Surgical Committee to study policy options for sustaining wartime trauma surgery capabilities. Current Committee members include trauma surgery representatives from each service, Reserve Affairs, the Uniformed Services University of the Health Sciences, the private sector, two military treatment facilities that have affiliations with civilian trauma centers, and DOD’s two military trauma centers. In February 1997, the Committee issued a report recommending three categories of military trauma-trained surgeons and trauma training standards, which included both hands-on experience and continuing education. The service Surgeons General approved the recommendations, and in May 1997, the Acting Assistant Secretary of Defense for Health Affairs directed the services to develop phased implementation plans for training active duty personnel in trauma surgical skills. The Surgeons General of the military services are responsible for policy development, direction, organization, and management of the health services system within their service. Each service has a medical department that is responsible for providing medical readiness training (i.e., the Army Medical Command, the Navy Bureau of Medicine and Surgery, and the Air Force Medical Services). Each individual department trains its medical personnel for their missions. However, the unit commander is ultimately responsible for certifying that unit personnel have medical readiness training. The Deputy Director for Medical Readiness Division in the Joint Staff Directorate for Logistics is responsible for reviewing medical portions of the commanders in chief’s operation and contingency plans and Joint Strategic Planning System documents to assess the adequacy, feasibility, and suitability of medical plans, requirements, and resources. In 1997, the Division sponsored five seminars to identify medical capabilities, training issues, and technology needed to support future war-fighting missions through 2010. The seminars focused on the management of wartime casualties in theater, including the identification of core medical skills and the subsequent training requirements. Section 744 of the National Defense Authorization Act for Fiscal Year 1996 requires us to assess the effectiveness of DOD’s demonstration program in providing shock trauma care training for military medical personnel through one or more public or nonprofit hospitals. Specifically, we (1) determined the status of the demonstration program and DOD’s actions to meet the legislative provisions, (2) identified other initiatives aimed at training military personnel in trauma care, and (3) identified key issues that DOD should address if it decides to expand its trauma care training program. To obtain background information on DOD medical readiness and trauma care training, we interviewed officials within many DOD and service components and reviewed DOD directives, policies, and guidelines. Our review focused on active component training because DOD focused the demonstration program and its initial efforts on the active duty component. In addition, active duty personnel provide most of the care in military treatment facilities. Nevertheless, reserve personnel play a major role in wartime medical care since they represent about 57 percent of all military medical personnel. Also, we reviewed DOD reports and studies on medical readiness training, DOD medical lessons learned reports from the Gulf War, and other related reports and congressional testimonies on military medical care. We examined military medical textbooks, medical journals, and various other information sources for relevant data on trauma care. To assess the effectiveness of DOD’s demonstration program, we (1) monitored the implementation of the program by Naval Medical Center Portsmouth officials, (2) collected data on the program and the rotations through the civilian trauma center at Sentara Norfolk General Hospital, (3) interviewed the program’s trainees and Navy trauma-trained surgeon and medical school officials, and (4) discussed legal issues regarding the program with Navy judge advocate officials from both the Naval Medical Center Portsmouth and the Navy Bureau of Medicine and Surgery. To identify other initiatives aimed at providing military medical personnel training in trauma care and determine the key issues that DOD faces in providing military medical personnel training in wartime medical skills, we interviewed officials from Health Affairs, military treatment facilities that provide trauma care training or have training affiliations with civilian trauma centers, and private trauma centers. We also interviewed military medical personnel who trained in civilian trauma centers. In addition, we consulted with officials from a professional medical association affiliated with trauma care to learn their perspectives on military trauma care training. We did not evaluate the feasibility of increasing the number of military treatment facilities that receive trauma patients. However, DOD officials noted that a substantial investment would be required to upgrade a military treatment facility to a level I trauma center. Appendix II lists all the federal, state, and private organizations we contacted. We conducted our review from April 1997 to February 1998 in accordance with generally accepted government auditing standards. Section 744 of the National Defense Authorization Act for 1996 mandated the establishment of DOD’s demonstration program to evaluate the feasibility of providing shock trauma training to military medical personnel in one or more public or nonprofit hospitals. However, the program does not fully meet all of the requirements of the mandate. Further, the program will only have been in effect for 5 months, as of April 1, 1998, and thus will need to be further developed before its effectiveness can be fully determined. Section 744 of the National Defense Authorization Act for Fiscal Year 1996 (P.L. 104-106, Feb. 10, 1996) requires DOD to implement a demonstration program by April 1, 1996, to evaluate the feasibility of providing shock trauma training for military medical personnel through one or more public or nonprofit hospitals. The law also requires DOD to report on the status of the demonstration program by March 1, 1997, and March 1, 1998, and us to comment on the program’s effectiveness by May 1, 1998. Finally, the law requires that agreements with hospitals include a provision that the hospitals provide health care services to DOD beneficiaries that are at least equal to the value of the services provided by the military personnel training at the hospitals. In April 1996, Health Affairs requested input from the services on existing programs that could be used for the demonstration program to train military general surgeons in a civilian trauma center. In April 1997, Health Affairs designated Naval Medical Center Portsmouth in Virginia as the site for the demonstration program because of its affiliation with Sentara Norfolk General Hospital—a local trauma center—and Eastern Virginia Medical School. This affiliation had consisted of Navy general surgery residents training at the local trauma center and two Navy trauma-trained surgeons on call at the civilian trauma center about 3 to 4 nights per month. In addition, a Navy surgeon at Portsmouth had been involved in the Combat Trauma Surgical Committee, which established the standards for trauma surgery sustainment training. No other sites were proposed by the Navy. According to Health Affairs and service officials, other sites were informally suggested but were deemed unacceptable because they were either military treatment facilities, instead of civilian centers, or graduate medical education programs, instead of sustainment training programs. Other suggestions had limitations. For example, the Army initially suggested a trauma sustainment program based in Georgia but then did not support it because the surgeon in charge of the program was deployed to Bosnia for a year. The Air Force suggested Ben Taub General Hospital in Houston; however, its current program for general surgeons only consists of observation and no hands-on experience. Because of the limitations of these and other possibilities, Health Affairs requested that the Naval Medical Center Portsmouth conduct the DOD demonstration program. In October 1997, the medical center signed an agreement with Eastern Virginia Medical School to obtain sustainment trauma training for Navy general surgeons at Sentara Norfolk General Hospital. The first rotation began in November 1997. Sentara Norfolk General Hospital, a nonprofit hospital, is the only level I trauma center located in Norfolk, Virginia. It is also the primary teaching hospital for Eastern Virginia Medical School. The hospital is a 664-bed facility located on a large medical complex that includes Eastern Virginia Medical School and a children’s hospital. In 1996, Sentara’s trauma center saw 2,060 trauma and burn patients. The hospital is also part of a larger regional health management organization, Sentara Health System, which currently holds the DOD contract for TRICARE through which approximately 40,000 enrollees eligible for the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) receive health care services. Eastern Virginia Medical School is a private school that does not own a hospital but provides human resources to Sentara Norfolk General Hospital and other hospitals in the area. The school has nearly 600 students in its degree programs as well as 300 residents and fellows and 300 faculty members. The surgery staff at Eastern Virginia Medical School currently provides and directs trauma services at Sentara Norfolk General Hospital. General surgery residents from Eastern Virginia Medical School and Naval Medical Center Portsmouth also rotate at Sentara Norfolk General Hospital for trauma care experience. Naval Medical Center Portsmouth is a 360-bed facility that provides medical services to active duty Navy, Marine Corps, Army, Air Force, and Coast Guard personnel; their families; and other DOD beneficiaries. The medical center is one of three major teaching hospitals in the Navy with residency programs, including general surgery. The head of the Department of General Surgery at Naval Medical Center Portsmouth has specific responsibility for the demonstration program. Under the program, a general surgeon from the medical center performs a 3-week rotation at Sentara Norfolk General Hospital. The Portsmouth official in charge of the program said that the program is operated at no cost to the government because the hospital is within commuting distance of the medical center. In addition, the Portsmouth official said the absence of a surgeon from the medical center does not affect the center’s patient workload because the general surgery department is well staffed. During the rotation, a Navy general surgeon is to be on call every other night at Sentara Norfolk General Hospital and, when possible, under the supervision of a Navy trauma-trained surgeon. Currently, Naval Medical Center Portsmouth has only one trauma-trained surgeon who is to be on call at the hospital 3 to 4 nights a month. On the remaining nights, the Navy trainee is to be under the direction of a civilian attending physician. The trainee is to function as a trauma team leader and be responsible for assessing patients and developing therapeutic and diagnostic plans. The trainee is to receive hands-on experience in caring for trauma patients, including stabilizing and resuscitating the patient by (1) inserting intravenous lines for fluids, chest tubes for air in the chest cavity, or endotracheal tubes for airway management and (2) performing surgery if necessary. The trainee is also responsible for the management of the patients after they leave the trauma room and enter the intensive care unit. DOD’s implementation of the demonstration program does not fully meet the legislative provisions authorizing the program for two reasons. First, the program did not meet the congressionally mandated schedule. Second, the program agreement does not include a provision that the civilian center provide health care services to DOD beneficiaries that are at least equal to the value of the services provided by military personnel training in the center. Public Law 104-106 directed DOD to implement its demonstration program by April 1, 1996. However, DOD did not implement the program at Sentara Norfolk General Hospital until November 1997. The law also specified that DOD report to Congress on the scope and activities of the demonstration program by March 1, 1997, and March 1, 1998. DOD issued its first report to Congress on July 24, 1997. The report describes the activities leading up to identifying the requirements for peacetime training of military surgeons, describes the demonstration site, and states that DOD would monitor other trauma training programs in military treatment facilities and with civilian centers. DOD’s second report, due March 1, 1998, had not been issued as of March 13, 1998. Figure 2.1 shows a timeline of major events from enactment of the law to the actual start of the demonstration program. DOD officials cited four main reasons for the delay in implementing the program. First, Health Affairs officials explained that the delay was partly due to shifting responsibility for the program between its offices. The program started in the Clinical Services office because Health Affairs thought trauma care training was a peacetime training issue. When Health Affairs realized that trauma care training was actually a wartime medical readiness training issue, it transferred responsibility for the program to its Health Services Operations and Readiness office. Second, Health Affairs was examining whether it could use in-house trauma training programs at DOD’s two trauma centers—Brooke Army Medical Center and Wilford Hall Medical Center—to fulfill the legislative mandate. The officials stated that these two military centers could train the whole trauma team and not just general surgeons. However, Health Affairs realized that this training would not meet the requirement of the law because the training would not take place in civilian trauma centers. In addition, according to Brooke and Wilford Hall officials, their military centers do not have the trauma volume to train military personnel that are not already permanently assigned there. Third, Health Affairs officials wanted to determine minimum training standards for general surgeons before the start of the program. According to DOD officials, consensus on the minimum number of cases and the amount of time needed in training was difficult to reach. Agreeing and publishing DOD’s recommendation for the minimum training standards for trauma surgery took from August 1996, when the Combat Trauma Surgical Committee was convened, to February 1997. According to a Committee official, consensus took a long time because (1) no civilian standards existed on how many cases per year a surgeon needs to manage to be adequately trained in trauma and (2) the length of training that is both reasonable and doable was difficult to determine, given DOD’s conflicting medical missions. Finally, DOD did not want the implementation of the demonstration program to interfere with other Naval Medical Center Portsmouth trauma training at the civilian center. Specifically, from May to October of each year, senior surgical residents from Naval Medical Center Portsmouth train for 3 months at Sentara Norfolk General Hospital. During this rotation, the surgical residents function as trauma team leaders. The official responsible for the demonstration program did not want to send general surgeons for sustainment training at the hospital at the same time as senior surgical resident training because the number of cases that could be managed by each group would be lessened. The Deputy Assistant Secretary of Defense for Health Services Operations and Readiness was not concerned about the late implementation of the demonstration program because he believed that 6 months would be adequate to determine the feasibility of training surgeons in a civilian trauma center. Other service officials stated that they were not concerned with the implementation deadline. These officials believed that it was more important to take the necessary time to design the program correctly rather than implement a program quickly just to meet the target date specified in the legislation. The agreement between Naval Medical Center Portsmouth and Eastern Virginia Medical School does not include an exchange of equal-value services, as required by the law. Specifically, the law states that an agreement shall require that the value of the services provided by a hospital to members of the armed forces and other DOD beneficiaries should be at least equal to the value of the services provided by military medical personnel under the agreement. The Navy did not propose equal value of services in its negotiations with Eastern Virginia Medical School. The official at Naval Medical Center Portsmouth that is responsible for the demonstration program believed that, if he had asked for this arrangement, the program would not have been initiated. Health Affairs officials said that they instructed Navy officials to try to meet the conditions of the law but not to allow negotiations on in-kind services to prevent the program from being implemented. In addition, officials believed that the value of the services provided by the military trainees was offset by the value of the training provided by the medical school. Eastern Virginia Medical School officials told us that an in-kind services arrangement would not be acceptable because neither the school nor the hospital receives any significant financial benefit from this arrangement. Officials also stated that the Navy surgeon trainee is used as additional staff and does not reduce the medical school’s staffing. Further, medical school officials stated that, if the Navy had insisted on such an arrangement, the demonstration program at Sentara would not have been acceptable. We discussed the possibility of in-kind service arrangements with trauma officials from four large level I trauma centers that provide training to military medical personnel. Officials from two of the centers stated that their hospital would be willing to consider an in-kind service arrangement with DOD, especially if DOD included a military trauma-trained surgeon as an attending physician. One of these centers currently provides room and board to its military trainees. The other center is in the process of negotiating an agreement in which 20 military trainees would receive room and board. Officials from the other two centers stated that their facilities would not consider providing in-kind services. It is still too early to determine the effectiveness of the demonstration program in training medical personnel in trauma care. The program at Sentara is limited to general surgeons, and only a few surgeons have rotated through the program. Also, not enough data has been collected: a training evaluation tool had not been completed as of January 1998, and an interim data collection instrument captures very little data. In addition, although the site chosen for the demonstration program provides valuable training, it does not offer the volume of penetrating trauma cases other urban centers may have afforded. Although DOD’s demonstration program is to evaluate the feasibility of training military medical personnel in public or nonprofit hospitals, the program has provided training thus far only to general surgeons. The program currently does not include training other military medical personnel who are expected to be the first to treat combat casualties, such as combat medics, corpsmen, and general medical officers. Health Affairs officials acknowledged that personnel other than general surgeons need trauma care training but stated that the training started with the surgeons because they are considered the trauma leaders. The officials also believed that civilian hospitals would more readily accept general surgeons because of their credentials and licenses. In addition, DOD already had numerous affiliations with civilian hospitals to provide graduate medical education to military physicians. An official at Eastern Virginia Medical School indicated that the DOD demonstration program could be expanded to include personnel other than general surgeons. The official noted that the school currently has physician assistant and surgical assistant training programs that could incorporate training for military corpsmen. Although the demonstration program has been limited to training general surgeons, we found a number of unrelated programs that are training medics and corpsmen in civilian trauma centers. For example, the Third Marine Aircraft Wing in California trains corpsmen and general medical officers at a level I trauma center in southern Los Angeles County. Likewise, Army Special Operations Forces enlisted medical personnel train at three civilian facilities located in Maryland, Colorado, and New Mexico. The Army is also negotiating with a level I civilian trauma center in Texas to provide training to a forward surgical team made up of general surgeons, orthopedic surgeons, anesthesiologists, nurses, and medics. Only four surgeons will have completed their training rotations by the March 1, 1998, congressional reporting date. The first trainee began his 3-week rotation in November 1997 and saw a total of 65 cases, including 50 blunt trauma, 5 gunshot wounds, 3 stabbings, and 7 other injuries. Of the total number of cases, 20, or 31 percent, were categorized as severe. The trainee performed surgery for six cases, including three penetrating trauma cases. The five gunshot wounds and the three stab wounds are penetrating injuries and are therefore similar to the type of combat casualties that are expected on the battlefield. These penetrating trauma cases represented 12 percent of the total number of cases. As of January 1998, the Portsmouth official responsible for the demonstration program stated that the feasibility of training military surgeons in a civilian trauma center had been shown. However, he believed that it would probably be another 6 months to 1 year, as additional trainees rotate through the program, before the effectiveness of the program could be determined. The trauma-trained surgeon and the first two Navy trainees, who all had prior deployment experience in the Gulf War, acknowledged that the training at Sentara Norfolk General Hospital provided them with recent experience in treating trauma. Although the surgeon and trainees reserved judgment on the overall effectiveness of the program, they believed that the program built their confidence level in treating severely injured patients. Naval Medical Center Portsmouth and Eastern Virginia Medical School have been developing a training evaluation tool. This tool is expected to capture data on the number and type of injuries managed and the procedures performed. The Portsmouth official in charge of the demonstration program has the responsibility for developing the evaluation tool, but no administrative support personnel have been provided to assist with the official’s additional duty. As of January 1998, the evaluation tool had not been completed, and the Portsmouth official did not know when it would be completed because of other competing demands. In the interim, the official has been collecting data on the number and types of cases managed by the trainees and working on a database to compile this information along with the procedures performed by the trainees. The official is also working on a subjective questionnaire for trainees who have completed the program. This questionnaire is to capture the trainees’ trauma experience level before they began their rotation and assess the adequacy of the training they received at Sentara Norfolk General Hospital. According to an official in Clinical Services, Health Affairs did not establish criteria for selecting a site for the demonstration program other than identifying already established military trauma training programs with civilian trauma centers. Health Affairs did not consider the amount of penetrating trauma cases that these centers typically see. As a result, it is not clear whether the site selected for the demonstration program will provide as many penetrating trauma cases as other potential sites. About 90 percent of battlefield trauma is penetrating (e.g., bullets from small arms and fragments from explosive munitions). Although criteria for site selection was not established when Naval Medical Center Portsmouth was chosen, DOD and civilian trauma officials told us that trauma centers that receive more than 2,500 trauma cases per year, with at least 30 percent from penetrating trauma, would provide the most hands-on exposure to warlike injuries. In addition, these officials and representatives of the American College of Surgeons’ Committee on Trauma stated that an ideal trauma center would also be associated with an academic center to show a commitment to trauma education, training, and research. Trauma centers that frequently meet these criteria are large inner-city level I centers whose personnel are frequently strained by the large number of trauma cases. One DOD official believed that the civilian center’s proximity to a military hospital and the presence of reserve or retired military personnel at the civilian center should also be a factor in selecting a site. Sentara Norfolk General Hospital is a level I trauma center, associated with a medical school, located within close proximity to a military hospital, and staffed with active and retired military personnel. However, the trauma center does not have the volume of penetrating trauma cases as some other civilian level I trauma centers that train military medical personnel. Sentara had less than 400 penetrating trauma cases in 1996, but other trauma centers that train military medical personnel had about 900 to 1,200 cases of penetrating trauma per year. For example, Martin Luther King, Jr./Drew Medical Center received 1,188 cases of penetrating trauma in 1996. Before the DOD demonstration program in November 1997, no overall DOD or servicewide program existed to provide hands-on experience in treating trauma patients. A number of individual programs have been established with civilian trauma centers to fill the void left by the lack of DOD training programs for trauma care. These individual programs generally involve affiliations between physicians, military medical facilities, or combat units and local civilian trauma centers. However, since the programs are mostly local and based on personal initiatives within the individual services, they are sometimes short-lived. The collective experiences of these programs, coupled with those of the demonstration program, could provide DOD valuable information in determining the feasibility and effectiveness of training military medical personnel in civilian trauma centers. Finally, although DOD operates two level I trauma centers, sustainment training at these centers is limited. Because of the lack of DOD or servicewide programs for sustainment trauma care training, a number of individual programs have been established to provide such training. Table 3.1 lists the individual trauma care training programs that we identified, followed by program descriptions. All of the programs, except one, have been limited to military medical personnel from a single service. The program at Ben Taub General Hospital in Houston, Texas, plans to include military medical personnel from all three services. Because individual programs are based on personal initiatives, neither DOD nor the services maintain a central clearing point or database of trauma training programs. Thus, there may be additional local trauma care training programs beyond those that we identified. The first of two Army programs that train military medical personnel in civilian trauma centers is the Regional Trauma Network. In 1993, Dwight David Eisenhower Army Medical Center in Augusta, Georgia, initiated a trauma training program for Army general and orthopedic surgeons in the Southeast Regional Medical Command. The Chief of Trauma and Surgical Critical Care at the center started this program because of the unavailability of sustainment trauma training in most military treatment facilities. Implementation of the program began in 1993 and was not completed until 1996 because of the lack of local command support for the program and funding for temporary duty and travel costs. Funding was ultimately obtained from the Army Surgeon General. This program was intended to give surgeons hands-on experience in managing and treating critically injured trauma patients in one of five level I trauma centers. From January to September 1996, seven surgeons trained in the five different trauma centers for 30 days, including two surgeons from deployments in Bosnia and Hungary. The cost for the seven surgeons was less than $19,000, or about $2,665 per surgeon. Many participants stated that the training renewed their confidence for treating seriously wounded patients. Between September 1996 and January 1998, only one surgeon rotated through the program. This rotation occurred in October 1997 at no cost to the military because the surgeon was stationed within commuting distance of the civilian trauma center. According to the surgeon in charge of the program, no additional rotations have occurred mainly due to insufficient funding for the trauma training and not the lack of available slots at the civilian centers or the lack of military volunteers. The surgeon intends to begin rotating a surgeon through a civilian center in April 1998. The second program, which is still in the planning stages, is at Ben Taub General Hospital in Houston, Texas. The hospital’s level I trauma center receives approximately 2,800 trauma cases per year, including about 900 penetrating injuries. Since November 1997, the Army has been negotiating with officials from the hospital to rotate forward surgical teams through the trauma center. The teams consist of three general surgeons, one orthopedic surgeon, two nurse anesthetists, one critical care nurse, one operating room nurse, one emergency room nurse, three licensed vocational nurses, three operating room technicians, four emergency medical technicians (medics), and one administrator. The team also includes a military trauma surgeon who would be given attending privileges at the hospital and would coordinate and monitor the training. Currently, two 30-day rotations are planned. An Army surgical team will rotate through the center in April 1998 and an Air Force team in May 1998. In addition, a Navy surgical team may rotate through the center in June 1998. The Army, along with the Defense Medical Readiness Training Institute, plans to develop an evaluation tool to capture travel costs, opportunity costs (decreased patient workload at a military treatment facility), and the benefits of training in a civilian trauma center. According to an Army official, the Great Plains Army Medical Command will provide funding for travel and any licensing fees for the Army team. The physicians are not required to have a Texas license and can train under the hospital’s institutional permit, which costs $50 per physician. The nurses will need a current Texas nursing license, which costs between $75 and $90. The hospital will provide room and board for the teams. In May 1997, the Third Marine Aircraft Wing at El Toro, California, established a trauma training agreement with Martin Luther King, Jr./Drew Medical Center in south Los Angeles. The hospital has a level I trauma center that receives approximately 2,500 trauma cases per year. Under the agreement, a Navy general medical officer and two hospital corpsmen, all from the same squadron, will train for 30 days on one of the center’s trauma teams. The first team completed its training in June 1997, and one team per month was expected to train at the center through March 1998. The program has been operating at no cost to the government. The trainees pay their own travel expenses to and from the center, and the center provides free housing, meals, and parking for the trainees. The trainees complete after-action reports detailing their training experience. According to these reports and interviews with the trainees, their confidence and skill levels in trauma care improved because of the training. For example, one rotation of trainees saw an average of two gunshot wounds per night, and in one night six gunshot wound victims arrived at the center. Under the direct supervision of the attending physician or senior surgical resident, the corpsmen were allowed to perform procedures, such as initial assessments of trauma patients for injuries, intubations, chest tube placements, central line placements, suture lacerations, and removal of bullets lodged under the skin. Before the rotations, the corpsmen stated that their duties in military treatment facilities did not include treating trauma patients. One corpsman said that he never saw trauma patients while working in the emergency department at the Naval Medial Center San Diego. His duties consisted of drawing blood and starting simple intravenous lines. All of the corpsmen stated that they had attended classroom training and field exercises on how to treat combat casualties but had not performed hands-on procedures with actual patients. Because of the aircraft wing’s experience at the civilian trauma center, officials at the First Marine Division at Camp Pendleton, California, are negotiating with Scripps Memorial Hospital, a local level I trauma center in San Diego, to provide trauma training for their corpsmen. According to the Deputy Commander of the I Marine Expeditionary Force, if the trauma training program is a success, the Force will consider expanding the training to the medical personnel in the support group, which includes the medical battalions and surgical teams. Third Marine Aircraft Wing officials also negotiated an agreement with the Santa Ana Fire Department to provide prehospital trauma training experience. Corpsmen and general medical officers rotate with the ambulance service for 30 days and act as emergency medical technicians. During one rotation, a corpsman started numerous intravenous lines, treated one person with severe burns over 60 percent of his body, evaluated and treated gunshot patients from a multiple shooting, and practiced spine stabilization procedures. The corpsman stated that he was able to practice invaluable skills and refresh old training with hands-on experience in an unusual, nonclinical, and unpredictable environment, which will allow him to perform more efficiently in a combat scenario. According to a Navy trauma-trained surgeon, five or six Navy surgeons from the Oakland Naval Hospital obtained trauma sustainment training at Highland General Hospital, Oakland, California, from 1991 to 1995. Under this program, a Navy trauma-trained surgeon was assigned for 2 years as the medical center’s Director of Trauma. Navy surgeons performed 30- to 90-day rotations as attending surgeons, with the trauma-trained surgeon backing them up. According to the trauma-trained surgeon, the lack of experience of the surgeons deployed to the Gulf War was a major factor that allowed him to convince the naval hospital of the need for this training. In January 1992, the general surgery specialty advisor for the Navy recommended that a similar program be set up at all four Navy teaching hospitals. However, when Oakland Naval Hospital was closed, the program was discontinued. According to Naval Medical Center San Diego officials, seven surgeons from the Naval Medical Center San Diego received trauma sustainment training at Mercy Hospital and Medical Center, also in San Diego, between 1992 and 1995. Five of these surgeons trained for 1 month, and two surgeons trained for 2 months. The current chairman of the general surgery department at the Navy medical center, appointed in the spring of 1995, has been hesitant to reestablish the program. He believes that, before the program can be restarted a curriculum should be developed for the training and all general surgeons should be required to obtain this training. The commander of the Navy medical center does not want to implement the agreement with Mercy Hospital and Medical Center because Mercy Hospital requires each Navy surgeon to obtain a current California medical license, even if the surgeon is licensed in another state. Military physicians who are training in civilian facilities in California are not required to have an active state medical license; they are only required to register with the state. Registration is done at no cost to the physician, whereas a California medical license can cost between $1,100 and $1,200. The Navy commander believes that, if this training is going to be required, DOD should pay for his staff to obtain a California medical license. Enlisted medical personnel in the Army Special Operations Command have been obtaining trauma sustainment training at the R. Adams Cowley Shock Trauma Center in Baltimore since 1989. The Command also has sustainment training agreements with Gallup Indian Medical Center in New Mexico and Denver General Hospital in Colorado. In addition, personnel obtain training at Brooke Army Medical Center and Wilford Hall Medical Center in San Antonio, Texas. From October 1995 to April 1997, 61 Army enlisted medical personnel within the Command trained at the 5 centers at a cost of about $157,000, which includes airfare, rental car, lodging, and meals. After-action reports from some trainees indicated that the training provided the hands-on experience they needed to be confident that they could care for injured soldiers. For example, one trainee stated that he was able to see and do things that he had only read and studied about in classroom training and while working in a military treatment facility. In April 1997, the Special Operations Command required all its enlisted medical personnel from the Army, the Navy, and the Air Force to become National Registry Emergency Medical Technician Paramedic trained and certified. As a result, sustainment training for the Army enlisted medical personnel at the three civilian centers was temporarily put on hold while resources were focused on getting all medical personnel certified. Sustainment training resumed in September 1997. Through a unique relationship with the city of San Antonio, Texas, the Army and the Air Force operate level I trauma centers at their medical centers in the city. This affiliation allows civilian trauma patients to be brought to these military hospitals for care. Brooke Army Medical Center at Fort Sam Houston receives about one-third of the city’s trauma patients. The center has been providing trauma care for about 15 years and receives about 800 admissions per year, 25 percent of which are penetrating trauma wounds. Wilford Hall Medical Center at Lackland Air Force Base also receives about 800 cases per year, about 20 percent of which are penetrating trauma. DOD and service officials believe that these centers offer an advantage over civilian trauma centers because they can train military surgeons and the rest of the military trauma team, including other types of physicians, nurses, and enlisted medical personnel. However, officials at the centers stated that their low volume of trauma admissions and their current staffing levels preclude them from providing sustainment training for military medical personnel not already assigned to the centers. The current physicians, residents, interns, and fellows are already competing for limited hands-on trauma experiences. Medical personnel from the Army Special Operations Command confirmed that they received little hands-on training at Brooke and Wilford Hall compared with other civilian centers because the military facilities did not have enough trauma patients for the military staff already assigned there. In addition, the city of El Paso, Texas, and the county-owned public hospital there have invited William Beaumont Army Medical Center, also in El Paso, to participate in a formal citywide trauma system. This system would require that the medical center become a level I trauma center. Currently, the center assists the community with civilian emergency support and receives about 500 of the 2,000 trauma injuries per year in the El Paso area. The Army Surgeon General views the citywide trauma care system as an opportunity to train surgical teams in trauma management. However, an official at William Beaumont stated that, even with a level I designation, the center cannot train military medical personnel beyond those already assigned there because of the limited number of trauma patients the center can receive. However, with additional funding of about $2.7 million for start-up costs and annual funding of about $1.4 million, the official believes that the center could be expanded to accept more trauma patients and therefore could train an additional 330 military medical personnel per year in trauma. DOD’s demonstration program, along with individual efforts, are yielding lessons learned that could be useful in evaluating the concept of military-civilian cooperation in trauma care training. Several issues that may pose difficulties in providing such training have been identified but can be overcome. These issues include (1) military physician licensure requirements, (2) the capacity of civilian trauma centers to train large numbers of military personnel, and (3) concerns that military participation might detract from training civilian or other military medical graduates in civilian centers. If DOD decides to expand its trauma care training, it will need to build on the Combat Trauma Surgical Committee’s report and develop an overall strategy for wartime training capabilities. Fundamental preliminary steps for DOD to take to achieve these goals are completing the ongoing assessment of wartime medical requirements and determining which personnel will require trauma care training. Other important DOD actions include prioritizing the personnel requiring the training, determining the frequency of refresher training, and devising a means to track trained personnel. However, the biggest challenge DOD may face is determining how best to meet the competing demands within its health care system, which will require balancing the need for providing wartime medical readiness training with the need to deliver peacetime health care services. In the United States, physicians must generally be licensed in each state where they practice to protect the health, safety, and welfare of the public. Each state has its own laws and regulations that govern the practice of medicine. Therefore, each state can determine the requirements that DOD must follow to train its medical personnel in civilian trauma centers. In addition, individual trauma centers can require military trainees to meet the center’s requirements, which may be more stringent than the state’s, as part of its contractual agreement with the military. Licensing is generally not an issue for military physicians practicing in military health care facilities. Under 10 U.S.C. 1094, military health care professionals who treat patients in military health care facilities are required to be licensed in only one state, which does not have to be the state where they are practicing. State licensure has not been an issue in most of the programs we identified. In certain circumstances, state licensing agencies may issue limited or temporary licenses or certificates for finite periods of time to health care professionals licensed in another state. In our review of six programs located in five states, only one of the states—Georgia—requires that the military physicians training in a civilian trauma center have a current state license. According to Georgia’s Professional Examining Board, the state does not have a trainee license or any law that would allow military physicians to practice in a civilian facility without a current license. The other four states only require registration, an institutional permit, or a trainee license. For example, California generally requires that military physicians register with the state before starting a training program in a civilian facility. Registration involves completing a one-page form at no cost. Some civilian centers accept registration or a training license, but other centers required a current state license. Although the Medical Board of California only requires military physicians to be registered with the state, surgeons from Naval Medical Center San Diego who trained at Mercy Hospital and Medical Center were required by the center to have a current California medical license. Because participation in the program was voluntary and many of the Naval Medical Center’s surgeons were already licensed in California, this requirement was not a problem. However, if training in the civilian centers becomes mandatory, then obtaining a license could become an issue because of the time and money to obtain a license. For example, obtaining a license in California takes about 45 to 90 days and costs about $1,100 to $1,200. Many military physicians we spoke with stated that DOD will not pay for obtaining this second license. In fact, DOD’s July 1997 mandated report to Congress stated that, if civilian facilities require state licenses, DOD might need to make provisions for reimbursement for that additional license. Competing with other in-house training programs in the civilian centers can limit the opportunities for military medical personnel to obtain hands-on trauma experience. Civilian hospitals that can offer the military the most beneficial training are generally teaching hospitals with level I trauma centers. However, these hospitals have internship, residency, and fellowship programs that train civilian physicians in trauma care; thus, the military trainees may have to compete with these students for hands-on experience. DOD can overcome this issue by arranging for training to occur in high-volume, understaffed level I trauma centers. According to DOD and private sector officials, about 12 to 15 inner-city trauma centers have a very high volume of trauma cases that frequently strain or exceed personnel resources. Each of these centers, which are geographically dispersed, treat about 2,000 to 3,000 severe trauma cases per year. Therefore, these centers would provide more opportunities for military trainees to obtain hands-on experience. The Third Marine Aircraft Wing’s trauma training program sends its medical personnel to Martin Luther King, Jr./Drew Medical Center, an inner-city trauma center in south Los Angeles. The center is frequently understaffed for the over 2,500 trauma patients it receives each year. In addition, almost 50 percent of the injuries at this civilian center were penetrating trauma, including 32 percent from gunshot wounds. According to the center’s director, the center has more than enough trauma cases for all of its civilian and military trainees because the military trainees augment the civilian members of the trauma team and do not replace staff. However, the additional staff allows the attending and senior residents to step back and teach decision-making and procedural skills rather than do the procedures themselves. The military trainees we spoke with stated that, during their 30-day rotation, there were more than enough training opportunities for all of the military and civilian trainees. DOD does not have a long-term strategy for providing trauma care training. If DOD decides to develop such a strategy, several issues warrant consideration, including the training needs of the reserve component, capacity of civilian centers to train military personnel, and the need for a system to identify trained personnel. Although the Combat Trauma Surgical Committee’s February 1997 report on policy options for DOD is a commendable beginning for identifying DOD’s trauma care training needs, DOD does not have a long-term strategy with clear goals, objectives, and milestones to achieve the Committee’s recommendations. Moreover, the report did not address the needs of the reserve component. The Assistant Secretary of Defense for Reserve Affairs was concerned with the report’s lack of references to the reserves. The report noted that the reserve component is an integral part of the military health system and a critical asset in U.S. wartime capability. The Committee made several recommendations regarding sustainment training of wartime surgical capabilities, resulting in the establishment of minimum readiness training standards for general surgeons. The report defined three categories of surgeons, which are distinguished by different levels of training and experience, and the required trauma care training for each category. The services are to propose the required and available number of general surgeons in each of the three categories and identify potential training programs at civilian trauma care centers. As of January 1998, the services’ plans were incomplete. Further, no strategy is in place to coordinate the development of combat surgical readiness standards for other surgical specialties, nonsurgeons, nurses, and medical support personnel. The capacity of civilian centers to train large numbers of military personnel is another DOD concern. However, this concern cannot be assessed because DOD has not (1) completed its ongoing reassessment of its medical force structure and (2) determined which personnel will be required to receive such training. DOD has about 480 general surgeons and about 74,000 enlisted active duty medical personnel in the force. Table 4.1 provides a breakdown of active duty medical personnel by type of provider and service for fiscal year 1997. The total number of deployable personnel who will need trauma care training is expected to change from previous wartime planning scenarios. DOD is updating its April 1994 study of the military medical care system mandated by Section 733 of the National Defense Authorization Act for Fiscal Years 1992 and 1993 to determine the appropriate wartime medical force level requirements. The study concluded that only 50 percent of the active duty medical force was needed for medical readiness, but that finding was very controversial among the services. In March 1995, we testified that the services disagreed with this conclusion and other aspects of the study and that the commanders in chief did not participate in the study. Because of the controversy surrounding the study, the Deputy Secretary of Defense directed that the study be updated to reflect changes in planning scenarios, operational requirements, and number of forces deployed. As of January 1998, DOD had not issued the updated study. DOD has not determined which medical personnel would need to be trained in trauma care. Not all medical personnel would deploy to a contingency or, if deployed, would provide initial treatment to injured soldiers. For example, not all of the 28,497 Army medics would be deployed to the front lines of a battlefield to provide first responder or enroute care, since Army tactical units require only about 8,900 combat medics. Likewise, not all of DOD’s 480 general surgeons would be assigned to combat units or even to the theater. Although DOD would not likely require all medical personnel to be trained in trauma care, DOD may face challenges until it determines what portion of the force structure needs trauma care training and the frequency of such training. In the event of a crisis, DOD would need to quickly identify which medical personnel have been trained in trauma care. The Combat Trauma Surgical Committee recognized that a system should be in place to identify and track individuals trained in trauma care. Currently, no such system is being used for this purpose since few individuals have received such training. Two systems currently in development—the Centralized Credentials and Quality Assurance System and the Defense Medical Human Resource System—could be used to track trauma care training, but each has limitations. The Centralized Credentials and Quality Assurance System is limited to credentialed medical providers, such as physicians, physician assistants, and nurse practitioners, and does not include other trauma care providers, such as nurses, combat medics, and corpsmen. In addition, the medical readiness training information displayed in the system is very limited: a medical commander verifies the date of the provider’s sustainment medical readiness training certificate. Since a list of criteria or standards outlining what type of training constitutes medical readiness does not exist, this verification is based on the commander’s judgment and is therefore subjective. The Defense Medical Human Resource System is a triservice information system being developed for use in military hospitals and clinics to facilitate patient care and staffing. The system includes all military health care personnel, whether officer or enlisted and credentialed or noncredentialed. The system has the capability to establish and track readiness training requirements by individual, military treatment facility or unit, and service. However, according to service officials, no requirements have been set to develop a template to facilitate tracking of trauma care training. In addition, the system is not designed to identify the training status of medical personnel assigned to nonmedical treatment facilities, such as physicians, medics, and corpsmen assigned to combat units. DOD must balance the need for training its medical personnel for their wartime mission and the need for delivering peacetime health care services to 8.2 million eligible beneficiaries. Large patient workloads can limit the time military medical personnel can take away from peacetime duties to participate in wartime medical readiness training, including trauma care training. In addition, operating budgets at military treatment facilities can be reduced to the extent that medical personnel participation in training displaces patient workload. Finally, military commanders may lack incentives for providing medical personnel with trauma care training because such training is not linked to wartime readiness. Although DOD does not provide hands-on trauma care training, it does provide a number of courses for medical officers that provide the basic military skills necessary to operate in the military environment, such as medical service operations and preparation for taking command. Before deployment, military physicians are required to take a course on combat casualty care, which focuses on the military casualty management system and providing casualty care in a battlefield environment. This course consists of classroom instruction and field training and includes the principles of Advanced Trauma Life Support, which were developed by the American College of Surgeons and have become the national and international standard for basic trauma resuscitation skills. However, in 1993, we reported that only 47 percent of active duty physicians attended the combat casualty care course. In 1996, DOD’s Office of Inspector General also found that less than 50 percent of a sample of active duty physicians assigned to combat support units had completed the combat casualty care course. According to service officials, medical personnel have limited time to participate in readiness training and often do not attend this training due to patient workloads and budgetary constraints. DOD’s medical mission is to maintain the health of 1.6 million active duty and 6.6 million other military-related eligible beneficiaries, such as active duty dependents and retirees and their dependents, through a system of 115 hospitals and medical centers and 471 clinics worldwide. Active duty personnel are given priority in receiving health care at military treatment facilities. Military-related beneficiaries are entitled to health care at these facilities as space is available. Military treatment facility commanders are required to manage personnel training within the practical constraints of providing peacetime health care. According to service officials, the operating budgets at military treatment facilities are based on the number of patients seen and diagnosed for treatment. Therefore, operating budgets may be reduced to the extent that physician participation in readiness training displaces patient workload. Service officials told us that military treatment facility commanders will meet the immediate priority of providing peacetime health care instead of sending staff to medical readiness training courses for a potential wartime mission. Service officials informed us that the impact of medical readiness training, such as trauma care, on DOD-administered programs that supplement health care provided in the military treatment facilities is unknown but a concern. When a military facility cannot provide health care services because its personnel are at readiness training, patients must obtain services through the civilian sector. DOD pays these cost through TRICARE, DOD’s new managed care program that stresses military treatment facility cost-effectiveness. Commanders may have insufficient incentives for providing medical personnel with trauma care training unless this training is linked to readiness assessments. According to DOD officials, medical readiness training, including trauma care training, is not currently tied to a unit’s readiness status for deployment. This status is based on whether essential mission-related equipment and personnel are on hand and required individual and team training has been performed. If a unit is missing some essential items, this information is reflected in the unit’s readiness status reporting system, and the unit’s status for deployment may be affected. According to DOD officials, the lack of trauma care training would not be reflected in the unit readiness status reporting system. There is no trauma care training or experience requirement for personnel assigned to units that are to provide care to wartime casualties. For example, a unit’s readiness status report would not be degraded if the medical officer assigned to an aid station did not have trauma care training because this training is not part of the unit’s required individual or team training. According to DOD officials, a unit commander will use the unit’s limited resources and time to train required tasks and not do the other training, such as trauma care, until all mission-essential items have been completed. Although the infancy of the trauma care training program makes it difficult to establish the linkage between trauma training and readiness, many service officials believe that such linkage will be important if trauma training is to receive this needed priority. Trauma care training is essential for DOD to successfully fulfill its wartime medical mission. Because of the void left by a lack of priority for combat trauma care training, individual surgeons, military treatment facilities, and combat units have been attempting to meet trauma care training needs on their own. However, command support for these individual efforts has been difficult to sustain because DOD currently has no clear goals or strategy for trauma care training as it relates to medical readiness. Wartime medical readiness should not be the responsibility of individual surgeons, military facilities, or combat units; it warrants the support of and coordination by high-level DOD management. The Combat Trauma Surgical Committee’s report is a good start for developing clear goals for trauma care training. The report’s recommendations address the minimum training standards for military general surgeons, but a DOD strategy for meeting those standards has not been developed. Information from DOD’s mandated demonstration program at Sentara Norfolk General Hospital could help with the development of such a strategy. The demonstration program could be a good training ground for general surgeons. However, due to the infancy of the program, it has not generated sufficient data useful to determine the effectiveness of training surgeons in civilian trauma centers. It would be difficult for one training model to provide all the data needed to determine the feasibility and effectiveness of training medical personnel in civilian training centers. Since other programs outside the demonstration program train other military medical personnel, such as orthopedic surgeons, general medical officers, nurses, combat medics, and corpsmen, coordinating data from these programs with the demonstration program could be used to determine the feasibility and effectiveness of training military medical personnel in civilian trauma centers. Information from the demonstration program and the other trauma training programs already shows that DOD and the services may face some challenges if they are to provide hands-on trauma care training. Some issues, such as licensure, present challenges depending on the location of the civilian training center. Other issues could arise if trauma care training is shown to be effective and feasible. The key questions to be answered then would be who should receive trauma care training and how will those personnel be identified. Currently, DOD does not have a mechanism to identify those trained in trauma care, but those who would deploy first to a contingency would need to receive priority for such training. Additional data is needed to evaluate the feasibility and effectiveness of providing trauma care training to military personnel in civilian centers. Because the authority for the demonstration program at Sentara Norfolk General Hospital expires on March 31, 1998, we recommend that the Secretary of Defense consider negotiating a new agreement for a similar program. We also recommend that the Secretary (1) expedite DOD’s efforts to establish an evaluation tool to assist in this assessment and (2) broaden the scope of the evaluation to include other individual programs that have provided trauma care training to general surgeons as well as other medical personnel. In addition, if DOD determines that the trauma care training concept is feasible and decides to expand such training in civilian trauma care centers, we recommend that the Secretary of Defense develop a long-term strategic plan that establishes goals and identifies actions and appropriate milestones for achieving these goals. This plan should (1) establish criteria for selecting locations for trauma care training that would maximize the experiences of military trainees, (2) identify which medical personnel should receive trauma care training and the frequency of such training, and (3) develop a mechanism to identify those military medical personnel who are likely to deploy early in a conflict so that they can receive priority for medical wartime trauma care training. This plan should also address the training needs of the active and reserve components. In official oral comments on a draft of this report, DOD generally concurred with our recommendations. DOD noted that it has determined that the trauma care training concept is feasible for general surgeons, although there is not yet sufficient data to determine the effectiveness of the training. DOD is also currently evaluating the concept for other military medical personnel. We agree with DOD that the demonstration program and the other individual trauma training programs have shown that it is feasible to train general surgeons in civilian trauma centers and that additional data is needed for other military medical personnel. The general surgeons who have trained in the civilian centers have been given opportunities to perform hands-on procedures on severely injured patients and participate in decision-making skills. Many of the trainees stated that the training in the civilian centers renewed their confidence for treating severely wounded patients. Even though the demonstration program and the other initiatives have shown that it is possible to train surgeons in civilian trauma centers, the impact on the delivery of DOD peacetime health care when the program is expanded DOD-wide is still unknown. DOD stated that it plans to negotiate a new agreement with Sentara Norfolk General Hospital to provide trauma care training. DOD also agreed with our recommendation to facilitate development of an evaluation tool to help in the assessment of the effectiveness of trauma care training. DOD plans to expand this evaluation to include other individual trauma care training programs beyond the demonstration program. DOD also plans to establish panels to determine trauma care sustainment training needs for military medical personnel in addition to those created for general surgeons. Regarding our recommendation that DOD develop a long-term strategic plan that establishes goals and identifies actions and appropriate milestones, DOD stated that, in February 1998, the Combat Trauma Surgical Committee reconvened to coordinate with the services to develop and implement trauma care training plans for both the active and reserve components that are directed toward building a long-term strategy. DOD stated that potential military training sites for reserve personnel could include the three military treatment facilities in Texas that treat trauma patients—Brooke Army, Wilford Hall, and William Beaumont Army Medical Centers. However, we believe that these facilities may not be viable training sites because their low volume of trauma admissions and their current staffing levels preclude the centers from providing sustainment training for military medical personnel not already assigned there. DOD also stated it has specific concerns regarding (1) the additional costs for licensure and credentialing of providers, (2) costs for additional civilian trauma training opportunities, and (3) the sustainment costs of what will have to become a new readiness mission. We did not identify any significant financial impact regarding the demonstration program. For example, only nominal costs were incurred for trainee licenses. In addition, due to the close proximity of the Naval Medical Center Portsmouth to Sentara Norfolk General Hospital, no travel or temporary duty costs were incurred for the trainees. Finally, no additional staffing was required at Naval Medical Center Portsmouth to cover patient workload. We recognize that cost is a factor that DOD must consider in selecting civilian training locations. We note that the extent to which DOD might incur additional costs depends on the agreement reached between the military organization and the specific civilian site selected.
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Pursuant to a legislative requirement, GAO evaluated the effectiveness of the Department of Defense's (DOD) demonstration program that would provide trauma care training for military medical personnel through one or more public or nonprofit hospitals, focusing on: (1) the status of the demonstration program and DOD's actions to meet the legislative provisions; (2) other initiatives aimed at training military personnel in trauma care; and (3) key issues that DOD should address if it decides to expand its trauma care training program. GAO noted that: (1) it is too early to assess the effectiveness of DOD's demonstration program because it has only been in place since November 1997; (2) as of March 1, 1998, only four surgeons had completed their training rotations; (3) DOD has not finished the evaluation tool it is developing to assess the program's effectiveness; (4) due in part to the program's late start, DOD's actions to implement the program have not been fully consistent with the legislative provisions; (5) DOD missed the April 1996 implementation milestone and issued a report on its proposed demonstration program to Congress 5 months late; (6) DOD did not seek an agreement with the civilian center to provide health care to DOD beneficiaries that is at least equal in value to the services provided by the military trainees; (7) DOD officials believed that such an arrangement might have jeopardized the willingness of hospital officials to enter into the program; (8) GAO identified several other initiatives that might be used in assessing the feasibility of training military personnel in civilian trauma centers; (9) unlike the current demonstration program, these other initiatives have not limited their training to general surgeons; (10) the collective experiences of these programs, together with those of the demonstration program, could provide DOD valuable information in determining the feasibility and effectiveness of training military personnel in civilian trauma centers; (11) DOD will need to address several issues, none of which appear to be insurmountable, if it decides to expand its trauma care training program; (12) questions have arisen over physician licensure requirements; (13) two issues concern whether: (a) civilian trauma centers have the capacity to train large numbers of military personnel; and (b) military trainees can obtain sufficient experience, since they will compete for training opportunities with the centers' own personnel; (14) the first issue cannot be addressed because DOD has not yet estimated the number and type of medical personnel that might require trauma training; (15) DOD could deal with the second issue by selecting civilian centers that are understaffed because of their large caseloads; (16) in the longer term, better information will be needed on wartime medical requirements, the personnel requiring trauma care training and their priority for such training, and the desired frequency of refresher training; and (17) the biggest challenge DOD may face is determining how best to balance need for wartime medical training with the substantial needs of its peacetime health care system.
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The Trust was established by statute as a tax-exempt entity to manage and invest the assets used to pay a portion of Railroad Retirement Program benefits. Congress anticipated that the Trust would be managed much like a private sector pension plan trust.seven trustees that, like trustees of multiemployer plans established The Trust is governed by through collective bargaining, include representatives of both management and labor. Three of the trustees are selected by railroad management, three by railroad labor, and one independent trustee is selected by the other six. The Trust may invest Trust assets in stocks, bonds and other investment vehicles in a manner similar to other defined benefit (DB) plans. While the Trust is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which governs private sector pension plans, its trustees are subject to fiduciary standards comparable to the fiduciary duties under ERISA. For example, each member of the Board of Trustees must act solely in the interests of the Board and, thereby, plan participants and beneficiaries; for the exclusive purpose of providing plan benefits and defraying administrative costs; with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use; and diversify investments to minimize the risk of large losses and avoid disproportionate influence over any industry or firm. As of September 2013, the Trust held about $25 billion in assets, placing it among the 50 largest DB plan trusts in the nation as of 2013. Trust assets consist mostly of equity and fixed income investments, but also include substantial assets allocated to alternative investments such as private equity, absolute return strategies, and commodities. From 2003 through 2013, according to a Trust representative, the Trust has had an average annual return on investment of about 6.4 percent. However, along with other plans, the Trust also suffered substantial investment losses during the financial crisis of 2008 and 2009. The Trust lost 19 percent in 2008 alone and suffered much lower losses in 2009 and 2011. The Trust operates in coordination with the Board, a federal agency established in 1937 to provide old-age pensions to retired employees of the nation’s railroads. In 2013, the Board oversaw the payment of about $11.6 billion in retirement and survivor benefits to about 568,000 beneficiaries. The Board pays two types of benefits to retired workers and their spouses, which are funded through federal payroll taxes assessed on private railroads and their employees. Tier I benefits are calculated to be comparable to Social Security benefits, for which railroad retirees generally are not eligible. The Board also pays Tier II benefits, which are intended to provide a benefit similar to that of a DB plan. Benefits under Tier II are based on a worker’s 5 years of highest earnings and the number of years spent in railroad employment. Assets not needed for immediate payment of Tier II benefits are invested by the Trust in accordance with its investment policy. The legislation creating the Trust includes language making it clear that the Trust is not part of the federal government. Specifically, the Trust is not a department, agency, or instrumentality of the federal government, and it is exempted from title 31 of the U.S. Code which governs the financial operations of the federal government and establishes the powers In addition, the and duties of the U.S. Government Accountability Office. Board is not represented on the Board of Trustees because the Board is a federal agency. However, as required by law, an independent qualified public accountant audits the Trust’s financial statements each year. It has been reported that these aspects of the Trust stemmed from concerns about government involvement in investment decisions that were repeatedly raised in Congress and elsewhere. It was reportedly feared, for example, that politically motivated investment decisions would lead to suboptimal investment returns and would provide political advantages to those influencing the decisions. Concerns about this “political risk” were of particular concern because the partial privatization of the much larger Social Security Trust Fund was a prominent public policy issue at the time. These concerns led to a desire to eliminate even the appearance of possible political influence and significantly influenced the Trust’s current structure. While the Trust manages the pool of assets in a manner similar to that of a private or public sector traditional DB plan, it also differs significantly from such plans in certain ways. As figure 1 illustrates, the Trust’s role is important but relatively narrow—its sole purpose is to manage and oversee the assets used to ensure payment of Tier II railroad retirement benefits. The Board assumes various other responsibilities of a DB pension plan, such as keeping track of benefit accruals and ensuring benefit payments. As a result, the Trust is a relatively small organization compared to the Board and pension plans of comparable size. While the Trust employs about 18 staff, the Board, which has many other duties— including unemployment and sickness benefit programs—and regional offices around the United States, employs about 865. A public pension plan like the Pennsylvania State Employees’ Retirement System, whose assets under management are comparable to that of the Trust, employs about 200 staff. Other essential aspects of a typical DB plan, such as maintaining records of accrued benefits, providing technical assistance to participants, and authorizing and making benefit payments, are carried out by the Board or the Department of the Treasury (Treasury). In addition, the Board assumes responsibility for interacting with workers or beneficiaries as needed. The Trust is thus free of these responsibilities, and is able to focus on overseeing its invested assets. Table 1 compares the Trust and the Tier II program to typical public and private DB plans. Although the Trust does not have its own OIG, since the Trust’s inception, the Board’s OIG has repeatedly expressed concerns about the adequacy of Trust oversight. In November 2002, the OIG contacted the Trust’s Chief Investment Officer to inquire about investment practices and the transfer of assets from Board accounts at Treasury to the Trust. The OIG requested written confirmation that transferred funds had been received, which investments had been purchased, and current investment yields. The Trust Chair responded by noting that the Trust transmits investment information in a statutorily-required annual report, as well as monthly reports pursuant to a memorandum of understanding with the Board, Treasury, and the Office of Management and Budget (OMB). In a subsequent correspondence, the Chairman noted that Congress had specified that the Trust was to be audited by an independent auditor, and delegated to the Board the responsibility to bring civil action if it believes the Trust is not complying with the statute. Since that time, the Trust has declined to provide any information directly to the OIG, although the Board has opted to share information pertaining to the Trust in some cases. In 2008, the OIG issued a report expressing concern that the Trust’s authorizing legislation provided the Board with a passive oversight role, and did not provide the Board with the ability to uncover circumstances requiring enforcement action. The report further noted limitations of annual financial statement audits, stating that such audits provide a “snapshot” of an organization’s financial health at a point in time, are not equivalent to a performance audit, and cannot assess program performance compared to applicable criteria. The report concluded that the annual financial statement audit should be supplemented by performance audits, which can offer information about the effectiveness of internal controls, assess compliance with law, and assess the efficiency of recruitment and retention strategies. The overall importance of adequate oversight of pension assets has been highlighted in recent years by a number of incidents involving officials responsible for managing large pools of retirement assets. For example, in 2011, high ranking officials of a large state pension plan were implicated in practices that violated fiduciary and ethical duties. Specifically, they were found to have guided investments to certain middlemen known as “placement agents” in exchange for trips and other benefits, possibly to the detriment of beneficiaries. Similarly, in 2009, the PBGC Office of Inspector General (PBGC OIG) issued a report regarding a former PBGC Director’s inappropriate involvement in contracting for investment services. Among other things, the PBGC OIG found that the former Director was communicating directly with some bidders at the same time he was actively considering their proposals, and so had clearly violated prohibitions against contact with potential service providers. Under the law, the Trust must submit an annual management report to the Congress, President, Board, and Director of OMB. This report is required to address various matters pertaining to the Trust’s administration and financial position. As table 2 outlines, the most recent annual report contains information about the investment results, financial activity, operations and management. For example, the report includes a discussion of the evolution, current status and performance of the Trust’s investment portfolio. It also includes a history of asset transfers and current book and market values. The report also includes a section on internal accounting and administrative controls including a description of the custodial arrangements under which Trust assets are primarily in the custody of a custodial bank, as well as the custodian’s responsibility to provide the Trust with a full record of all transactions involving Trust assets. The Annual Management Report also includes relevant Trust policies such as Trust by-laws, investment guidelines, and a conflicts of interest policy statement. In addition to Annual Management Reports, the Trust also submits monthly and quarterly reports to the Board. The monthly reports include financial information such as information on the purchase and sale of federal and non-federal securities, the monthly cash balance, and aggregate administrative expenses. Quarterly reports include a summary of investment objectives, quarterly investment returns, and aggregate asset values. Under the terms of a memorandum of understanding with three federal agencies, the Trust also submits a monthly report to the Board.memorandum states that because the Board is responsible for the overall management of the Railroad Retirement System, it is responsible for all budgetary and proprietary reporting of Trust transactions. Consequently, as table 2 describes, the Trust must submit information on investment and other transactions to the Board, and may do so on a 1-month delayed basis. The Board then uses this information to prepare monthly financial reports submitted to Treasury. In addition to reviewing these reports, Board and Trust officials stated that the organizations conduct regular formal meetings. In addition, the Board, in cooperation with the Trust, receives and reviews communications and information throughout the year. Board officials explained that Board members and trustees meet face-to-face twice annually, during which the Board receives a presentation on economic, legal, and other issues that could affect the Trust and its investments. The presentation may also include a detailed discussion of investment performance and outlook by asset class. A Board official said that such meetings typically include a question and answer session. These meetings are supplemented by quarterly conference calls between Trust and Board financial and legal staff in which investment performance, ongoing audits, or other issues are discussed. Board officials indicated that, after more than 10 years of experience working with and overseeing the Trust, they saw no need for enhanced oversight, noting that these reports and communications effectively provide continuous oversight, and in the event of a participant complaint, the Board would stand in for a claimant’s interest and take action in the event of malfeasance or mismanagement. Further, Board and Trust representatives told us that the Trust has never declined to share information that the Board has requested. Based on this working relationship, Board officials stated they believe they would be aware of any cause to file a lawsuit under the statute. While not required by law to do so, the Trust has commissioned four performance audits since the Trust was organized in 2002. As table 3 illustrates, these audits have occurred roughly every 2 to 3 years, and have covered a wide range of issues from technical compliance with the terms of the MOU between the Board, OMB, and Treasury, to the Trust’s approach to non-traditional investments such as hedge funds and private equity. These performance audits varied considerably in subject matter and breadth. For example, the 2004 audit, conducted by the internal audit departments of two railroad firms, sought to ensure that various core functions, including financial reporting functions, were in place and operating as intended. In contrast, the 2009 review sought to examine various aspects of investment related practices, for which a railroad internal audit department would not likely have sufficient expertise. Instead, according to a Trustee, the Trust hired a consulting firm that it believed to have considerable expertise in investment strategy and management. This report went into some detail about the nature and management of the Trust’s alternative investments such as hedge funds and private equity, and examined the Trust’s “due diligence” procedures regarding the search for investment managers and ongoing manager oversight. Each report contained recommendations and, according to Trust documents, the Trust either implemented, committed to implement, or explained why it would not implement each recommendation. In at least one instance, the Trust has not pursued the auditor’s recommendations. Specifically, while the 2006 internal risk assessment generally found few gaps in Trust processes and controls of risk, the auditor also proposed a second audit phase to explore a number of issues more deeply. According to a Trust representative, the Trust audit committee opted not to commit to the significant cost of this second phase, since the risk analysis found only a few “gaps” out of the 19 areas evaluated, and because the Trust either took corrective action or determined that the Trust’s existing policies sufficiently addressed the concern. Since that time, some of the specified issues have been addressed in subsequent reviews, but others have not. For example, the audit proposed a more in- depth review of recruiting, staff compensation, and organizational culture, but the Trust has not followed up with an audit of these issues. Although Trust representatives indicated that they intended to continue the practice of periodic performance audits, the Trust does not have a written policy regarding performance audits, their frequency, or their subject matter. For example, the Trust’s Audit Committee Charter specifically assigns the Committee responsibility for, among other items, 1) retaining and working with the independent financial auditor, 2) overseeing the Trust’s conflict of interest and confidentiality policies, and 3) overseeing Trust staff compliance with the MOU. However, the charter is silent on performance audits. Recently, a second MOU—developed between the Trust and the Board— has been drafted that would formalize the practice of commissioning periodic performance audits. Under a draft MOU, starting in 2015, performance audits would be performed at least every 3 years, in consultation between the Trust and the Board. The document also lists 12 areas that would be appropriate subjects of the audits, and provides that the Trust and the Board would meet to review the audit results and assess what changes to Trust practices or procedures would be warranted. However, the document does not include some audit subjects, such as fiduciary responsibility and conflict of interest policies, and does not specify timeframes for addressing particular areas subject to audit. Unlike the Trust, most state plans and both federal programs we contacted are subject to performance audits that can be initiated and conducted by an independent entity. As figure 2 shows, 42 of the 50 state plans we contacted are subject to external audits conducted by the states’ Auditor General or a comparable entity with authority to audit or otherwise review them. External audits of these plans can be initiated and conducted independent of the plans’ governing board and management. The remaining 8 of these 50 state plans are not subject to external audit. Plan officials in these 8 states stated that oversight can be achieved in other ways, such as through the preparation of publically available reports as well as through board of trustee and legislative oversight. Two federal programs that oversee large asset pools for the benefit of retirees and their beneficiaries are also subject to independently initiated performance audits. For example, PBGC’s single employer insurance program is subject to OIG audits and TSP is subject to Employee Benefit Security Administration (EBSA) audits. While the large majority of state and federal officials noted the importance of performance audits conducted by an independent external entity, officials of some state plans subject to audit noted potential drawbacks as well. A plan official in one state said auditors should be independent because they need to be unbiased, and conduct their work without influence. An EBSA official stated that given the value of TSP’s asset holdings, they would be concerned if EBSA was not able to initiate an audit to examine program areas they felt warranted closer review. Nonetheless, a plan official in one state said the plan resisted such audits in part out of a concern for politically motivated reviews and a perceived lack or expertise in investment matters. The official explained that the Auditor General’s office was seen as a stepping stone to the governorship, and that plan officials were concerned that audits could be used for political purposes. According to the official, when a state court ruled that the Auditor General had the power to initiate an audit, plan officials commissioned an external firm in 2006 to conduct a separate review so state legislators could consider the findings of both audits. In contrast to the Trust, several state and both federal programs we contacted are subject to multiple audits initiated by independent agencies. As indicated in figure 2, 13 of 50 state plans can be reviewed by two or more entities. In one state for example, the plan is subject to review by three state agencies: the Auditor General, a legislative oversight agency, and the state’s Inspector General. In some cases, state oversight agencies do not conduct audits but monitor investment strategy and activities in other ways. For example, one state’s legislative oversight committee informs and advises the legislature about different investment options for pension assets. Both federal programs we contacted are also subject to audit by multiple agencies. As noted above, PBGC is subject to audit by its OIG, and TSP is subject to audit by EBSA. In addition, unlike the Trust, both are subject to GAO’s audit jurisdiction. As illustrated in figure 3, the frequency with which the Trust has commissioned performance audits is comparable to or exceeds most state efforts. Unlike the Trust, 29 of the 50 state plans we contacted are subject to external audits on a specific calendar cycle. While 14 of the 42 state plans are subject to quarterly or annual external audits, most state plans are audited about as frequently as or less so than the Trust. For instance, similar to the Trust, nine state plans are audited at least once every 2 or 3 years. The remaining 19 state plans were subject to audits at longer set intervals that varied from state to state or were not reviewed according to any established time frame. While the Trust had not established time frames for periodic reviews of any topic, in some states, external auditors are required to review certain topics within specified intervals. In one state, the Auditor General conducts a performance audit every 2 years focusing on plan operations while a second state agency audits the plan’s investment strategy, performance, and practices every other year. In another state, a state agency is required to conduct an audit every 3 years related to investment strategy, performance, and practices as well as ethics and conflicts of interest. The most recent of these audits assessed whether fiduciaries act for the sole benefit of participants, and whether the highest ethical practices were being upheld. Plan officials in this state stated that the requirement is relatively new, resulting from allegations that investment firms made improper payments to politically connected intermediaries in exchange for managing the investment of state pension assets. Thirty-seven of the 50 plans we examined report being subject to performance audits by an office of internal audit located within the plan itself. In 32 of these plans, internal audits supplement external audits, but in 5 others, the office of internal audit is the only entity that conducts performance audits. According to plan officials, internal audits are typically conducted on an ongoing basis in accordance with an annual audit plan, and are conducted with a significant degree of independence. For example, plan officials in two states stated that, although the board of trustees must formally review and approve their annual audit plan, trustees do not influence what internal auditors should or should not review. One plan official said that such independence is important because—if problems or malfeasance were occurring—the board of trustees might try to divert the focus of these reviews. Nonetheless, an official of one state plan that, like the Trust, solely manages and invests pooled pension assets, told us that given their relatively small size, an office of internal audit would not be appropriate. Instead, the official said they plan to retain a third party firm to conduct a broad-based risk assessment related to the plan’s investment allocations. Trust performance audits are comparable to state and federal audits in terms of the breadth of topics reviewed. We examined relevant performance audit reports of plans in seven selected states and two federal entities and compared these to the four audits the Trust has commissioned. Our examination indicated that the range of topics the Trust has reviewed included some topics that state or federal audits have not included, and in some cases Trust audits addressed topics in more detail. For instance, as shown in table 4, unlike TSP and four states, a Trust audit included a review related to the qualifications and compensation of its Board of Trustees and Trust staff. Further, Trust audits of some topics have been more detailed than those of some state audits. For instance, the Trust’s 2009 audit included an assessment of its practices for selecting and monitoring external investment managers, as did several state audits. However, the Trust audit also assessed the Trust’s practices for terminating contracts based on the performance of external investment managers which one state audit did not include. Table 4 lists broad audit topics and indicates whether the Trust, state plans, and federal agencies have conducted related reviews. Conversely, some state and federal performance audits have included findings on topics that Trust audits have not included, or addressed topics in more detail. As table 4 indicates, two federal and six state entities have audited plan ethics and conflicts of interest policies and practices whereas the Trust audits have not. In some cases, such reviews have resulted in findings and recommendations in areas that could be relevant to the Trust. For instance, one state audit found that the plan did not have a process to independently identify potential conflicts of interest. Several states have also conducted audits that solely assessed whether the plan was in compliance with law and plan policies whereas the Trust has not. Although limited in scope, officials in one state said these types of reviews have identified issues such as conflicts of interest and the misuse of state funds. Finally, while a 2006 Trust audit considered qualifications and compensation of the Board of Trustees and Trust staff as part of a broad risk assessment, some state audits examined this issue in more detail. For example, a Trust audit considered the risk that improper compensation of staff would drive inappropriate behavior or limit ability to attract and retain staff. The review found that the Trust has processes and controls in place to address this concern, including a staff handbook and an annual review for each employee. In contrast, an audit of a state plan appeared to encompass more, finding that while the plan has a consistently high quality investment staff, it has relatively low staffing levels in several asset classes, a tendency to leave vacancies unfilled for many months, and underdeveloped and underutilized human resources. As a result, the fund has had to make more extensive use of external consultants, which, according to the audit report, resulted in higher costs to the plan. According to experts on private sector pensions, the Trust’s practice of commissioning external firms to conduct performance audits every 2 to 3 years is comparable to the practices of large private sector plans. While such plans are generally not subject to independently-initiated audits, fiduciary experts stated that large private sector DB plans commission periodic audits that are typically conducted by external consulting firms. In discussing the Trust’s current practice of commissioning audits every 2 to 3 years, one investment fiduciary expert said that this is similar to many large private sector plans. Experts indicated that such audits are fairly common among large pension plans, but that smaller plans—those managing assets of fewer than $100 million—do not typically commission these reviews. One expert stated that smaller plans may have a more difficult time justifying the use of the resources necessary to commission performance audits. Nonetheless, where resources are available, experts said that audits can be beneficial to a plan’s trustees and management. For instance, one expert said these reviews help ensure the plan is complying with all reporting and disclosure requirements. In addition to periodic audits, private plans are also subject to potential external review by ERISA enforcement agencies. To enforce the fiduciary standards established in ERISA, for example, EBSA may review private sector plans to ensure officials are in compliance with ERISA standards and, like plan participants and others, take civil action to enforce compliance. While not subject to ERISA, the Trust’s authorizing legislation includes similar fiduciary standards and the Trust is subject to potential civil action by the Board for violations of law. While such action is possible, Board officials stated that the Board has never had cause to take such action. The Board’s OIG officials emphasized their long-held belief that the current level of oversight is inadequate, and that the Trust should be In a 2011 report, the OIG subject to more rigorous performance audits.stated that without stricter accountability, transparency, and oversight on issues such as administrative expenses and overall financial health, the Trust runs the risk of fraud, waste and abuse. Further, according to the OIG, there is no comparable example where federal program assets are completely outside the jurisdiction of a federal agency’s appointed Inspector General. OIG officials told us that that the Board can take enforcement action if it believes the Trust is not in compliance with its founding legislation, but that without more transparency, fraud or mismanagement would be difficult to detect. The OIG maintained that an external organization should have oversight authority so that it can independently verify Trust reports. The OIG added that—despite explicit statutory language making it clear that the Trust is not an agency of the federal government—the Trust’s control of about $25 billion in federal government assets makes its status as a non-governmental organization somewhat illogical, and that it should be subject to greater oversight. The official added that if the railroad industry fell on hard times and the Trust was unable able to make benefit payments, industry officials would likely need to seek federal financial assistance. Both Trust and Board representatives stated that, in their view, the current oversight is adequate, citing annual mandatory financial audits, regular reporting and communications between the Board and Trust, and voluntary periodic Trust-commissioned performance audits. Also, officials cited the statutory “tax ratchet”, which raises or lowers the Tier II employer and employee tax rate to ensure that the Trust assets equal between 4 and 6 years of expected benefit payments. Officials noted that this mechanism both ensures that the Trust’s financial position will not unduly deteriorate so long as there is a viable railroad industry in the United States to pay required taxes, and ensures that railroad labor and management have a self interest in overseeing a financially healthy Trust. Selected representatives of railroad management and labor generally concurred with Board and Trust officials. For example, representatives of the Association of American Railroads—an organization representing U.S. railroads—stated that they did not have concerns about the Trust’s current oversight structure. Similarly, an official of the Brotherhood of Maintenance of Way Employes indicated that the Trust is doing well financially, and did not have concerns with regard to Trust oversight because the Trust is quite transparent, and labor organizations are able to obtain periodic reports. Based on discussions with experts and key stakeholders, as well as our review of oversight models that apply to large state plans, private sector plans subject to ERISA, and comparable federal entities, we identified four possible policy options for expanding Trust oversight. We spoke with key stakeholders about these policy options and solicited their views on the potential benefits and drawbacks of each. Table 5 summarizes stakeholder views on these policy options. An OIG official told us that, in their opinion, this would be the most logical option because the Trust controls Board assets and the OIG is responsible for overseeing the Board. However, the official noted that the OIG has limited staff, and that such authority would require additional staff resources. To make this option more agreeable to the Trust, an OIG official said that any necessary statutory language could clearly delineate what the OIG’s role would and would not be. The official said the OIG would seek to verify that there are proper checks and balances in place and to assess internal controls. The official stated the OIG would not seek to advise the Trust on investment policy, which is beyond the OIG’s area of expertise. However, representatives of the Trust and the Board that we contacted were unanimously opposed to such a proposal. Board officials stated that such a development would be counter to the Trust’s originating legislation, and one official stated that externally-initiated audits could open the door to political influence, stating that audit objectives could be framed in a way that would pressure the Trust’s investment policies in a particular direction. For example, an audit could be designed to review “politically incorrect” investments, or investments that might be portrayed as not environmentally conscious. Similarly, a Trustee expressed concern about “headline risk”, where an outside auditor might make an issue about the Trust’s investments in alternative investments such as private equity. Trust representatives also expressed concerns about what they perceived as an unconstructive, confrontational relationship with the OIG. One official said this has been manifest in a number of ways since the Trust was established, including on matters relating to investment management and returns. A Trust official noted that the OIG has commented on Trust investments and related issues, and said that should the OIG be granted authority to audit the Trust, such concerns could result in an audit that would influence Trust investments. The official added that the Trust has a professionally developed investment strategy, and does not wish to take advice about investments or about its selection of investment advisors from the OIG or any other government agency. Also, as summarized below, Trust officials noted that the OIG’s stance with regard to the Statement of Social Insurance (SOSI) has led them to undertake a costly and, in their view, unnecessary second audit of their financial statements each year. An OIG official told us that because the SOSI is included in Board financial statements, in their view the audit of the December 31 asset values is necessary based on OMB guidance. The official further noted that while the difference in the value of Trust assets between September 30 and December 31 is generally not large, in 2008 there was an 18 percent difference. Background U.S. generally accepted accounting principles require federal agencies charged with responsibility for selected federal social insurance programs such as the Railroad Retirement, Social Security and Medicare programs—to present the Statement of Social Insurance (SOSI) as a basic financial statement in their respective annually audited financial statements. The SOSI presents the projected actuarial present value of the estimated future revenue and estimated future expenditures of these social insurance programs over 75 years. In preparing its annual SOSI for the Railroad Retirement program, the Board considers projections of employment levels, economic factors, and demographic factors such as mortality rates, widow remarriage rates, retirement rates, as well as current asset values provided by the Trust. The Department of the Treasury has cautioned that the assumptions used to prepare SOSI’s are inherently subject to substantial uncertainty, and that depending on future events, there will be differences between the SOSI estimates and actual results. OIG Action In 2006, the OIG informed the Board that it would not provide an unqualified opinion on its financial statements if the Board continued to accept unaudited December 31 asset values from the Trust. The Board then requested that the Trust pay for an audit of the December 31 asset values. Trust Position A Trust official stated that this is unnecessary because Trust assets are audited at the end of the Trust’s fiscal year—September 30. Further, the Trust noted that the variance between audited December 31 and unaudited December 31 values are invariably quite small—averaging about .12 percent and never exceeding ½ of 1 percent. According to a Trust official, the various assumptions made by the Board actuary in preparing the SOSI have much more impact on the projections than the difference between the audited and unaudited asset values. Impact According to the Trust, the additional audit is also wasteful—costing $152,000 in 2013 and a total of about $1.6 million since 2005. Finally, Board and Trust officials indicated that the OIG would not have sufficient expertise to conduct performance audits of the Trust. One official noted that the internal audit departments of two railroad firms were hired for the first audit that covered various administrative issues. However, Trust officials decided that these auditors would not have the expertise to conduct subsequent reviews, the scope of which required greater knowledge of investment management. Instead, the Trust opted to hire private consulting firms with recognized expertise in the relevant subject matter. For the same reason, a Trust official contended that OIG lacks the expertise to conduct these audits. Key stakeholders—including Board and Trust officials—generally supported this option. The Trust does not have a formal policy regarding the frequency or subject matter of its performance audits, or a policy regarding obtaining external advice on the subject and scope of such audits. However, one trustee stated that, while the Trust has every intention of continuing the practice of conducting periodic audits, they would be amenable to formalizing this process. An OIG official also generally supported this idea, but had previously stated that reviews every 3 years would not be sufficient, and that more ongoing oversight is needed. Board and Trust officials were also supportive of the Board serving in an advisory role with regard to such audits. Recently, the Trust and the Board have been developing a memorandum of understanding (MOU). According to a draft version of this MOU, starting in 2015, performance audits would be performed at least every 3 years based on mutual agreement between the Trust and the Board. The draft MOU also lists 12 areas that would be appropriate subjects of such audits, and provides that the Trust and the Board would meet to review the results and assess what changes to Trust practices or procedures are warranted. However, the draft MOU does not mention some audit subjects, such as fiduciary responsibility and conflicts of interest policies, and does not specify that key subjects should be addressed within specified timeframes for addressing particular areas subject to audit. Larger private sector DB plans have, according to experts we contacted, performance audit practices resembling those of the Trust. However, in response to participant complaints or other information, such plans are also potentially subject to EBSA investigations. As we have previously reported, EBSA does not conduct routine compliance audits, but rather investigators rely on various sources for case leads, such as staff reviews of plan annual reports or media reports, participant complaints, or referrals from other agencies. As noted previously, the Board can bring a civil action against the Trust for violations of law. Trust officials are subject to fiduciary standards similar to those under ERISA, and are prohibited from transactions in the trustees’ own interest, or receiving any benefit from any party dealing with Trust assets. However, the Trust’s authorizing statute does not provide for any mechanism other than a lawsuit with regard to a violation. Trust officials stated that establishing an external investigative authority might have limited benefits because railroad retirees and survivors do not interact with the Trust in the same way that retirees interact with a DB plan. A Trust representative noted that because the Trust’s sole duty is to manage the assets pertaining to Tier II benefits, it does not have responsibility for determining benefit levels, making benefit payments, or the other matters about which a pension plan may communicate with beneficiaries. According to Board representatives, workers taking issue with some aspect of Trust management or actions would likely contact the labor representative on the Board, and management officials would likely contact the Board’s management representative. An office of internal audit is common in state plans, but according to stakeholders, the Trust may be too small an organization to justify such a unit. The majority of the state plans were subject to audits conducted by an internal audit department. Internal auditors generally conducted audits on an ongoing basis, following a routine audit plan. Both Board and Trust officials stated that, given the small size of the Trust’s staff, an office of internal audit would not be suitable. One Trust representative noted that, if the Trust was comparable in size to a large public pension plan, establishing an internal office would make some sense. However, he noted that the Trust employs few staff, and investment management is entirely carried out by external firms. The official stated that such an entity would need considerable skill—including in-depth expertise in investment, accounting, and financial controls—and such a professional would likely command a much higher salary than the Trust would be willing to pay for someone who would have limited responsibility for most of the year. A trustee also expressed concern about the substantial cost of such a position given that there would not be much for them to do most of the time. A representative of the OIG stated that establishing an internal compliance officer or auditor is a reasonable idea, but expressed concern about the operational independence of such a position. This official was not familiar with the status of internal audit offices within public pension plans, but indicated that such an office would need to be independent of management and Trustees, just as the OIG is independent of the Board. With respect to the policy options we discussed with stakeholders, Trust and Board officials stated that they would prefer any changes be established through an interagency agreement such as an MOU as opposed to a statutory amendment. Representatives of the Trust and the Board strongly preferred to avoid a statutory change. Trust representatives explained that any statutory amendments would offer less flexibility and opportunity for modification than would an administrative agreement such as an MOU. Further, Trust and Board officials expressed concern that the process of a statutory change might bring unexpected and disruptive consequences. For example, once begun, industry or labor might use the legislative process to impose additional amendments, which could cause unnecessary strife. An OIG official noted advantages and drawbacks to both options, noting for example that while the statutory option could be more difficult to achieve, it would have the benefit of greater permanence, since the Trust could not legally opt to discontinue new oversight practices. The National Railroad Retirement Investment Trust manages a $25 billion pool of federal assets that are critical to providing retirement benefits for railroad workers and their families. To protect these assets—and the entity that manages them—from political influence, the Trust was established independent of the federal government and explicitly exempted from the title 31 of the U.S. Code, which governs the financial operations of the federal government and establishes the powers and duties of GAO. However, the Trust is not without oversight beyond mandatory financial audits. Through regular reports and other communications, the Trust’s financial condition is monitored by the Board and other agencies of the federal government. Further, the Trust has appropriately recognized the importance of oversight and transparency by taking the initiative to commission four performance audits since it was organized in 2002. These voluntarily initiated audits are comparable to and in some cases more comprehensive than those of the state pension plans we reviewed. Nonetheless, our review suggests that there are aspects of the approach to accountability for the Trust that could be strengthened. First, while 42 of the 50 state plans we surveyed and both federal agencies we reviewed are subject to performance audits that are initiated and conducted by external entities, the Trust is not. Instead, it has commissioned private firms to conduct audits whose subject and scope the Trust defines. However, a lack of independently initiated audits raises the risk that auditors could be directed away from potentially problematic issues. Second, 29 of the 50 state plans we contacted are subject to external audits on a specific calendar cycle, and those plans with an internal auditor are audited on an ongoing basis. Although the Trust has opted to commission performance audits every 2 to 3 years since its creation, it does not have a written policy requiring such audits, defining their scope, or establishing their frequency. Finally, while some states require that specific subjects be periodically reviewed, the Trust does not. For example, one state now requires plans to undergo ethics and conflict of interest reviews every 3 years—the most recent of which assessed whether fiduciaries act for the sole benefit of participants, and whether the highest ethical practices were being upheld. Any improvement in Trust’s performance audit oversight should help ensure that its investment decisions are insulated from political influence. Our review of state pension plans and selected federal programs suggests that while external audits are not necessarily a source of such influence, such influence may not be beyond the bounds of possibility. However, concerns about such “political risk” should be balanced against the management and financial risk that exists in situations where oversight is not clearly independent. The Trust’s recent initiative to document a performance audit policy and to involve the Board in determining the subject and scope of future audits adds a welcome external perspective that is likely to enhance the independence of future audits. However, Trust action—including any interagency agreements—would not necessarily be permanent, and under current law the parties could revoke such an agreement at any time. After more than a decade of Trust operation, it may be time to consider whether such an arrangement should be made permanent, while still ensuring that Trust assets are managed solely with the long term best interest of railroad retirees and their families in mind. We provided a draft of this report to the National Railroad Retirement Investment Trust, the Railroad Retirement Board, and the Railroad Retirement Board Office of Inspector General for review and comment. We received formal written comments from all three organizations, and each generally agreed with our findings and analysis. Among other comments, the Trust indicated that it would seek to address two issues GAO noted with regard to the draft memorandum of understanding between the Trust and the Board regarding performance audits between the Trust and the Board. The Board’s OIG summarized some of its long- standing concerns about oversight of the Trust, and raised other concerns. For example, the OIG stressed the importance of audits conducted by independent external entities, and expressed opposition to any arrangement that would allow the Trust and the Board to control performance audits. The OIG also disagreed with the concern expressed by the Board that its audits could lack independence or be a source of political influence. The Trust, Board, and OIG formal comments are reproduced in appendixes II, III, and IV, respectively. The Trust and Board also provided a number of technical comments, which we incorporated as appropriate. Because performance audit policies or the work of the Pension Benefit Guaranty Corporation, the PBGC Office of Inspector General, the Federal Retirement Thrift Investment Board, and the Department of Labor’s Employee Benefit Security Administration are reflected in our report, we also provided those agencies with a copy of the report for technical review and comment. None provided formal written comments, but the Federal Thrift Investment Board and the PBGC provided technical comments, which we have incorporated at appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to appropriate congressional committees, the agencies named above, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report, please contact Charles Jeszeck at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are found in appendix V. Our objectives were to answer the following questions: 1. What performance audit policies and practices exist for the oversight of the National Railroad Retirement Investment Trust (Trust)? 2. What performance audit policies apply to comparable organizations, such as large state public pension plans? 3. What options, if any, could be pursued to improve Trust performance audit policies and what tradeoffs do stakeholders believe such options entail? To answer our first question, we reviewed applicable federal laws, regulations, and Railroad Retirement Board (Board) policies and procedures regarding oversight of the Trust and the memorandum of understanding established between the Board, the Trust, the Office of Management and Budget (OMB), and the Department of the Treasury. Additionally, we interviewed representatives of the Board, the Trust, and the Railroad Retirement Board’s Office of Inspector General (OIG) to determine the nature and frequency of oversight and audit policies and practices regarding the Trust. We also obtained and reviewed relevant documents including each of the four Trust-commissioned performance audit reports, the Trust’s annual reports to Congress, and the Trust’s financial statement audit reports. Additionally, we reviewed relevant OIG reports and communications between the Board and OIG related to Trust audit and oversight. To answer our second question, we conducted in-depth illustrative case studies of audit policies and practices in seven states: California, Florida, Illinois, New York, Tennessee, Texas, and Pennsylvania. We purposefully selected case studies based on region, plan participation, and governance and oversight structure.interviewed representatives of the state’s Auditor General or equivalent and either representatives of the state’s largest public employee pension plan or state agency that, similar to the Trust, solely managed the investment of pooled pension assets. Further, we obtained and reviewed As part of each case study, we relevant state performance audit reports. Specifically, we reviewed relevant state audit reports issued since 2008. We generally obtained these reports from the website of the states’ Auditors General or equivalent. During interviews with state Auditors General or equivalent and state pension officials, we discussed these reports and asked for copies of other relevant audit reports issued since 2008. Where available, we also reviewed audit reports produced by state plans’ offices of internal audit. As internal audit reports are generally not publically available, we asked officials to provide us with copies of these reports particularly those that reviewed aspects of the plan related to investment strategy and management that would be most applicable to the functions of the Trust. To obtain higher-level data regarding the performance audit policies and practices of the remaining 43 states, we also conducted structured interviews with officials of each state’s largest defined benefit (DB) public employee pension plan or pension investment entity as available. To identify the state DB plans or pension investment entities, we used information obtained from Pension and Investment’s Research Center and the National Association of State Retirement Administrators (NASRA).questions and held pre-tests with officials in two states to obtain feedback on the clarity and relevance of our questions. While the majority of our questions could be answered with a yes or no response, we also included more open ended questions regarding the frequency of external and internal performance audits and to what extent plan officials found such audits useful. Based on our audit objectives, we developed standard To obtain information on comparable federal entities, we also interviewed officials from the Pension Benefit Guaranty Corporation’s (PBGC) single employer insurance program and the Federal Retirement Thrift Investment Board that administers the Thrift Savings Plan. While the functions of these organizations are not completely analogous to the functions of the Trust, like the Trust, both programs manage large asset pools for the benefit of retirees and their beneficiaries. Further, we also interviewed officials from two federal agencies that have audit authority of these programs—respectively, PBGC’s Office of Inspector General and the Department of Labor’s Employee Benefit and Security Administration—to determine the nature and frequency of their audit practices. Additionally, we obtained and reviewed relevant federal audit reports issued since 2008. Further, we interviewed representatives of NASRA, and the Association of Public Pension Fund Auditors to discuss audit practices of public plans. To obtain information on the audit practices of private sector DB plans, we reviewed relevant provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and interviewed private sector plan fiduciary experts, ERISA experts, and representatives of an external consulting firm that has been commissioned by private sector plans to conduct performance audits. To answer our third question, we developed four policy options regarding improved Trust oversight. These options were based substantially on the oversight models that apply to state pension plans or comparable federal agencies, as developed under objective 2. We then interviewed experts and stakeholders familiar with the Trust—including representatives of the Board, the Trust, the OIG, and other federal officials, as well as railroad labor and management—to discuss the potential benefits of establishing independent performance audits of the Trust. We discussed with them the benefits and drawbacks of four possible policy options: 1) permitting OIG audits, 2) requiring periodic audits with external input on scope, 3) establishing external investigative authority, and 4) establishing an office of internal audit. We also solicited input on the mechanisms—statutory or otherwise—by which the options could be implemented. We also obtained and reviewed existing principles and guidelines regarding the audit and oversight of DB pensions plans, especially those applicable to investment management activities. Examples of such principles include the guidelines published by the Organisation for Economic Cooperation and Development (OECD) and the National Conference on Public Employee Additionally, we reviewed Retirement Systems (NCPERS) among others.academic articles on pension plan governance and oversight and relevant auditing and internal control standards such as the American Institute of Certified Public Accountants Statements on Auditing Standards, Government Auditing Standards, International Standards for the Professional Practice of Internal Auditing (Standards), and Standards for Internal Control in the Federal Government. We conducted this audit from April 2013 to May 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient and appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, David Lehrer (Assistant Director), Michael Hartnett, and Justin Dunleavy made key contributions to this report. In addition, key support was provided by Susanna Clark, Mimi Nguyen, Kate van Gelder, Walter Vance, and Craig Winslow.
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The Trust was established by federal statute effective in 2002 to manage a portion of the assets the Board uses to pay benefits to retired railroad workers, and managed about $25 billion in assets as of 2013. The Trust invests assets in stocks, bonds, and other investment vehicles in a manner similar to that of defined benefit plans. To insulate the Trust from political influence over its investment decisions, the Trust was established independent of the federal government. It is exempted from the federal law that governs the financial operations of the U.S. government and which establishes the duties and powers of the GAO. GAO assessed (1) the performance audit policies and practices that exist for oversight of the Trust; (2) the performance audit policies that apply to comparable organizations, such as large state public pension plans; and (3) what options, if any, could be pursued to improve Trust performance audit policies and what tradeoffs stakeholders believe such options entail. GAO reviewed applicable federal laws, Trust policies and procedures, and relevant reports such as state, federal, and Trust-commissioned performance audit reports. GAO also interviewed officials of the Board, state and federal pension plans, the state Auditors General, and private plan fiduciary experts. Oversight of the National Railroad Retirement Investment Trust (Trust) includes both regular reporting and communications with the Railroad Retirement Board (Board), and periodic performance audits that the Trust has opted to commission; however, no written requirement for such audits exists. The Trust's mandatory annual management report includes financial and descriptive information, including a discussion of the evolution, current status and performance of the Trust's investment portfolio and administrative costs, including investment manager fees. The Trust has also commissioned four external performance audits since its creation—the first in 2004 and the most recent in 2012. These reviews have encompassed a wide range of issues, including the accuracy of monthly reports, compliance with Trust investment manager hiring policies, processes to ensure accuracy of financial recordkeeping and internal controls, adequacy of due diligence procedures, and the role of non-traditional investments. Performance audit practices of comparable entities can differ from the Trust in scope and frequency. The large majority of state pension plans and two federal programs GAO reviewed that manage investment assets are subject to performance audits that can be initiated and conducted by an external entity, and some of these audits have addressed issues Trust-commissioned audits have not included. Forty-two of the 50 state plans GAO contacted are subject to performance audits that can be initiated and conducted by an external auditor, such as state Auditors General or equivalent, or by offices of internal audit. In some cases, the external auditor reviews the plan annually, while in others, plans are audited less frequently. Both federal programs—the Pension Benefit Guaranty Corporation's single-employer insurance program and the Thrift Savings Plan—are also subject to externally initiated and conducted performance audits. State and federal audits varied in subject and scope, and in some cases, examined issues that Trust-commissioned reviews have not yet included, such as ethics and conflict of interest policies. Experts told GAO that Trust performance audit practices are comparable to those of large private sector plans governed by the Employee Retirement Income Security Act of 1974. Based on our review of oversight models that apply to state plans and other information, GAO developed several options to enhance the Trust's performance audit practices, and stakeholders identified potential advantages and limitations pertaining to them. For example, the Board's Office of Inspector General (OIG) could be granted authority to conduct performance audits, which would help ensure these reviews are initiated and performed independent of the Trust. However, both Board and Trust officials had reservations about this option, stating that the OIG lacks sufficient expertise in aspects of the Trust investment program, and expressing concerns about what they perceive as an unconstructive working relationship. The Trust's practice of commissioning periodic performance audits could be established as a formal requirement, either through a memorandum of agreement between the key parties, or through a statutory amendment, with external input on subject and scope of the audits. Trust and Board officials stated that this would be a reasonable option, and in early 2014 developed an initial proposal to implement such an agreement. This report makes no recommendations.
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This section describes the role of coal in generating electricity, the four key EPA regulations, actions involved in maintaining electric reliability, and federal and state government roles in electricity markets. Because of the abundance of coal and its historically low cost, many coal- fueled electricity generating units were built and these provide a large share of the electricity produced in the United States. In 2010, there were 1,396 coal-fueled generating units in the United States, with a total 316,800 megawatts (MW) of net summer generating capacity—about 30 percent of the total generating capacity in the United States. In addition to coal, electricity is produced by burning other fossil fuels, particularly natural gas and oil; using nuclear power through nuclear fission; and using renewable sources, including hydropower, wind, geothermal, and solar. Coal is the largest source of electricity generation, but the percentage of electricity produced using coal has declined––from 53 percent in 1990 to about 42 percent in 2011—and coal’s role in the electricity system is changing due to a number of factors. According to some stakeholders we interviewed, several broad trends are affecting the use of coal and contribute to the retirement of coal-fueled generating units. First, in some areas of the country, it has become less economically attractive to use coal to produce electricity, as the regional prices of coal have increased, and prices for natural gas have fallen and the availability of natural gas has increased. Second, demand for electricity is projected to grow slowly in some areas, limiting the need for new power plants. Third, a portion of coal-fueled generating units are old—73 percent of coal-fueled capacity was 30 years or older at the end of 2010—and less efficient than other sources. Despite these trends, coal is expected to continue to be a major fuel source in the future, with the EIA recently projecting coal to account for about 39 percent of the United States’ electricity by 2035 with current policies. We are examining these issues and expect to report later this year on how the use of coal in electricity production is expected to change. Reliance on coal varies significantly around the country. As shown in figure 1, in 2010, coal was used to generate the majority of electricity produced in several states, particularly in the Midwest, while little of the electricity generated in states on the West Coast and in New England was from coal. Four recent key EPA regulations address air pollution from electricity generating units, disposal of coal combustion residuals from certain generating units, and death of aquatic life as a result of water withdrawal for use for cooling at certain electricity generating units. As outlined in table 1, these regulations are at different stages of development, have different compliance deadlines, and EPA estimates that they will generate significant monetized benefits and costs. Coal-fueled electricity generating units are a major source of air pollution in the United States. Burning coal for electricity production results in the emission of pollutants such as SO, NO, mercury and other metals, and acid gases. Coal-fueled electricity generating units are among the largest emitters of these pollutants. This air pollution has adverse health and environmental effects. For example, SO emissions contribute to the formation of fine particulate matter, and NO contributes to the formation of ozone. Fine particulate matter may aggravate respiratory and cardiovascular diseases and is associated with asthma attacks and premature death. Ozone can inflame lung tissue and increase susceptibility to bronchitis and pneumonia. In addition to affecting health, SO and NO reduce visibility and contribute to acid rain, which can acidify streams and change the nutrient balance in coastal waters and large river basins, affecting their ability to support fish and other wildlife. Mercury is a toxic element, and human intake of mercury, for example, through consumption of fish that ingested the mercury, has been linked to a wide range of health ailments. In particular, mercury can harm fetuses and cause neurological disorders in children, resulting in, among other things, impaired cognitive abilities. Other toxic metals emitted from power plants, such as arsenic, chromium, and nickel can cause cancer. Acid gases cause lung damage and contribute to asthma, bronchitis, and other chronic respiratory diseases, especially in children and the elderly. The Clean Air Act requires EPA to establish national ambient air quality standards that states are primarily responsible for attaining. States generally develop state implementation plans that detail how the standards will be attained and maintained. In addition, the act’s Good Neighbor provision requires state implementation plans to prohibit emissions of air pollutants in amounts that will contribute significantly to nonattainment or interference with maintenance of a national ambient air quality standard in any other state. Electricity generating units contribute to pollution that affects the ability of downwind states to attain and maintain these standards because some of these pollutants may travel in the atmosphere hundreds or thousands of miles from the areas where they originate. If a state fails to develop and submit a state implementation plan that satisfies all Clean Air Act requirements, including the Good Neighbor provision, by specified deadlines, EPA is required to issue a federal implementation plan. EPA issued regulations interpreting and clarifying the Good Neighbor provisions in 1998 and 2005, but a federal court found the 2005 regulation and its federal implementation plans to be unlawful. Although the court remanded the 2005 regulation to EPA in 2008, it allowed the regulation and its federal implementation plans to remain in effect until EPA issued a replacement regulation. and NO emissions that contribute significantly to downwind nonattainment of certain national ambient air quality standards. The CAIR federal implementation plans issued in 2006 regulate electricity generating units in the covered states and achieve CAIR’s emissions reductions requirements. The court allowed CAIR and its federal implementation plans to remain in effect until replaced because, even with flaws, they would at least temporarily preserve the environmental values covered by CAIR. the control period could be subject to financial penalties and must surrender two allowances for each excess ton of pollution emitted. EPA projects that CSAPR would reduce SO emissions by 54 percent in the covered states and could avoid 13,000 to 34,000 premature deaths, generating $128 to $299 billion in benefits, with $853 million in costs in 2014. The control periods for some of the trading programs were scheduled to begin on January 1, 2012, but the U.S. Court of Appeals for the D.C. Circuit stayed CSAPR on December 30, 2011. Depending on how the court rules, CSAPR may change. The Clean Air Act also requires EPA to study the public health hazards from electricity generating units’ emissions of mercury and other hazardous air pollutants and to regulate those emissions under section 112 if it finds that such regulation is “appropriate and necessary.” EPA made such a finding regarding certain electricity generating units in 2000 but did not issue a regulation under section 112. In 2005, EPA reversed this finding and finalized a regulation under section 111 of the Clean Air Act regulating mercury emissions from certain electricity generating units, which a federal court later struck down. Pursuant to a settlement agreement to resolve a lawsuit for failing to meet the statutory deadline for issuing a section 112 regulation, EPA published the final MATS regulations in February 2012. Among other things, MATS establishes numerical emissions limitations for mercury, filterable particulate matter (as a surrogate for all toxic nonmercury metal pollutants), and hydrogen chloride (as a surrogate for all toxic acid gas pollutants) at certain new and existing generating units. All of the numerical limitations applicable to existing units except one are set at the average emissions limitation achieved by the best performing 12 percent of existing sources. Generating units would have 3 years, until April 2015, to comply with MATS and could receive up to a 1-year extension from permitting authorities (typically state or local authorities), if necessary for the installation of controls. EPA also outlined a mechanism to allow units that are needed to address specific and documented reliability concerns to receive Clean Air Act administrative orders to provide up to an additional year to come into compliance. EPA estimates that the final standards would reduce mercury emissions from coal-fueled electricity generating units by 75 percent and reduce hydrogen chloride emissions by 88 percent. EPA estimated the benefits of MATS would be $39 to $96 billion with costs of $10.2 billion in 2016. Petitions for review of MATS have been filed in the U.S. Court of Appeals for the D.C. Circuit, but the court has not yet issued a ruling. Depending on how the court rules, MATS may change. Burning coal to produce electricity creates combustion residuals, such as coal ash, which represent one of the largest waste streams in the United States. These residuals contain contaminants like mercury, cadmium, and arsenic that are associated with cancer and various other serious health effects. Coal combustion residuals can be disposed of wet (mixed with water) in large surface impoundments, or dry in landfills. that many landfills and impoundments lack liners and groundwater monitoring systems, and without proper protections, contaminants can leach into groundwater and migrate to drinking water sources, posing significant public health concerns. Some coal combustion residuals have beneficial uses; for example, they can be used in the manufacture of such construction materials as concrete or wallboard. According to EPA documentation, about 37 percent of coal combustion residuals are used beneficially. EPA did not propose to regulate the beneficial use of coal combustion residuals, though some industry officials have expressed concerns that designating residuals as hazardous could negatively impact beneficial uses. disposal of nonhazardous solid waste to protect human health and the environment. In June 2010, to address risks from the disposal of coal combustion residuals generated at electricity generating units, EPA proposed CCR to regulate coal combustion residuals for the first time. EPA co-proposed two alternative regulations. Under the first, EPA would list residuals as a special waste and regulate them as a hazardous waste by establishing requirements for their management from generation to disposal. Under the second option, EPA would regulate coal combustion residuals as nonhazardous solid waste and establish national minimum standards for their disposal in surface impoundments or landfills. Regulation as a special waste would occur through a federal or authorized state permitting program with requirements for its storage, transport, and disposal, among other things. Regulation as a special waste would also allow for federal enforcement. Regulation as a nonhazardous solid waste would not require the establishment of a permit program and would not be federally enforceable. Instead, states or private parties could bring lawsuits against alleged violators. EPA estimated the annualized benefits of its special waste option would be $207 to $1,342 million with $1,549 million in annualized costs and that the nonhazardous waste option would generate annualized benefits of $88 to $596 million with $606 million in annualized costs.issuing a final CCR regulation. Damage to Aquatic Life: 316(b) Coal and other types of electricity generating units often draw in large volumes of water from nearby rivers, lakes, or oceans to use for cooling, which can damage aquatic life. Thermoelectric generating units are the largest water use category by sector, using 201 billion gallons per day in 2005, the most recent year for which data were available. Depending on how a generating unit’s cooling system is designed, drawing in water for cooling can result in fish and other aquatic life being impinged—trapped— against intake screens used to filter out solid matter, as well as entrained—drawn into—the generating unit with the cooling water. According to EPA, generating units kill hundreds of billions of aquatic organisms in U.S. waters each year, including fish, crustaceans, marine mammals, and other aquatic life. EPA first issued a regulation implementing section 316(b) in 1976, but that regulation was struck down by a federal appeals court in 1979. EPA has issued two other regulations implementing section 316(b) that are currently in effect: the Phase I regulation that governs new power plants and manufacturing facilities and the Phase III regulation that governs new offshore oil and gas facilities. capacity would be affected by the proposed regulation.regulating cooling water intake structures, EPA estimates increased harvests in recreational and commercial fisheries, improved ecosystem function, and reduced harm to threatened and endangered species, among other benefits. EPA estimated the annualized benefits of its proposed regulation to be $18 million with costs of $397 million. EPA is required by a settlement agreement to sign a final regulation no later than July 27, 2012. Electric reliability refers to the ability to meet the needs of end-use customers even when unexpected generating equipment failures or other factors affect the electricity system.multiple ways: Reliability challenges can arise in Resource adequacy challenges. These arise when there are inadequate resources—generation, transmission, and others—to meet the electricity needs of end-use customers. To avoid resource adequacy challenges, system planners typically take steps to ensure that generating capacity exceeds the maximum expected demand by a certain margin, referred to as a “reserve margin.” System security challenges. These arise because of a disturbance, such as an electrical short, or the loss of a system component, such as a generating unit that is needed at a specific location to maintain the electricity grid’s voltage and frequency or to help restart the electricity system in the case of a blackout. To avoid system security challenges, system operators make real-time changes in the operation of the electricity system, for example, by increasing or decreasing the amount of electricity generated in particular locations or by changing power flows on the transmission system in order to maintain suitable operating conditions. System planners attempt to avoid reliability problems through advance planning of transmission and, in some cases, generation resources. The role of a system planner can be carried out by individual power companies or regional entities called Regional Transmission Organizations (RTO). Figure 3 shows the territories of the seven RTOs in the United States. System planners’ responsibilities include analyzing expected future changes in generation and transmission assets, such as the retirement of a generating unit; customer demand; and emerging reliability issues. For example, once a system planner learns that a power company intends to retire a generating unit, the system planner generally studies the electricity system to assess whether the retirement would cause reliability challenges and identify solutions to mitigate any impacts. The solutions could be in the form of replacement capacity (generation or demand-side resources) and new transmission lines or other equipment, each with its own associated permitting and construction timelines. When reliability challenges cannot be avoided through prior planning, system operators take measures to resolve the problem by rebalancing supply and demand. The role of the system operator is also fulfilled by different entities, including individual power companies and RTOs. In the event of an urgent reliability challenge, system operators may take immediate steps to lower demand through public appeals to reduce use; interrupting or lowering electricity supply to customers who have negotiated prior agreements with the power company, which are referred to as reliability-driven demand-response programs; as well as rotating blackouts of limited duration. For example, during a period of sustained high summer temperatures in 2011, the system operator in Texas called upon the public to reduce electricity use during hours of peak demand to prevent the need for rotating blackouts. When reliability challenges cannot be adequately managed by system operators, unplanned, uncontrolled interruption of customer’s electricity use can occur. These interruptions may be confined to a localized area or widespread. For example, in August 2003, an electricity blackout affected millions of people across eight U.S. states and parts of Canada when, among other things, system operators were unable to keep outages in northern Ohio from cascading to interconnected portions of the electric grid. In some areas, power was lost for several days. The potential impact of retrofits and retirements on electricity prices and reliability is generally overseen by the federal regulator, FERC; state regulators, including state public utility commissions; and others. At the federal level, among other things, FERC is responsible for ensuring that the rates, terms and conditions of services for wholesale electricity sales and transmission in interstate commerce—which includes wholesale electricity prices—are just and reasonable and not unduly discriminatory or preferential. In some parts of the country, FERC does this by overseeing the design and operation of organized electricity markets—markets for electricity and other services intended to promote the reliable management of the grid—to ensure these markets are competitive and will result in just and reasonable electricity prices. Organized markets are administered by RTOs, the same independent entities that serve as system planners and operators in some regions. These electricity markets are designed to ensure an adequate supply of electricity at reasonable prices, and the markets are routinely examined by independent entities and FERC to ensure they are competitive and free of manipulation. As a part of its responsibility for ensuring just and reasonable rates, FERC has broad authority to oversee RTO rules related to electricity transmission, markets, and other areas. These rules may include requirements about how the transmission planning process is managed, the terms and conditions under which transmission service is provided, when and how the operator of a generating unit should notify the RTO of a planned retirement, and steps the RTO will take in scheduling outages, among other things. For example, RTOs typically require power companies to notify them when the companies plan to retire a generating unit. The time frame for this notification generally varies from 45 days to approximately 180 days. RTOs have an internal process in which stakeholders review, modify, and may vote on proposed changes to rules. If changes are agreed upon by the RTO’s stakeholders—power companies, transmission owners, and users of electricity, among others— the RTO may propose them to FERC for approval.own review of proposed changes to RTO tariffs and market rules to ensure they promote just and reasonable rates including, where relevant, reliability requirements. In some cases, FERC may also proactively review RTO market rules and order any changes to ensure they are just, reasonable, and not unduly discriminatory or preferential. FERC is also responsible for examining whether reliability must-run agreements— agreements to provide nonmarket based payments to power companies with generating units that are not economical to operate but are critical to the reliability of the electricity grid—are at reasonable rates. These FERC conducts its payments would cover the cost of keeping such units operational past when companies were planning to retire them. The role of state governments in overseeing electricity prices varies across the country. In some areas, referred to as “traditionally regulated markets,” state public utility commissions—which generally aim to ensure retail electricity rates are just and reasonable—review power companies’ requests to recover the costs of investments in new generating units, distribution lines and other system upgrades. Once a state public utility commission approves a power company’s request, consumer retail prices are adjusted to recover the power companies’ costs plus a rate of return. For companies in traditionally regulated markets, their investments in controls to comply with EPA regulations would have to be approved by public utility commissions for the companies to adjust their rates to include these costs. In other parts of the country, referred to as “restructured markets,” electricity is sold by multiple companies competing with each other. In these areas, public utility commissions play a more limited role in overseeing generation. Consumers pay competitive retail electricity rates based on the price of electricity as determined in FERC-regulated wholesale markets. Many electricity generating companies have received authority from FERC to sell power at market- based rates and, in restructured markets, these companies would aim to recover the costs of any investments made to comply with EPA regulations through wholesale sales of electricity, but their ability to do so depends on overall supply and demand conditions, which determine the prices they can receive. Under the Energy Policy Act of 2005, FERC is responsible for approving and enforcing standards to ensure the reliability of the bulk power system. FERC certified NERC to develop and enforce these reliability standards, subject to FERC review. These standards outline general requirements for planning and operating the bulk power system to ensure reliability. For example, one reliability standard requires that system planners plan and develop their systems to meet the demand for electricity even if equipment on the bulk power system, such as a single generating unit or transformer, is damaged or otherwise unable to operate. With respect to MATS, EPA has stated that it will rely on the advice and counsel of reliability experts, including FERC, to identify and analyze reliability risks when owners request a Clean Air Act administrative order to provide units with up to an additional year for compliance with MATS. FERC recently issued a policy statement detailing how it intends to provide advice to EPA on such requests. In general, neither FERC or NERC, nor the system planners can require companies to build generation or compel existing generation to operate, but DOE can order the generation of electricity in limited circumstances. Specifically, in certain emergencies, section 202(c) of the Federal Power Act authorizes DOE to order, among other things, the generation of electricity that in its judgment will best meet the emergency and serve the public interest. DOE has used this authority in the past to, among other things, ensure electricity could be provided to the District of Columbia in the event of a transmission line failure, as well as to provide electricity to customers during the California energy crisis. Furthermore, some state public utility commissions may require power companies to ensure they can provide adequate levels of generation to meet the demand of customers in their service territory. According to available information, there is uncertainty regarding how power companies will respond to the four key EPA regulations, though companies are expected to retrofit most coal-fueled generating units with controls, retire other units, and take additional actions. It is unclear how power companies will respond to the four key EPA regulations, in part because there is uncertainty about the regulations themselves and other factors affecting the industry, including future natural gas prices. Analysts that have studied how power companies may respond to the regulations have made different assumptions regarding these factors, which affect power companies’ assessments of whether to make additional investments in coal-fueled generating units such as investments that may be needed to respond to the four key regulations. Regarding the regulations, the requirements and deadlines they may establish for generating units are somewhat uncertain, especially for the proposed regulations. This is because the final CCR and 316(b) regulations might differ from the proposed regulations and because of current and potential future legal challenges. For example, CSAPR and MATS—the two regulations that have been finalized—face legal challenges and may change depending on how the court rules. In addition, some of the regulatory requirements, such as some aspects of 316(b), will not be specified until the relevant permits are issued. Furthermore, several bills have been introduced in Congress that would affect some or all of the regulations. Some power companies may delay taking actions to respond to these regulations until there is additional certainty about their final regulatory requirements. Several other factors also contribute to the uncertain environment in which power companies will respond to the new regulations. Among these is uncertainty about the future demand for electricity. EIA projects that demand for electricity will grow slowly over the next few years. This means power companies may be less inclined to make, and state electricity regulators may be less willing to approve of, investments in electricity generating units that may not be needed as often. On the other hand, if the economic recovery is more robust, there could be more electricity demand than expected, which might increase the need for additional generating capacity in some areas. Another factor that contributes to uncertainty is the price of fuels. Natural gas prices have decreased in recent years, and coal prices have increased, narrowing the historical cost advantage of using coal to produce electricity in some parts of the country. As a result of these changing prices, among other things, the use of natural gas to produce electricity has increased and is expected to continue to increase. For example, EIA recently projected that the use of natural gas to produce electricity in 2012 could increase by 24 percent, and that, in turn, electricity generation from coal could decline by 15 percent. However, some stakeholders we interviewed raised concerns about the prospects for continued low natural gas prices, citing the potential increased future use of natural gas for electricity or more strict regulation of natural gas production that could affect the long-term outlook for domestic natural gas production and prices. Another factor that contributes to uncertainty is the increased focus on renewable energy production and other potential future regulations. In recent years, there have been federal and state efforts to encourage the development of renewable energy sources—particularly wind and solar— to produce electricity. For example, 30 states have laws or regulations requiring power companies to increasingly rely on renewable sources for electricity. renewable sources increasing from 10 percent in 2010 to 16 percent of total electricity generation by 2035, potentially diminishing the demand for electricity from fossil fuels, including coal, in the future. Some stakeholders we met with noted that there is uncertainty about future environmental requirements, in particular those aimed at reducing carbon Such future requirements dioxide emissions to address climate change. These states are: Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Washington, West Virginia, and Wisconsin. could affect the attractiveness of additional investments by power companies in existing coal-fueled generating units because coal-fueled units are more carbon intensive than other forms of generating electricity. As we have previously reported, on average, coal-fueled units produced twice as much carbon dioxide as natural gas units in 2010. According to available information, power companies are projected to retrofit many coal-fueled generating units with environmental controls and retire some other units, as well as take additional actions to respond to the four key EPA regulations. Retrofit many coal-fueled generating units. All 12 of the studies we reviewed suggest that power companies may retrofit many coal-fueled generating units with new or upgraded controls to respond to the four key regulations. EPA’s analyses and two other studies we reviewed report national projections of how companies may reduce emissions of air pollutants to meet the finalized MATS and CSAPR requirements. Projections in these studies suggest that one-third to three-quarters of all coal-fueled capacity could be retrofitted or upgraded with some combination of controls, including the following: (1) fabric filters or electrostatic precipitators to control particulate matter; (2) dry sorbent injection or flue gas desulfurization units—also known as scrubbers—to control SO and acid gas emissions; (3) selective catalytic reduction or selective non-catalytic reduction units to control NO; and (4) activated carbon injection units to reduce mercury emissions. Appendix IV describes these controls, how they operate, and the extent of their use among coal-fueled generating units. Two of the studies we reviewed include estimates of how power companies may respond to CCR, projecting that some companies would convert power plants from wet ash handling to dry ash handling, which uses conveyor belts or trucks to gather and transport coal combustion residuals to storage sites, since wet ash impoundments may effectively be phased out under the final CCR regulation. These two studies projected that companies could convert 96-98 and 158 power plants to dry ash handling respectively. For power companies to respond to the proposed 316(b) regulation, EPA estimates that approximately 224 generating units may install intake screens called modified traveling screens— screens or buckets that collect fish from the cooling intake water and return them safely to the source water body—or reduce the facility’s water intake velocity to meet impingement requirements. In addition, two studies estimated how many power plants may install cooling towers to meet the proposed 316(b) entrainment requirements, projecting that 46 and 92-93 plants may do so. These projections are uncertain since the proposed regulation gives permitting authorities the responsibility to set entrainment requirements on a case-by-case basis.would be installed at a coal-fueled power plant. Available information suggests the actions power companies take to respond to the four key regulations will have costs, and some may be challenging to complete by the regulations’ compliance deadlines. In addition, these actions may have varied implications across the country— increasing electricity prices in some regions and contributing to some potential reliability challenges. Two of the studies we reviewed reported national estimates of the total costs of actions power companies may take in response to the four key EPA regulations, projecting from $16 billion to $21 billion in additional annual costs. EPA analyzed each regulation individually and projected annual compliance costs of $10.2 billion for MATS, $853 million for CSAPR, $600 million to $1.5 billion for CCR depending on which option is finalized, and $397 million for 316(b). According to EPA reports, in addition to operating and maintenance costs, a typical coal-fueled unit with a capacity of 700 MW could incur costs from $287 million to $351 million to install a scrubber, from $116 million to $137 million to install a selective catalytic reduction unit, and from $97 million to $114 million to install a fabric filter. Other controls are less expensive, and a 700 MW unit could incur $22 million to $43 million to install a dry sorbent injection unit or $4 to $5 million for an activated carbon injection unit, according to EPA reports. Additional costs could be incurred to build or acquire new generating capacity or to upgrade transmission systems due to unit retirements. For example, MISO estimated that building new generating capacity in its region to offset capacity lost from unit retirements could cost from $2 billion to $10 billion and that an additional $580 to $880 million in transmission upgrades could be required to maintain reliability criteria after potential unit retirements in net present value terms. MISO’s study is the only one we identified that estimated potential transmission investments needed to maintain reliability. Assessments by EPA and DOE suggest that much of the electricity industry may be able to complete actions by the compliance deadlines. In their assessments, EPA and DOE compared past coal-fueled generating unit retrofits to the MATS compliance deadline. DOE found that, assuming prompt action by regulators and generators, the timelines associated with retrofits and new construction are generally comparable to EPA’s regulatory deadlines. EPA reported that a reasonable, moderately paced effort would result in the majority of needed retrofits being installed by 2015 with the possibility of some retrofits needing up to an additional year for completion. In addition, EPA’s analysis stated that past experience may not reflect industry’s ability to deploy controls at a faster pace in the future using overtime, additional off-site modularization and prefabrication. At the same time, power company representatives and other stakeholders suggested that it might be challenging to complete retrofits or retirements by the compliance deadline for MATS in some cases. In this regard, an analysis by the Utility Air Regulatory Group, a voluntary group whose members include power companies, found that about 30 percent of projects to install fabric filters might be completed by the 2015 MATS compliance deadline and almost 70 percent of projects might be completed by the 2016 deadline, with the 1-year extension available from permitting authorities. EPA's study of the final MATS regulation indicates that fewer fabric filters may be needed than were assumed by the Utility Air Regulatory Group, and the group's results suggest that it may be possible to complete these by the 2016 deadline with the 1-year extension. Similarly, actions to mitigate capacity loss and other challenges due to generating unit retirements could take time as they could involve building new generating units or upgrading transmission systems. If these actions cannot be completed before compliance deadlines, a reliability challenge could arise unless steps are taken to keep generating units that are critical for the reliability of the electricity system from retiring. There have been examples of efforts to conduct transmission upgrades to address reliability challenges that have taken longer than the 4 years that may be available to meet the MATS compliance deadline assuming a 1-year extension. For example, transmission upgrades were necessary to allow several generating units with total capacity of 790 MW to retire at the Benning Road and Buzzard Point power plants on the Potomac Electric Power Company system, which serves 788,000 customers in Maryland and the District of Columbia. In 2007, the plants’ owner notified the system planner of its desire to retire the units by mid-2012. The needed transmission upgrades, including new transformers and circuits, are expected to be completed in mid-2012. Retrofits of generating units, transmission system upgrades, and the construction of new generating units can be major engineering undertakings, and several power company representatives and other stakeholders we interviewed said that completing some of these undertakings by compliance deadlines may be challenging in some cases. Stakeholders expressing concerns highlighted the following three reasons meeting these deadlines could be challenging, particularly for MATS compliance: Regulatory approvals can take time. Retrofits, transmission line upgrades, and construction of new generating units will require various state and local regulatory approvals, which may include construction permits and modifications of air pollution permits, which can extend the completion time of such projects. In traditionally regulated markets, power companies that decide to undertake a retrofit or new construction may also need to obtain a review by the state utility commission in order to include associated costs in electricity rates. Some of these approvals can be pursued concurrently with or be obtained after design, construction, and start- up, but some may extend completion times. Site-specific concerns for retrofits. In addition, some of the power company representatives we interviewed told us that power plants may have site-specific physical constraints that can slow completion of work. For example, according to representatives at one company, it took the company about 5 years to install fabric filters on four units at one plant, in part because the site did not have space to place the needed controls. The fabric filter for one of the units had to be constructed 1,200 feet away and connected via ductwork. Figure 6 illustrates another power plant with site-specific concerns, constrained by a river on one side and a highway and mountain on the other. Officials from the power company owning this plant told us that they generally construct a separate new stack for retrofitted scrubbers, but this was not possible due to space constraints at this site. Instead, the power company is installing ductwork from the scrubber through the cooling tower in order to use the cooling tower as a stack. Supply chain concerns. Some power company representatives and other stakeholders stated that, because of the large number of potential retrofits, they had concerns about the availability of specific skilled laborers or equipment needed to install some controls. The installation of some controls could entail significant retrofit efforts industry-wide. For example, according to EPA, companies could install fabric filters on an additional 102,000 MW of coal-fueled capacity in response to MATS. This is almost double the coal-fueled capacity that currently has fabric filters. The simultaneous installation of air pollution controls has strained supply chains in the past. For example, EPA stated that, from 2007 to 2008, when a significant number of power plants installed scrubbers, delays as long as 18 months occurred for plants to obtain such key engineered equipment as large pumps, motors, and chimneys that were needed. (See app. IV for additional information on the controls installed on coal-fueled units.) Some other stakeholders have said that there are sufficient resources available and did not identify concerns related to supply chain issues. EPA has stated that the controls needed to meet CSAPR and MATS are much simpler and will take significantly less time to plan, design, install, and commission than the controls that caused strains in the past. The actions power companies take to respond to the four EPA regulations are expected to affect some parts of the country less than others. First, some areas of the country, such as California, Washington, Oregon, and Maine, have little coal-fueled generation and, therefore, are expected to see little impact. In addition, CSAPR would cover 28 states in the eastern half of the United States, so generating units in the remaining states would not be affected. Second, power companies in certain areas may have already installed some of the needed controls on their coal-fueled units for a variety of reasons. For example, at least 18 states have enacted laws or regulations to limit mercury emissions from electricity generation. To satisfy these state requirements, power companies with coal-fueled generating units in these states may have already installed, or be planning to install, controls that are also capable of meeting MATS limits. These states may not see many additional changes in their electricity systems. In addition, some regions have coal-fueled generating units that were built more recently, and such newer units, as we reported in April 2012, are more likely to have installed some controls that could be helpful in meeting MATS and CSAPR requirements.areas, including the Midwest, Mid-Atlantic, and South, have higher concentrations of coal-fueled generating units that do not have control equipment needed to respond to the four key regulations. These areas are more likely to be affected by the key EPA regulations. The actions power companies may take in response to the four key EPA regulations would likely increase electricity prices in some regions. Of the 12 studies we reviewed, EPA and three other entities––Resources for the Future (RFF), NERA Economic Consulting, and MISO––conducted studies that project price impacts, but their results are not directly comparable because they considered different sets of the four regulations, report results differently, and examined different configurations of states in their regional analysis. EPA’s analyses suggest that MATS, by itself, may increase average retail electricity prices in the contiguous United States by 3 percent in 2015 and 2 percent in 2020 and have the most significant potential price impact of the four regulations. EPA estimated that the potential impact of MATS on average retail electricity prices in 13 regions could range from about a 1 percent increase in a region covering most of California to about a 6 percent increase in a region covering Kansas, Oklahoma, and parts of New Mexico, Texas, Louisiana, Arkansas, and Missouri. Table 2 summarizes the results of EPA’s studies.number of other factors, including changing prices of fuels and demand for electricity. According to EPA officials, the projected price increases associated with CSAPR and MATS are within the historical range of price fluctuations, and projected future prices overall may be below historic electricity prices. EPA officials also said that the regions of the country most likely to experience larger price increases have historically had lower than average prices and that they project that postimplementation prices in these regions will remain below the national average. Electricity prices are influenced by a Narrow reserve margins in Texas and New A few more detailed studies that examined local reliability and some stakeholders we interviewed identified the potential for local reliability challenges associated with the four key regulations. Furthermore, representatives from some power companies, RTOs, and other stakeholders told us that the combination of retrofits and retirements in an area could raise system security challenges, for example, if they affect a generating unit needed at a particular location to maintain the electricity system’s voltage or to perform other highly technical services to ensure the availability of electricity. Retirements and retrofits could contribute to such concerns if generating units have not been able to retrofit on time or because efforts to mitigate reliability effects are not completed in time. According to EPA documents and some stakeholders we interviewed, there are expected to be few such situations, and existing tools should be sufficient to address issues that do arise. Figure 7 below shows how planned retrofits and retirements through 2020 are distributed nationwide and how these are concentrated in certain areas. Specifically, available information and stakeholders identified three potential reliability challenges that could occur at a local level. (For such situations, regulatory or other tools may provide flexibility for resolving challenges. These are discussed in the following section.) Retrofits. Two aspects of retrofits can cause potential reliability challenges. First, in certain cases, generating units will need to be temporarily shut down to connect new controls, and some stakeholders said that scheduling these shutdowns while maintaining reliability could be challenging in certain areas. According to DOE, shutdowns for the types of controls that may be undertaken in response to MATS and CSAPR usually take less than 8 weeks. In addition, these shutdowns can often be scheduled during regular maintenance periods, and therefore may not require units to be shut down for additional time. More time may be needed for some units, however, because of site specific conditions—such as when a single control device must be connected to multiple generating units—or because installation involves the types of controls that take longer to connect. For example, connecting activated carbon or dry sorbent injection units may require less than a 1-week shutdown. Installing scrubbers, which are more complex, typically requires a 3- to 8-week shutdown, and these installations can sometimes take longer according to information presented by DOE. Scheduling a large number of these longer shutdowns may pose challenges. For example, one system planner told us that companies typically try to schedule such shutdowns during periods of normally low demand, such as the spring and fall, but it may be difficult to schedule all of these longer shutdowns during those periods between now and the compliance date for MATS. Second, if power companies cannot install controls in time to respond to MATS and CSAPR regulations, they may have to shut some units down until such installations are completed, also potentially posing reliability challenges. EPA officials said that large numbers of air pollution controls were installed in response to past regulatory requirements without raising major reliability issues. However, NERC and two of the RTOs we interviewed have expressed concerns about having sufficient generating capacity as companies undertake retrofits that require short-term shutdowns. Retirements. It is not certain what portion of the 2 to 12 percent of coal-fueled generating units expected to retire could cause reliability challenges that would need to be addressed. Several stakeholders said it could be difficult to resolve all potential reliability challenges that may arise because of retirements before the 3-year MATS compliance deadline established by statute. There have been examples in the past of efforts to resolve reliability issues as a result of retirements that have taken multiple years to resolve, and two of the RTOs we spoke with have identified similar challenges going forward. For example, PJM Interconnection (PJM), an RTO system planner in the Mid-Atlantic and Midwest, received 116 requests from power companies to retire units, as of May 30, 2012—representing 16,184 MW of capacity and almost 9 percent of capacity under PJM’s authority. PJM has identified reliability concerns with 101 of these retirement requests because they may cause violations of reliability standards. PJM has identified solutions to these potential violations, including transmission upgrades and operational changes, and stated that it expects the resolution of its reliability concerns with 16 of these retirements to take past April 2016—the MATS compliance deadline for units with a 1-year extension. Similarly, as of May 3, 2012, MISO has identified reliability challenges with 8 of the 62 unit retirement notifications it has received and completed evaluations on. MISO expects 5 of these to take until 2018 to resolve. Increasing reliance on natural gas. Several stakeholders said that increasing dependence on natural gas to produce electricity could pose potential reliability challenges because there could be interruptions in the delivery of natural gas to generating units. In particular, one stakeholder said that there can be other natural gas users on pipelines, such as homeowners in regions of the country where natural gas is used as a home heating fuel, who may also consume natural gas during periods of peak demand. In these areas, constructing pipelines to improve the supply of natural gas to existing or new natural gas-fueled generating units could take time because of a range of financial and regulatory steps that must be taken. Without such upgrades, there may be inadequate natural gas supply in certain locations where it is needed for electricity generation. While pipeline capacity is being expanded in some regions of the country to accommodate rising demand, several stakeholders raised concerns about gas-electric coordination in the industry. To better understand and prepare for these challenges, MISO recently completed a study on the availability of natural gas pipeline infrastructure to support increased use of natural gas-fueled capacity. The study found that some of the region’s pipelines that deliver natural gas to power plants may be close to capacity and that further investments in pipeline capacity and additional natural gas storage may be needed to ensure the delivery of reliable natural gas supplies. Various tools available to industry and regulators could help mitigate potential adverse electricity market implications, including some price increases, associated with requirements in the four key regulations. Various tools could also address many, but not all, potential reliability challenges associated with these regulations. In addition, FERC, DOE, and EPA have begun taking steps to monitor industry’s progress in responding to the regulations but have not established a formal, documented process for jointly and routinely doing such monitoring, and FERC has not taken steps to proactively assess RTO rules in the context of the EPA regulations. Various tools available to industry and regulators could help mitigate some, but not all, potential increases in the prices consumers pay for electricity. In traditionally regulated markets, in order to determine whether to allow power companies to recover the costs of responding to the regulations, public utility commissions will hold proceedings to review whether power companies’ investments in response to the four key EPA regulations are prudent. These proceedings could involve consideration of whether a power company’s compliance strategy—whether to invest in controls, modify a unit to produce electricity using a different fuel source, retire a unit, or build a new unit—is defensible. They could also include a review of the actual costs involved in installing controls. Once approved by the regulator, ratepayers in these markets primarily bear the risk associated with actions to comply with the regulations. State public utility commissions may also review longer-term resource plans developed by power companies to identify when new capacity is needed to accommodate unit retirements and, if appropriate, approve power companies’ proposed approaches for obtaining that capacity—building new units, entering into long-term power contracts, or other steps. For example, in 2012, the Georgia Public Service Commission reached a decision in its proceedings to review Georgia Power Company’s plans to retire certain generating units and purchase power from other sources to address, among other things, state pollution regulations and MATS. In addition to its other rulings, the Georgia commission approved three of the four power purchase agreements, indicating that such a decision represented the best balance of increased cost to consumers with the benefits of having additional capacity. In restructured markets, where the prices consumers pay for electricity are influenced by prices set in competitive, organized wholesale markets, the competitive nature of these markets provides an incentive for power companies to ensure that their investment decisions are cost-effective. In these markets, investors in the power company bear the risk associated with these decisions—the installation of any controls that turns out to have been unnecessary or too costly may not yield the additional revenue needed to pay for the investment. In addition, to ensure these markets remain competitive and that prices reflect the cost of producing electricity, FERC officials told us that RTOs and FERC have processes in place to identify, investigate, and prosecute manipulative behavior in wholesale electricity markets, as well as to ensure that prices are set in well- functioning markets representing the interplay of supply and demand. Several stakeholders we spoke with said these processes should be effective at keeping power companies from using actions they may take in response to the EPA regulations as an opportunity to manipulate the electricity markets. However, these tools in traditionally regulated and restructured markets do not limit power companies from passing on to consumers any legitimate costs they incur in responding to the EPA regulations, such as the costs of installing controls, procuring CSAPR allowances, constructing transmission lines to address reliability challenges, and acquiring power from other sources to compensate for retiring generating units. Two of the state public utility commission representatives we spoke with from traditionally regulated markets said it would be unlikely for a public utility commission to deny cost recovery for prudent investments needed to respond to these EPA regulations. In restructured markets, power companies will attempt to recover the costs they incurred in responding to the regulations through the electricity markets. To the extent that price increases are the result of prudent steps in response to the EPA regulations rather than market manipulation, federal or state regulators may have little authority to mitigate them. EPA has designed the regulations with some provisions that provide flexibility and allow power companies to minimize the costs of responding to them, which may reduce consumer electricity price increases. For example, by making CSAPR allowances tradable rather than requiring all generating units to individually meet a particular emissions threshold, EPA may enable power companies to achieve overall emissions limits at a lower cost. Additionally, EPA requested public comment on several regulatory provisions in the proposed CCR regulation which, according to EPA officials, could help lower industry compliance costs and reduce price increases. In addition, some tools could lower demand for electricity, which may offset potential price increases. For example, some states have provided incentives for consumers to purchase more energy efficient household appliances as part of an effort to avoid constructing additional generating units. Furthermore, electricity pricing and other programs can encourage customers to adjust their usage in response to changes in prices or market conditions, which can affect reliability. These programs are collectively referred to as “demand-response” programs, and two types— ”market-based pricing” and “reliability-driven”—are in use. Market-based pricing programs enable customers to adjust their use of electricity in response to changing prices. Reliability-driven programs, on the other hand, enable system operators to request that customers reduce electricity use when needed, such as if hot weather or system malfunctions mean that demand will probably exceed supply and cause a blackout. In August 2004, we reported that demand-response programs promote greater efficiency in supplying electricity by postponing the need to construct new generating units and reducing the need to use the generating units that are the most costly to operate. We recommended that FERC consider the presence or absence of demand response when making key decisions about electricity markets, including whether to allow some buyers to participate in wholesale markets. In response to our recommendation, FERC has taken steps to facilitate broader use of demand-response programs among RTOs. Tools available to industry and regulators may also help address many, but not all, potential reliability challenges. For example, planning, market, and operational tools used by system planners and operators to ensure the availability of adequate transmission and generation will help address many potential reliability challenges associated with these regulations. System planners and operators, whether RTOs or individual power companies, manage the electricity system in accordance with NERC reliability standards. With respect to transmission, system planners compare the long-term demand for electricity at various points throughout the system to the location, capacity, and operating limits of generation and transmission resources. These activities require timely information on, among other things, planned retirements and new additions. EPA provided one mechanism through which system planners may receive this information in a more timely way when it instructed power companies seeking Clean Air Act administrative orders—orders to give units up to an additional year to come into compliance with MATS—to provide compliance plans to system planners. In addition, some RTOs have begun requesting that power companies in their regions voluntarily provide early information on their plans to respond to the regulations, including planned retirements, retrofits, and operational changes. With respect to generation, system planner activities vary, with some areas of the country planning their future investment in generation and others using market-based approaches to encourage the development of new generation. System operators take more immediate actions to ensure the grid operates in conformance with NERC reliability standards, such as directing when to bring additional generation online to meet demand or improve system operating conditions. System planners and operators must manage changes that power companies make to respond to the EPA regulations—retiring generating units, changing operating schedules, or scheduling shutdowns to install controls—in a way that does not violate NERC’s reliability standards. For example, system planners must maintain adequate contingency reserves—such as additional available generation or electricity consumers willing to lower their demand for electricity—to address any unexpected operational problems that arise, even when some electricity generating units retire or are out of service to install controls. Broader initiatives in the electric power industry, such as activities to promote demand-response and energy efficiency, may also help mitigate reliability challenges. Although these planning, market, and operational tools could address many potential reliability challenges, challenges may still arise if generating units needed for reliability are not in compliance with the EPA regulations by the deadlines. For example, local reliability challenges could occur if generating units that need to operate in a local area to ensure resource adequacy or system security do not meet these regulations’ compliance deadlines––either because they have not been able to retrofit on time or because system planners have not yet completed efforts to mitigate the reliability effects of the units’ planned retirement. However, according to EPA officials and documentation, most units should be able to complete steps to respond to the regulations prior to their deadlines. Nonetheless, some stakeholders remain concerned and told us that the loss of reliability-critical units that cannot comply by the deadlines could have an adverse impact on reliability. These administrative orders are authorized by section 113(a) of the Clean Air Act and, by statute, cannot last for longer than a year or be renewed. year. According to EPA’s MATS enforcement memo, EPA does not intend to seek civil penalties for violations of the MATS regulation that occur as a result of operation in conformance with these administrative orders. Power companies that intend to seek these orders must, among other things, notify system planners by April 16, 2013, of their MATS compliance plans, which EPA expects to help the system planners better manage possible reliability challenges. However, EPA officials told us that such notifications are not required if a power company does not intend to seek additional time to respond, such as if it plans to retire its generating units. Furthermore, some stakeholders have raised concerns that administrative orders do not shield power companies from private parties suing them for violating the MATS regulation.address situations in which units need more than 5 years to comply. EPA officials told us that, if generating units need additional time to respond, EPA will make case-by-case decisions about how to proceed by using, for example, the consent decree process described below. In addition, this tool would not Clean Air Act consent decrees. These consent decrees are authorized by section 113(b) of the Clean Air Act. develop it. In addition, according to EPA officials, power companies must be willing to enter into consent decrees. However, in the case of a retiring generating unit, it may be the system planner, rather than the power company, that wants to keep the unit operating. As a result, a power company that wants to retire a reliability-critical generating unit may have little incentive to enter into a consent decree, particularly if it means paying a penalty to do so. Reliability must-run agreements. Reliability must-run agreements— which provide cost-based payments to the owners of reliability-critical generating units to cover the cost of operating these units past when their owners were planning to retire them—are another possible tool for addressing some reliability challenges. These agreements have been used in the past to address occasional retirements of individual generating units due to changing economic conditions, such as when operating a unit became unprofitable. For example, a reliability must- run agreement was used to keep Hudson Unit 1, a 383 MW unit in New Jersey, operational for reliability reasons for 7 years after the Public Service Enterprise Group, the power company that owns the unit, had requested to retire it. A reliability must-run agreement was needed for so long, in part, because of delays in the construction of a transmission line that was being developed to address potential reliability violations that could occur without the new line. However, these agreements may not be an option for responding to all types of reliability challenges that could arise when power companies seek to retire reliability-critical generating units in response to the four key regulations. According to representatives from some RTOs we spoke to, reliability must-run agreements have historically been used to reimburse power companies for their operating expenses rather than major capital and other expenditures, such as the installation of controls to reduce pollution, or financial penalties for violating environmental laws and regulations. As such, in situations where a power company plans to retire a generating unit, reliability must-run agreements may be useful if an administrative order or consent decree can be obtained. If not, reliability must-run agreements may be less applicable because those units would either have to install controls in order to comply or risk financial penalties for noncompliance. DOE emergency authority. DOE’s authority under section 202(c) of the Federal Power Act to order a power company to generate electricity in certain emergencies is another tool through which reliability challenges resulting from actions to comply with the four regulations may be addressed. For example, DOE could use this authority to require a retiring electricity generating unit that emits more mercury than allowed by MATS to continue to operate after the MATS compliance deadline if the unit was needed to respond to an emergency because of an electric shortage. However, DOE officials told us that they expect to use their section 202(c) authority to address reliability concerns associated with the EPA regulations rarely and as a tool of last resort. Further, in some circumstances, this authority may not provide for timely resolution of potential reliability challenges associated with the four EPA regulations. DOE has used its section 202(c) authority six times in the past, and officials told us that, in most instances, DOE has been able to issue section 202(c) orders quickly.where it is less obvious whether there is a reliability emergency, it could take time for officials to analyze whether the requirements for an order are met and issue the order. However, DOE officials explained that, in situations In addition, although DOE may coordinate with EPA and state environmental regulators to ensure the section 202(c) order that is issued does not result in a violation of environmental requirements, some power company representatives expressed concern that operating under a section 202(c) order could still result in a potential conflict between DOE’s order and environmental laws and regulations. This could occur if DOE issued a section 202(c) order before agreement could be reached with EPA and state environmental regulators on how to operate the unit to adequately respond to the emergency and comply with applicable environmental laws and regulations.told us that, in these situations, it is unclear whether the power company would (1) refuse to generate electricity and risk electricity reliability or (2) operate in violation of the environmental laws and regulations and risk enforcement action and legal liability. A legal representative at one power company we spoke with explained that he could not advise company officials to operate a unit in violation of the Clean Air Act without additional legal protection. Representatives from another power company said that power companies in such a situation may defer to the courts—a potentially time-intensive solution—to avoid legal liability and determine what course of action they should take. Moreover, power companies may have to negotiate with, or seek approval from, multiple additional parties, including the relevant RTO and FERC, for an agreement outlining the payment terms for the unit’s operation under the section 202(c) order, as well as with EPA and state environmental authorities to avoid financial penalties if operation results in violation of environmental laws and regulations. Getting these agreements in order can also be time- consuming which, if the process is not started well in advance, may delay steps to address reliability. EPA staff commented that the agency will be closely tracking cases where extensions and orders are used. Representatives from two power companies Clean Air Act section 112 presidential exemption authority. The broad authority provided to the President to exempt power companies from complying with MATS is a potential tool to avoid reliability challenges, but this authority has never been used, and uncertainties exist as to how this tool would apply to reliability challenges that arise under MATS. Section 112(i)(4) of the Clean Air Act authorizes the President to exempt any generating unit from compliance with MATS for a period of not more than 2 years under certain circumstances. Specifically, the President must make two determinations to use this authority: (1) that the technology to implement the regulation is not available and (2) that the exemption is in the national security interests of the United States. As of May 2012, this authority has never been used, and there is uncertainty about whether these conditions could be met. For example, as to the first determination, EPA established emissions standards for mercury and other pollutants that can be met with technology that has been available for a significant time. However, according to EPA staff, EPA’s rulemaking was not intended to and did not consider the interpretation of the term ‘available’ as used in the presidential exemption provision. Furthermore, regarding the second determination, EPA staff explained that the record supporting EPA’s rulemaking includes some information that others might consider relevant in making any such determination. EPA officials also noted, however, that section 112(i)(4) authorizes the President, not EPA, to act. Regarding these determinations, according to one stakeholder, it would be implausible to claim that technology to comply with MATS is not available, and there is not currently evidence of a sufficient threat to national security. Another stakeholder, however, has argued that the statute is sufficiently broad to allow the exemption authority to be used in some situations when a power company does not have the physical ability to obtain, purchase, and install technology by the deadlines and that the true extent of reliability challenges' threat to national security interests cannot be fully known until specific reliability studies are completed based on specific compliance plan proposals. Several stakeholders we spoke to during this review indicated that the presidential exemption authority can be used, though two said the statute establishes a high threshold that must be met. In addition to these six tools, some provisions in two of the regulations— CSAPR and 316(b)—help address electric reliability. For example, CSAPR allows power companies to run existing controls more often, install additional controls, or acquire allowances by purchasing them from another source or using allowances saved from prior years. According to EPA officials, this flexibility can help power companies plan and manage their operations in a manner that ensures system reliability. With respect to 316(b), as indicated in the preamble to the proposed regulation, permitting authorities have flexibility to tailor compliance timelines to enable installation without negatively impacting the reliability of electric supply. FERC, DOE, and EPA have begun taking steps to monitor industry’s progress in responding to the regulations but have not established a formal, documented process for joint and routine monitoring, and FERC has not taken steps to proactively assess RTO rules in the context of the regulations. FERC, DOE, and EPA officials said they have taken initial steps to understand the status of industry’s plans to respond to the regulations, and officials from each agency told us they have periodically met with affected stakeholders—for example, power companies, state public utility commissions, and all of the RTOs, among others—to discuss the regulations’ impact and the status of industry compliance. For example, staff from all three entities said they have had multiple conference calls with RTOs in areas affected by the regulations. In addition, FERC hosted a technical conference in 2011 to discuss policy issues related to the EPA regulations with industry stakeholders, and FERC and state public utility regulators have established a forum to explore reliability challenges related to the EPA regulations.Furthermore, according to EPA staff, the agency had multiple meetings with all of the major utility trade associations, as well as a number of large power companies with substantial coal-fueled generating capacity, to discuss compliance plans and issues that are emerging. However, each agency’s efforts are varied in scale and scope, and none of the agencies has developed a formal, documented process for routinely monitoring industry progress, including goals for any monitoring activities, data to be collected and analyzed, and how the agencies will use this information. Officials from FERC and DOE told us they had not formalized their processes for monitoring industry’s progress since power companies were in the process of finalizing their approach for responding to the regulations. As discussed, actions power companies take in response to the four regulations may present potential reliability challenges, or risks. In a December 2005 report on risk management, we reported that monitoring is essential in ensuring that a risk management approach is current and relevant. Without a formal, documented process that the three agencies have agreed on for monitoring industry’s progress toward meeting the compliance deadlines, it is uncertain how comprehensive the agencies’ monitoring efforts will be and whether they will adequately address such specific issues as the status of required regulatory approvals, the availability of key materials and skilled workers, the likelihood of potential reliability challenges, and the adequacy of existing tools for addressing these challenges. Without a formal, documented process for monitoring, it is also uncertain whether the agencies’ future monitoring activities will be sufficiently comprehensive to alert them in advance if a larger than expected number of reliability challenges arise so they can assess whether internal agency resources are available to carry out their responsibilities. For example, if there is a larger than expected number of local reliability challenges, FERC may be less able to effectively and quickly manage reviewing (1) applications for cost recovery for transmission investments, (2) the reliability impacts of electricity generating units whose owners seek an administrative order from EPA for compliance with MATS, (3) reliability must-run agreements outlining the payment terms for the operation of a unit that would otherwise retire, and (4) whether steps should be taken to require RTOs or market participants to secure additional demand-response resources. Furthermore, these three agencies have informally collaborated about the EPA regulations, but they have not developed a formal, documented process for coordinating their monitoring efforts. Officials from all three responsible agencies said they have held periodic discussions with officials from the other agencies. This informal collaboration also involved participation in the FERC technical conference on the EPA regulations and joint agency participation at meetings with industry stakeholders. EPA officials told us the agencies have agreed to work together to monitor the progress of industry’s compliance with the regulations in the future. However, these agencies have not documented their process for coordination, including the expected frequency of contact with each other and industry, key agency responsibilities, and how they will share information. We have previously reported that by using informal coordination mechanisms, agencies may rely on relationships with individual officials, which could end once personnel move to their next assignments. We reported that agencies can strengthen their commitment to work collaboratively by articulating their roles and responsibilities in formal documents—such as memorandums of understanding or interagency planning documents—to facilitate decision making. These documents can clarify which agencies will be responsible for particular activities and how they will organize their individual and joint efforts. Without more formal coordination mechanisms, any assessment of whether tools are sufficient to mitigate potential reliability challenges may not fully leverage the perspective of all three agencies, each of which has a unique area of expertise and ability to perform different analysis. Each of the three agencies may have knowledge of whether particular tools are useful for addressing actual reliability challenges, and DOE and FERC may be able to provide insight into the magnitude and urgency of such challenges. Moreover, according to agency officials, the agencies do not have a formal, documented process for how they will provide information from their monitoring efforts to Congress. Without information on whether existing tools are sufficiently timely, relevant, and effective for addressing any adverse implications that arise, Congress may not be sufficiently informed about whether additional statutory authority is needed. Through multiple hearings and an information request to FERC, members of Congress have already sought additional information on these issues. Legislation has also been introduced to, among other things, extend the compliance dates for MATS and CSAPR, to prohibit or invalidate one or more of the regulations, and establish that compliance with a section 202(c) order cannot be considered a violation of any environmental law or regulation. Without information such as what could be provided through EPA, FERC, and DOE’s joint monitoring efforts, Congress will be less informed when it deliberates these bills about the extent to which actual reliability concerns arise and whether new statutes are needed to address them. Furthermore, FERC has not taken steps to proactively assess whether RTO market rules and similar rules at non-RTO system planners will be adequate to ensure timely, cost-effective mitigation of the potential reliability challenges associated with the multiple generating unit retirements and outages that may occur over a short period due to the EPA regulations and other factors. These rules govern such things as how these entities schedule temporary shutdowns for retrofits, receive notifications from power companies regarding retirements of generating units, and address potential reliability challenges, including how transmission upgrades and demand response are considered and pursued. These rules affect how cost-effectively reliability challenges are managed. Table 3 shows examples of RTOs that have begun reviewing their rules related to electricity transmission, markets, and other areas and are considering whether changes are needed in light of the EPA regulations and other industry factors. Changes under consideration relate to scheduling outages, unit retirements, and planning for transmission needs. Many are being considered with the goal of avoiding unnecessary costs or reliability problems. For example, under current market rules in the MISO region, power company retirement requests are binding, meaning once a power company has submitted a request to retire, it cannot change its mind. MISO stakeholders are discussing whether changes need to be made to market rules to allow power companies to submit nonbinding requests for unit retirements, so that MISO can provide these companies with information on the reliability impacts of their proposed retirements prior to these companies making a final decision about whether to retire. According to MISO officials, if a power company received this information prior to making a retirement decision, the company might be able to make more cost-effective choices by comparing the cost of steps to address reliability concerns associated with a potential retirement to the cost of complying with the regulations by installing environmental controls. FERC officials told us that initial discussions with the RTOs—such as through the FERC technical conference—indicated that current market rules are adequate and that FERC will review any proposed changes to market rules that they receive from RTOs to ensure that the rules continue to promote just and reasonable rates and, where relevant, address reliability issues. However, the commission does not have plans to proactively assess the adequacy of any rules unless RTOs propose specific changes. Furthermore, FERC officials said the commission does not plan to evaluate whether changes proposed by one RTO may also be useful at others. FERC officials said they have also not assessed the rules of non-RTO system planners because FERC has more limited authority over non-RTO rules. However, FERC officials acknowledged that they have the authority to proactively request that RTOs make changes to rules if FERC believes a rule change is warranted. Under the current approach—wherein individual RTOs consider potential changes and request approval from FERC—FERC risks taking a piecemeal approach to oversight and may miss opportunities to encourage development of market rules in all regions that are adequately designed to promote just and reasonable rates in the context of the industry’s transition. The four key EPA regulations—two finalized and two proposed—would reduce adverse health or environmental impacts associated with coal- fueled electricity generating units, potentially avoiding thousands of premature deaths each year. Aspects of these regulations remain uncertain, but they, along with other industry trends such as the aging of coal-fueled generating units and lower prices for natural gas, are expected to contribute to significant changes in electricity systems in some parts of the United States in the near future. These potential changes, which include retrofitting many coal-fueled units and retiring more coal-fueled capacity than has been retired over the past 22 years, have implications for electricity prices and reliability. FERC, DOE, and EPA each have key responsibilities concerning the electricity industry and all three agencies have taken steps to address potential adverse implications associated with these regulations. Existing tools provide a foundation for mitigating many of the price and reliability implications of actions power companies may take in response to the regulations. However, these tools may not fully address all potential adverse implications in some regions, for example, some reliability challenges that arise after the compliance deadlines. Knowledge of the severity and extent to which challenges arise will be key to understanding whether existing tools are adequate or additional tools are needed. FERC, DOE, and EPA have taken important first steps to coordinate with RTOs, other system planners, and state regulators, among others, to better understand these issues. However, without a formal, documented process that the three agencies have agreed upon for jointly, routinely monitoring industry’s progress, it is uncertain whether their activities will be sufficiently comprehensive and fully leverage their unique areas of expertise. FERC, DOE, and EPA can build on their initial monitoring efforts by documenting their process for monitoring, including the expected frequency of their contact, and how they will organize their efforts and share information. Moreover, as shown by multiple hearings and the introduction of legislation that would affect some or all of the regulations, there has been congressional interest in the potential reliability and price implications of these regulations. Information from a coordinated monitoring effort could help inform these ongoing deliberations and make clear whether additional statutory authority is needed to cost-effectively address any reliability challenges that actually arise. In addition, rules at system planners, including RTO market rules and, in some cases, similar rules at non-RTO system planners, govern such details as how these entities schedule temporary shutdowns for retrofits; receive notification from power companies regarding retirements of generating units; and address potential reliability challenges, including how transmission upgrades and demand-response are considered and pursued. These rules matter greatly in terms of whether potential reliability challenges are managed as cost-effectively as possible. FERC has not proactively evaluated whether RTO rules will be adequate to ensure timely, cost-effective mitigation of potential reliability challenges associated with multiple generating unit retirements and shutdowns, which may occur over a short period in light of the EPA regulations. As a result, FERC may miss opportunities to encourage development of rules in all regions that are adequately designed to promote just and reasonable rates in the context of the industry’s transition. We are making the following two recommendations: To further strengthen agency efforts to understand whether existing tools are adequate, or additional tools are needed, we recommend that the Chairman of FERC, the Secretary of Energy, and the Administrator of the EPA develop and document a formal, joint process consistent with each agencies’ respective statutory authorities to monitor industry’s progress in responding to the EPA regulations until at least 2017. Each agency, to the extent practical, should leverage resources and share the results of its efforts with the other agencies. The agencies should consider providing Congress with the results of their monitoring efforts, including whether additional statutory authority is needed to address any potential adverse implications. To ensure that RTO market rules and, to the extent practical, similar rules at non-RTO system planners promote timely, cost-effective mitigation of potential reliability challenges associated with the EPA regulations reviewed in this report, we recommend that the Chairman of FERC assess the adequacy of existing rules for this purpose. In particular, this assessment should cover rules related to scheduling retrofits, retirement notification, and whether more can be done to facilitate demand response. If the FERC Chairman determines that these rules are not adequate, FERC should consider requesting that these entities make changes where appropriate. We provided a draft of this report to FERC, DOE, and EPA for comment. In written comments, which are reproduced in appendixes V through VII, DOE and EPA agreed with the recommendation directed to them, and FERC disagreed with both recommendations directed to it. Regarding our first recommendation that FERC, DOE, and EPA develop and document a formal process to monitor industry's progress in responding to the EPA regulations, DOE and EPA generally agreed. FERC disagreed with the recommendation, stating that we did not take into account a number of actions FERC has taken, including publicly committing to work closely with industry, states, and other agencies to address issues that arise. FERC cited several examples of the actions it has taken, and we made some clarifying changes and, in one case, added language about an example that we had not previously included in the report. FERC also stated that it had taken further steps to implement our recommendation after seeing our draft report. We agree that FERC has taken positive steps, and we are encouraged that FERC has begun to implement our recommendations. However, we do not believe these actions adequately represent the type of formal, documented process needed for EPA, DOE, and FERC to monitor industry's progress in responding to the regulations. FERC also said that, as an independent agency, it cannot dictate the sharing of information with and by other parts of the government. We acknowledge there may be limits on the extent to which the three agencies can collaborate and clarified our recommendation accordingly. All three agencies noted that they are working to establish a more formalized approach to continued coordination, outreach, and monitoring. We commend the agencies for their efforts and believe it is important for them to complete these efforts in order to establish a more formalized approach. Regarding our second recommendation that FERC assess the adequacy of existing RTO market rules, and similar rules at non-RTO system planners, FERC stated that it continually assesses the rules of entities over which it has jurisdiction and that it has specifically explored whether changes are needed to respond to the regulations. In particular, FERC noted that it asked participants at a 2011 technical conference to address whether changes were needed in market rules and that the response from panelists and commenters was that no significant changes were needed. Our observation from attending this conference is that it fostered a useful exchange of ideas and perspectives. However, we do not believe it is a substitute for an assessment by FERC of the adequacy of rules. FERC also noted that several recent rulemakings may lead to changes in rules that may be beneficial in the context of the EPA regulations, such as in how information is gathered regarding retirements and how demand response is encouraged. These are also positive steps, but they do not constitute an assessment of whether RTO market rules need to be modified to ensure timely, cost-effective mitigation of potential reliability challenges that may be associated with responses to the regulations. In addition, FERC, DOE, and EPA provided technical comments and clarifications, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, Chairman of FERC, Administrator of the EPA, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact Frank Rusco at (202) 512-3841 or [email protected] or David Trimble at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII. This report provides information on the implications associated with four key recently proposed or finalized regulations from the Environmental Protection Agency (EPA): (1) the Cross-State Air Pollution Rule (CSAPR); (2) the Mercury and Air Toxics Standards (MATS); (3) the proposed Cooling Water Intake Structures at Existing and Phase I Facilities regulation, also known as 316(b), and (4) the proposed Disposal of Coal Combustion Residuals from Electric Utilities regulation (CCR). Specifically, this report addresses: (1) what available information indicates about actions power companies may take at coal-fueled generating units in response to the four key EPA regulations; (2) what available information indicates about these regulations’ potential implications on the electricity market and reliability; and (3) the extent to which EPA, FERC, DOE, and other stakeholders can mitigate adverse electricity market and reliability implications, if any, associated with requirements in these regulations. To provide available information on actions power companies may take in response to these regulations and their potential market and reliability implications, we (1) selected for review 12 studies of companies’ projected responses to the regulations, as well as the potential impacts of these responses, and (2) analyzed data from Ventyx Velocity Suite on electricity generating units. We considered several factors in selecting these studies including how closely they reflected the four regulations, and we prioritized studies published after significant changes in the regulations, and those from independent groups or federal agencies. We also selected certain studies that provided information on specific aspects of our review, such as those with estimates of price implications and that contained regional assessments. The studies we selected were carried out by EPA, the Energy Information Administration, system planners, research organizations, and a consulting firm. (Selected studies are listed in app. III.) We took several steps to evaluate the reasonableness of the studies’ assumptions and methodologies, including reviewing descriptions of the policy scenarios that formed the basis of the studies’ analysis. In some cases, we identified differences between study assumptions and the regulations themselves, which we note in the text where appropriate. Some of these studies analyze several scenarios, and we report results from those scenarios which we felt best reflect the regulations. The actual price and reliability implications of these four regulations will depend on various uncertain factors, such as future market conditions and the ultimate regulatory requirements, but we determined that these studies were reasonable for describing what is known about the range of potential actions power companies may take and implications of the four regulations. We also analyzed data from Ventyx Velocity Suite EV Market-Ops database to describe characteristics of coal-fueled generating units and to provide information on historic and planned retrofits and retirements of such units. We reviewed this data as of April 9, 2012, from all operating units that had capacity greater than 25 megawatts, making them subject to MATS and CSAPR. In all, we examined the characteristics of 1,050 coal-fueled electricity generating units, accounting for 99 percent of all coal-fueled capacity and 75 percent of coal-fueled units. We classified detailed air pollution controls into control types, and reviewed our classifications with officials at Ventyx, the Department of Energy (DOE), and EPA. Information regarding planned retrofits and retirements reflect publicly reported plans as identified by Ventyx. As plans may change, actual future retrofits and retirements may differ from the data in these plans. To assess the reliability of the Ventyx data, we reviewed existing documentation about the data and the system that produced them, interviewed Ventyx staff who were knowledgeable about the data, consulted with EPA and DOE officials and other knowledgeable parties, conducted some electronic testing, and compared data in Ventyx to information obtained from several power companies and regional transmission organizations. We determined the Ventyx data to be sufficiently reliable for the purpose of this report. To examine the extent to which industry, regulators, and other stakeholders can mitigate adverse implications, we interviewed officials at the Federal Energy Regulatory Commission (FERC), DOE, North American Electric Reliability Corporation, and EPA to better understand what steps they had taken to mitigate potential reliability and price challenges and additional options for doing so. We reviewed relevant laws, regulations, and agency documentation for information on agency authorities, responsibilities with respect to the EPA regulations, and options for mitigating adverse reliability concerns. We conducted multiple interviews with system planners and operators in both restructured and traditionally regulated markets that are expected to be significantly affected by the regulations to understand the tools they had available for managing electric reliability and prices. To address all three objectives, we summarized the results of semistructured interviews with a nonprobability sample of 33 stakeholders. (See app. II for a list of these stakeholders.) We selected these stakeholders to be broadly representative of differing perspectives on these issues based on recommendations, including from FERC, DOE, and industry associations, and other factors. In particular, we obtained views and information from staff at power companies that may be affected by these regulations, regional transmission organizations, and officials in six states—Georgia, Kentucky, Missouri, Ohio, Pennsylvania, and Texas—to understand the role of these state agencies in addressing the reliability and price implications of the regulations. To select states and companies, we considered, among other factors, the amount of state and companies’ electricity generating capacity that is coal-fueled. We also sought a balance of states and companies in and out of RTO regions that were traditionally regulated and restructured. We provided a preliminary list of the stakeholders we intended to interview to FERC and EPA, and we incorporated their suggestions in considering stakeholders where appropriate. Because we used a nonprobability sample, the views of these stakeholders are not generalizable to all potential stakeholders, but they provide illustrative examples. We conducted this performance audit from July 2011 to July 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Burtraw, Dallas, Karen Palmer, Anthony Paul, and Matt Woerman (RFF). “Secular Trends, Environmental Regulations, and Electricity Markets.” Resources for the Future Discussion Paper. DP12-15. Washington, D.C.: March 2012. Energy Information Administration (EIA). Annual Energy Outlook 2012 Early Release Overview. DOE/EIA-0383ER. Washington, D.C.: January 23, 2012. Environmental Protection Agency (EPA-316b). Economic and Benefits Analysis for Proposed Section 316(b) Existing Facilities Rule. EPA 821-R- 11-003. March 28, 2011. Environmental Protection Agency (EPA-CCR). Regulatory Impact Analysis For EPA’s Proposed RCRA Regulation Of Coal Combustion Residues (CCR) Generated by the Electric Utility Industry. Washington, D.C.: April 30, 2010. Environmental Protection Agency (EPA-CSAPR). Regulatory Impact Analysis for the Federal Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone in 27 states; Correction of SIP Approvals for 22 States. June 2011. Environmental Protection Agency (EPA-MATS). Regulatory Impact Analysis for the Final Mercury and Air Toxics Standards. EPA-452/R-11- 011. Research Triangle Park, NC: December 2011. IHS Global Insight. US Energy Outlook. September 2011. Macedonia, Jennifer, Joe Kruger, Lourdes Long, and Meghan McGuinness (Bipartisan Policy Center). Environmental Regulation and Electric System Reliability. Washington, D.C.: Bipartisan Policy Center, June 13, 2011. Midwest Independent Transmission System Operator. (MISO). EPA Impact Analysis: Impacts from the EPA Regulations on MISO. October 2011. NERA Economic Consulting (NERA). Potential Impacts of EPA Air, Coal Combustion Residuals, and Cooling Water Regulations. Prepared for the American Coalition for Clean Coal Electricity. Boston, MA: September 2011. North American Electric Reliability Corporation (NERC). 2011 Long-Term Reliability Assessment. November 2011. PJM Interconnection (PJM). Coal Capacity at Risk for Retirement in PJM: Potential Impacts of the Finalized EPA Cross State Air Pollution Rule and Proposed National Emissions Standards for Hazardous Air Pollutants. August 26, 2011. Figure 8 shows the distribution of the nation’s coal-fueled electricity generating units by the territories of eight regional reliability entities that set and enforce reliability standards for the electricity industry. Various air pollution controls are used at electricity generating units to reduce emissions of air pollutants by either reducing the formation of these emissions or capturing them after they are formed. At coal power plants, these controls are generally installed in either the boiler, where coal is burned, or the ductwork that connects a boiler to the stack. A single power plant can use multiple boilers to generate electricity, and the emissions from multiple boilers can sometimes be connected to a single stack. The reduction in emissions from a coal-fueled generating unit by the use of pollution controls can be substantial, as shown in table 4. Controls may be capable of removing multiple pollutants. For example, a wet scrubber can control both sulfur dioxide (SOFigure 9 shows the capacity of coal-fueled generating units that were retrofitted with select controls from 2000 through 2011, and figures 10 and 11 show the percent of generating capacity with select controls by region. 1. We recognize that FERC has taken a number of positive actions related to the EPA regulations, and we have described these in our draft and final report. We have made some clarifying changes and, in one case, added language about an example we had not previously described in the report in response to these comments. 2. The scope of FERC's policy statement is limited to describing how FERC intends to provide advice to EPA on requests for administrative orders to bring a source into compliance with MATS within 1 year. It provides a useful description of FERC's role with respect to this tool for addressing potential reliability challenges, but it does not establish a formal, documented process for FERC's overall monitoring effort or for its coordination with EPA and DOE. We added a description of FERC's policy statement where we describe FERC's role with respect to MATS in response to this comment. 3. We agree that multiagency coordination can be difficult. When we met with FERC, EPA, and DOE during the course of our audit work, the agencies had not documented a formal process for monitoring. In response to our draft report, these agencies said they are working to establish such an approach. We commend these agencies for taking this step and believe it is important that they complete this effort. We acknowledge there may be limits on the extent to which agencies can collaborate and clarified our recommendation accordingly. 4. We acknowledge that FERC has gathered views on the potential implications of these regulations from various affected parties, including at formal events such as FERC's 2011 technical conference and the February 2012 forum with state regulators. Our observation from attending these events is that they fostered a useful exchange of ideas and perspectives about the potential implications of the EPA regulations. However, the actual implications will only be known once electricity generating unit owners finalize their plans for responding to the regulations and begin to take steps to retrofit or retire units—which will occur over the next several years. We believe that additional monitoring will be important and that the actions noted by FERC do not represent the type of formal, documented process that will be needed for successfully monitoring industry's progress in responding to the regulations or for FERC’s coordination with DOE and EPA in this effort. We believe there are risks to relying on informal mechanisms and that a formal, documented process could help strengthen FERC's future efforts at identifying potential problems. As such, we made no changes in response to this comment. 5. We believe that the NERC-overseen reliability assessments, plans and reports from other stakeholders, as well as conferences and workshops, can all be useful in an overall monitoring effort. We encourage FERC to work with NERC and other stakeholders in monitoring industry progress to the extent that FERC determines such activities to be useful. We maintain that FERC should formalize this process and document it if the agency intends for this monitoring to continue in the future. We made no change in response to this comment. 6. We acknowledge that FERC periodically performs various assessments of the adequacy of existing RTO market rules and similar rules of non-RTO system planners and, where FERC believes it is appropriate, encourages changes. However, based on our conversations with FERC officials, FERC had not proactively assessed the adequacy of system planner rules in light of the EPA regulations to determine whether changes are needed or if improvements at one system planner could be useful at another. We also acknowledge that there was a useful exchange of ideas and perspectives about the need for potential changes in market rules at FERC's technical conference, but we do not believe that the gathering of these views is a substitute for an assessment by FERC of the adequacy of these rules. In addition, FERC's recent rulemakings are positive steps, but they do not reflect an assessment of whether rules need to be modified in light of the EPA regulations to ensure timely, cost-effective mitigation of potential reliability challenges that may be associated with the regulations. We made no change in response to this comment. 7. Neither the draft report, nor the final report recommends that FERC consider the presence or absence of demand response when making key decisions about electricity markets. FERC’s comment refers to text in our draft report that referred to a recommendation in our 2004 report on demand response. We made this reference to highlight that demand response is a tool that could lower demand for electricity to mitigate the price or reliability implications of the EPA regulations and to note that FERC has taken a number of steps to facilitate broader use of demand response among RTOs. As noted in the conclusion of this report, we believe that demand response could provide an important mechanism that could mitigate potential reliability challenges, should they arise. As such, it may be useful for FERC to consider whether there are certain approaches related to demand response at one or more RTOs that could be encouraged elsewhere or whether the presence or adequacy of demand response in a market should be used when making decisions regarding market rules. We made no change in response to this comment. 8. We do not suggest that a one-size-fits-all approach would be best, and believe efforts to develop the RTOs and other institutions requires leveraging prior entities' experiences. FERC may have the opportunity to take a more proactive role in narrowing these differences to the benefit of market participants overseen by FERC and the consumers who are ultimately served by these markets. We made no change in response to this comment. 9. We do not assert that FERC will be unable to meet its statutory deadlines for review of transmission investments and reliability must- run agreements. Rather, we suggest that information from a formal, documented monitoring effort could help alert agencies in advance if a larger or smaller than expected number of reliability challenges arises, which could be useful for managing its staffing and operations. We made no change in response to this comment. 10. We agree that FERC’s policy statement provides clarity about the process FERC intends to take to provide timely comments to EPA on requests for administrative orders to bring a source into compliance with MATS within 1 year. However, we continue to believe that a documented, formal monitoring process—by giving FERC insight into the extent of potential reliability challenges—could aid FERC in managing its process for providing input to EPA. We made no change in response to this comment. In addition to the individuals named above, Jon Ludwigson (Assistant Director), Mike Armes, Melinda Cordero, Philip Farah, Quindi Franco, Cindy Gilbert, Paige Gilbreath, Michael Hix, Mitch Karpman, Karen Keegan, Alison O’Neill, Madhav Panwar, Kendal Robinson, Jeanette Soares, and Kiki Theodoropoulos made key contributions to this report.
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EPA recently proposed or finalized four regulations affecting coal-fueled electricity generating units, which provide almost half of the electricity in the United States: (1) the Cross-State Air Pollution Rule; (2) the Mercury and Air Toxics Standards; (3) the proposed Cooling Water Intake Structures regulation; and (4) the proposed Disposal of Coal Combustion Residuals regulation. Power companies may retrofit or retire some units in response to the regulations. EPA estimated two of the regulations would prevent thousands of premature deaths and generate $160-$405 billion in annual benefits. Some stakeholders have expressed concerns that these regulations could increase electricity prices and compromise reliabilitythe ability to meet consumers' demand. FERC and others have oversight over electricity prices and reliability. DOE can order a generating unit to run in certain emergencies. GAO was asked to examine: (1) actions power companies may take in response to these regulations; (2) their potential electricity market and reliability implications; and (3) the extent to which these implications can be mitigated. GAO reviewed agency documents, selected studies, and interviewed stakeholders. It is uncertain how power companies may respond to four key Environmental Protection Agency (EPA) regulations, but available information suggests companies may retrofit most coal-fueled generating units with controls to reduce pollution, and that 2 to 12 percent of coal-fueled capacity may be retired. Some regions may see more significant levels of retirements. For example, one study examined 11 states in the Midwest and projected that 18 percent of coal-fueled capacity in that region could retire. EPA and some stakeholders GAO interviewed stated that some such retirements could occur as a result of other factors such as lower natural gas prices, regardless of the regulations. Power companies may also build new generating units, upgrade transmission systems to maintain reliability, and increasingly use natural gas to produce electricity as coal units retire and remaining coal units become somewhat more expensive to operate. Available information suggests these actions would likely increase electricity prices in some regions. Furthermore, while these actions may not cause widespread reliability concerns, they may contribute to reliability challenges in some regions. Regarding prices, the studies GAO reviewed estimated that increases could vary across the country, with one study projecting a range of increases from 0.1 percent in the Northwest to an increase of 13.5 percent in parts of the South more dependent on electricity generated from coal. According to EPA officials, the agencys estimates of price increases would be within the historical range of price fluctuations, and projected future prices may be below historic prices. Regarding reliability, these actions are not expected to pose widespread concerns but may contribute to challenges in some regions. EPA and some stakeholders GAO interviewed indicated that these actions should not affect reliability given existing tools. Some other stakeholders GAO interviewed identified potential reliability challenges. Among other things, it may be difficult to schedule and complete all retrofits to install controls and to resolve all potential reliability concerns associated with retirements within compliance deadlines. Existing tools could help mitigate many, though not all, of the potential adverse implications associated with the four EPA regulations, but the Federal Energy Regulatory Commission (FERC), Department of Energy (DOE), and EPA do not have a joint, formal process to monitor industrys progress in responding to the regulations. Some tools, such as state regulatory reviews to evaluate the prudence of power company investments, may address some potential price increases. Furthermore, tools available to industry and regulators, as well as certain regulatory provisions, may address many potential reliability challenges. However, because of certain limitations, these tools may not fully address all challenges where generating units needed for reliability are not in compliance by the deadlines. FERC, DOE, and EPA have responsibilities concerning the electricity industry, and they have taken important first steps to understand these potential challenges by, for example, informally coordinating with power companies and others about industrys actions to respond to the regulations. However, they have not established a formal, documented process for jointly and routinely monitoring industrys progress and, absent such a process, the complexity and extent of potential reliability challenges may not be clear to these agencies. This may make it more difficult to assess whether existing tools are adequate or whether additional tools are needed. GAO recommends, among other things, that FERC, DOE, and EPA take additional steps to monitor industrys progress in responding to the regulations. DOE and EPA agreed with this recommendation, and FERC disagreed with this and another recommendation. GAO continues to believe that it is important for FERC to take the recommended actions.
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According to the program’s legislative history, the Visa Waiver Pilot Program was created, in part, to improve U.S. foreign relations and to promote effective use of State Department‘s resources. It was also intended to facilitate international travel, without posing a threat to the welfare or security of the United States, and thereby to increase the number of foreign travelers to the United States. In addition, according to a statement by President Clinton, the program allowed the State Department to reallocate scarce department resources from the issuing of visas in low- risk countries to higher priority needs such as visa screening in high-fraud areas. The law that created the Visa Waiver Pilot Program required that before implementing the program, the Attorney General establish an automated arrival and departure tracking system (see page 15 for a discussion of this system). The law also required that the Attorney General produce a special arrival and departure form for travelers seeking to enter the United States under the program, which was made permanent in 2000. Persons traveling to the United States under the Visa Waiver Program must have a valid passport issued by the participating country and be a national of that country; be seeking entry for 90 days or less as a temporary visitor; have their identity checked at the U.S. port of entry against an automated electronic database containing information about the inadmissibility of aliens, to uncover any grounds on which the alien may be inadmissible to the United States, with no such ground found; have been determined by the Immigration and Naturalization Service (INS) at the U.S. port of entry to represent no threat to the welfare, health, safety, or security of the United States; have complied with conditions of any previous admission under the program (e.g., stayed in the United States for 90 days or less); if entering by air or sea, possess a round-trip transportation ticket issued by a carrier that has signed an agreement with the U.S. government to participate in the program and must have arrived in the United States aboard such a carrier; and if entering by land, have proof of financial solvency and a domicile abroad to which he or she intends to return. In addition, the applicant must present a completed and signed visa waiver arrival and departure form on which he or she waives the right to a hearing, other than on the basis of an application for asylum, if INS denies the applicant entry into the United States. All foreign visitors, whether they have visas or are seeking to enter the United States under the Visa Waiver Program, undergo inspections conducted by INS inspectors at U.S. airports and seaports. These inspections are intended to ensure that only admissible persons enter the United States. The INS inspectors observe the applicant, examine his or her passport, and check his or her name against an automated database that contains information regarding the admissibility of aliens. Table 1 lists the visa waiver countries, the year each country entered the program, and the numbers of arrivals to the United States under the program in 2000. The Visa Waiver Program Act includes criteria that a country must fulfill to be eligible for nomination for, and continued participation in, the program. Justice and State have established a draft protocol based on these criteria that spells out the procedures that the agencies must follow in nominating a country and for assessing participating countries to ensure that they continue to pose a low risk to U.S. security. The Attorney General, in consultation with the Secretary of State, may also immediately terminate a country’s participation in the Visa Waiver Program in the event of an emergency that threatens U.S. law enforcement or security interests. Legislation enacted after September 11, 2001, added more requirements for countries to remain eligible to participate in the program, but full, timely implementation of these requirements is uncertain. To comply with laws intended to ensure that countries’ participation in the Visa Waiver Program does not threaten U.S. security and interests, the Departments of State and Justice have established a draft protocol that spells out procedures to assess countries’ eligibility to be admitted to the program. The procedures are comprehensive and cover a variety of security concerns, including patterns of passport and visa fraud, assessments of terrorism within the country, and assessments of law enforcement practices. An Interagency Working Group comprising representatives from Justice, including the INS, and from State, including the Bureau of Consular Affairs, developed the protocol. Although the protocol is in draft, the agencies have used it to assess some countries’ eligibility. (See fig. 1.) As shown in figure 1, State initiates the process of adding countries to the program by advising Justice of its intent to nominate a country for inclusion in the program. State may nominate a country only after it has determined that the country has a low nonimmigrant visa refusal rate for its citizens who apply for U.S. nonimmigrant visitor visas (ranging from less than 2 percent to less than 3 percent depending on the years assessed), has the ability to supply machine-readable passports to its citizens or is in the process of developing such passports, and offers visa-free travel for U.S. citizens and nationals. The protocol requires State to provide Justice with information on the nominated country, including patterns of passport fraud, visa fraud, and visa abuse over the past 5 assessments of terrorism within or outside the country by the country’s evaluations of the impact of the country’s participation on U.S. national security and law enforcement. Various Justice components—including the law enforcement agencies (for example, INS and the FBI), Criminal Division, and Office of Intelligence Policy and Review—review the nomination, focusing on the effect that the country’s inclusion would have on U.S. law enforcement and national security. If no clearly disqualifying objections are raised during this review, the Secretary of State submits a formal written nomination to the Attorney General. After a country’s formal nomination, INS leads a team of representatives from interested agencies to visit the nominated country. The team reviews the country’s political, social, and economic conditions; security over its passport and national identity documents; immigration and nationality laws, law enforcement policies and practices, and other matters relevant to law enforcement, immigration, and national security. On the basis of the review and site visit, the Interagency Working Group submits a recommendation to the Attorney General, who, in consultation with the Secretary of State, then decides whether to admit the country to the program. The protocol includes an evaluation process, similar to the nomination process, for periodically assessing the effect on U.S. law enforcement and security interests of each country’s continued participation in the Visa Waiver Program. INS is primarily responsible for these evaluations. It obtains information from a number of other agencies, including State and intelligence agencies, and other components of Justice. These evaluations assess the status of factors reviewed during the nomination process, including whether the rate at which visa waiver applicants are refused entry at U.S. ports of entry exceeds specific numerical targets; demographic, economic, political, and social trends in the program the security of the country’s procedures for issuing passports; and legal issues, including how foreign nationals acquire citizenship, law enforcement considerations, national security (including information on terrorism), and other matters. The areas evaluated involve more qualitative than quantitative assessments. For example, INS examines the security of processes for issuing passports but uses no quantitative criteria in assessing the process. However, the protocol does allow the Attorney General, in determining a country’s risk level, to consider quantifiable data. Such data may include comparisons between the denial rates of persons presenting passports purported to have been lawfully issued by a particular visa waiver country and the denial rates of individuals traveling from the same country with nonimmigrant visas. INS has completed the assessments of five countries: Argentina, Belgium, Italy, Portugal, and Slovenia. The assessment of Uruguay is still pending. INS selected the countries for assessment on the basis of specific security concerns. For example, INS selected Argentina because of the economic crisis and political instability in the country; the Attorney General subsequently removed Argentina from the program because of those problems. INS selected Belgium because of repeated thefts of blank Belgian passports. INS accelerated the scheduling of the evaluations after the terrorist attacks on September 11, 2001. However, although INS completed the field visits to the countries in December 2001, it did not send the finalized reports with recommendations to Justice until September 2002. The next step in the evaluation process is for the Attorney General, in consultation with the Secretary of State, to decide whether each country should remain in the program or its participation should be terminated. The Attorney General, in consultation with the Secretary of State, may also immediately terminate a country’s participation in the Visa Waiver Program in the event of an emergency that threatens U.S. law enforcement or security interests. The law defines emergencies as the overthrow of a democratically elected government; war (including undeclared war, civil war, or other military activity) in a severe breakdown in law and order affecting a significant portion of the program country’s territory; a severe economic collapse in the program country; or any other extraordinary event in the program country that threatens the law enforcement or security interests of the United States. On February 20, 2002, the Attorney General used this emergency provision to remove Argentina from the Visa Waiver Program because of the country’s economic crisis, which had raised concerns that the number of Argentines illegally immigrating to the United States would increase. INS had reported an increase in the number of Argentine nationals attempting to remain illegally in the United States after their 90-day period of admission had expired. Laws passed since the terrorist attacks of September 11, 2001, affect the process for determining countries’ eligibility to participate in the Visa Waiver Program. These laws cover passport requirements for visa waiver countries and reemphasize the requirement for the Attorney General to establish a system to monitor peoples’ entry into and exit from the United States. However, it is unclear whether Justice and State will fully implement these requirements by the deadlines called for under U.S. law. First, regarding passports, the October 2001 USA PATRIOT Act advanced to October 1, 2003, the deadline for the requirement that travelers from participating countries wishing to enter the United States under the Visa Waiver Program must submit a machine-readable passport. Subsequently, the May 2002 Enhanced Border Security Act stated that to remain in the program, a visa waiver country must certify, by October 26, 2004, that it has a program to issue tamper-resistant, machine-readable passports that contain biometric and document authentication identifiers. With the exception of Switzerland and San Marino, all participating countries are issuing machine-readable passports, but none issue passports that have biometric identifiers, according to State. Some State and law enforcement officials in Europe and the United States questioned whether countries participating in the Visa Waiver Program would be able to certify by October 2004 that they can issue passports with acceptable biometric identifiers—particularly since there is not yet an international standard for biometric identifiers. The Act required that the biometric identifiers comply with standards established by the International Civil Aviation Organization. Representatives of several countries, including the United States, Visa Waiver Program participating countries, and members of the European Union (EU), have met to work toward developing recommendations on minimum standards for the application of biometrics in procedures and documents by the spring of 2003. However, responding to a State inquiry to visa waiver countries about their plans to issue passports with biometric identifiers, only 3 of 17 countries had said as of October 2002 that they would meet the deadline. State plans to incorporate this information into a report to the Congress on the status of countries’ efforts to include biometric identifiers in their passports. State officials also told us that in response to the U.S. requirement, European countries might require U.S. passports to have biometric identifiers. For the system to be effective in increasing U.S. national security, INS will need to install machines capable of reading the biometric identifiers at each U.S. port of entry, of which there are about 390. However, until countries decide which biometrics they will include in their passport, INS may have a difficult time ensuring that all ports will have machines that can read the various biometric identifiers by October 2004. Additionally, the Enhanced Border Security Act conditioned participation in the Visa Waiver Program on a country’s timely reporting of its stolen blank passports to the United States. INS has described problems with countries’ timely reporting of stolen blank passports, and the Justice Inspector General concluded that INS does not have a mechanism to provide systematic, consistent, and timely information about missing passports to its inspectors. A State official testified that although this requirement probably will not apply to countries until they are certified for continued participation in the program, State is discussing this requirement with all countries. Finally, INS has not yet developed an automated nonimmigrant entry–exit control system to screen and monitor the arrival and departure of foreign visitors entering the United States as temporary visitors. Congress has passed several laws requiring the Attorney General to implement such a system and has extended the implementation deadline several times. For example, the 1986 law creating the Visa Waiver Pilot Program required, as a condition of implementing the program, that an automated nonimmigrant entry–exit control system to monitor aliens using the program be established. The Visa Waiver Permanent Program Act reiterated the requirement, directing that the system be implemented no later than 2001. INS decided to use an existing automated border inspections system in conjunction with its arrival–departure system to meet this requirement. The arrival–departure system includes passenger information electronically transmitted by air and sea carriers that have an agreement with INS to transport aliens to the United States. INS began using this system on October 1, 2002. An INS official recently testified that this new initiative implements the requirements that had been set forth in the Visa Waiver Permanent Program Act of 2000. Also, the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 required an entry–exit system that covered all nonimmigrant visitors, not solely those traveling under the Visa Waiver Program. This act required the Attorney General to develop an automated entry–exit system within 2 years of the law’s enactment to collect a record of departure for every alien departing the United States and match the record of departure with the record of the alien’s arrival in the United States. Subsequently, Congress extended the deadline to implement the system at all U.S. ports of entry to December 31, 2005. After the terrorist attacks of September 11, 2001, the effectiveness of monitoring nonimmigrant visitors came under additional scrutiny, as authorities considered how to identify and locate terrorists who might be in the United States. As a result, new laws have again directed the Attorney General to establish an integrated entry–exit system. INS and other agencies, including the U.S. Customs Service, State, and the Transportation Security Agency, are working together to develop the system. According to Justice, INS has established a multiagency task force to coordinate all activity associated with the establishment of the entry–exit system. The systems established as part of the Visa Waiver Program, as well as a system launched on September 11, 2002, to collect fingerprints and a photograph from a specific population, are the first step in the development of the entry–exit system. The implications for U.S. national security of eliminating the program are uncertain; however, eliminating the program could negatively affect U.S. relations with participating country governments, impede tourism to the United States, and increase the need for State personnel and facilities overseas. According to the program’s legislative history, Congress established the program, in part, to facilitate travel by citizens from countries that the Attorney General and Secretary of State determined to pose low risk to U.S. national security. Data showing the extent to which the program has been exploited are limited, and U.S. government officials expressed differing opinions about the effect of the program on U.S. national security. The implications for U.S. national security of eliminating the Visa Waiver Program are not clear. While Justice has not systematically collected data on how frequently potential terrorists and other criminals have entered the United States, anecdotal information indicates that such individuals have entered the United States under the Visa Waiver Program as well as with valid U.S. visas. State Department and U.S. law enforcement officials’ opinions varied on the effect of the Visa Waiver Program on U.S. national security. Some law enforcement agency officials said that the Visa Waiver Program negatively affects U.S. national security and that eliminating the program and requiring visas from current visa waiver travelers would increase national security. Other officials from Justice and State asserted that unless the current visa-screening process is improved, for example, by increased information sharing among U.S. agencies, the effect of the program on U.S. national security is not certain. Justice has not systematically collected data on the extent to which terrorists and other criminals have entered the United States under the Visa Waiver Program or committed crimes while in the country. The FBI operates a nationwide information system dedicated to serving and supporting local, state, and federal criminal justice agencies. This system contains 17 databases with information on, among other things, stolen articles, foreign fugitives, gangs and terrorist members, and wanted persons. However, crime statistics collected by the FBI do not capture the criminals’ immigration status. Also, the data that INS collects on aliens it has removed from the United States for committing crimes include some information on aliens’ immigration status. According to INS data, 204 (about 0.3 percent) of the 69,580 criminals removed from the United States during fiscal year 2002 entered under the Visa Waiver Program. The Drug Enforcement Agency maintains information on domestic drug arrests by country that shows the arrestees’ country of nationality but not their immigration status. While Justice has not systematically collected data on how frequently potential terrorists and other criminals have entered the United States, anecdotal information indicates that such persons have entered the United States under the Visa Waiver Program as well as with a valid U.S. visa. For example, Zacarias Moussaoui, a French national whom the United States indicted as a co-conspirator in the attacks of September 11, 2001, entered the United States under the Visa Waiver Program, and the 19 individuals who carried out the attacks entered with valid U.S. visas. U.S. law enforcement and State officials in Washington, D.C., and at posts overseas expressed different opinions about the effect of the Visa Waiver Program on U.S. national security. Some INS and other law enforcement agency officials said that the Visa Waiver Program can facilitate illegal entry into the United States by inadmissible aliens, including terrorists and other criminals, because under the program such individuals avoid the screening that consular officers usually perform on visa applicants abroad. The lack of consular screening makes the program attractive to inadmissible aliens, according to INS officials. Aliens traveling to the United States under the Visa Waiver Program are first screened when INS inspectors interview them for admission at the U.S. port of entry. These inspectors have little time to screen each person entering the United States, according to a report by the Justice Department’s Office of Inspector General. INS inspectors reported that terrorists and criminals who were intercepted had attempted to enter the United States under the Visa Waiver Program—rather than applying for a U.S. visa abroad—because they believed it would give them a greater chance of entering the country. Some officials in Washington, D.C., and at the U.S. embassies in Argentina and Uruguay said that eliminating the Visa Waiver Program would increase national security, because the visa-screening process is an additional tool to deter terrorists from entering the United States. One Justice official stated that the Visa Waiver Program is clearly a vulnerability and that eliminating the program would increase national security, but at a high cost in terms of the effect on State resources and U.S. tourism. Other law enforcement and State officials in Washington, D.C., and at the U.S. embassies in Belgium, Italy, and Spain questioned whether eliminating the Visa Waiver Program and requiring visas would increase national security. They agreed that the visa-screening process could serve as an additional tool to screen out terrorists but only to the extent that State had the necessary overseas resources, including relevant information on potential terrorists and sufficient staff and facilities to interview all or most visa applicants. They said that if current visa waiver travelers were required to apply for visas and State’s current resource levels were not increased, consular officers would be inundated with paperwork for routine and low-risk cases and would become less effective and alert in dealing with cases needing additional scrutiny. The officials emphasized that better, timely information and improved data sharing on inadmissible aliens among U.S. law enforcement, border control, and intelligence agencies are essential to improving U.S. national security. U.S. officials, including those from State as well as from some law enforcement agencies, said that eliminating the Visa Waiver Program could have negative implications for U.S. relations with governments of participating countries and could impair their cooperation in efforts to combat terrorism. Some allies are cooperating significantly in matters ranging from providing military personnel and access to air bases to support Operation Enduring Freedom in Afghanistan to freezing terrorists’ financial assets. Examples are as follows: Visa waiver countries have provided political and military support to Operation Enduring Freedom in Afghanistan and to the International Security Assistance Force, which is to help the new Afghan Interim Authority provide security and stability in Kabul. The United Kingdom, France, Italy, Germany, Australia, Japan, and other visa waiver countries partnered with the United States in military operations to expel the Taliban and al Qaeda from Afghanistan, according to government reports. EU member states vigorously supported U.S. efforts in the United Nations to adopt strong resolutions against terrorism and U.S. efforts to persuade third countries to resist terrorism. Visa waiver countries have also increased their law enforcement efforts. The EU strengthened member states’ ability to take action against terrorists and their supporters—including freezing their assets. The EU reported that between September 11, 2001, and June 3, 2002, about $100 million of assets belonging to persons and entities sponsoring terrorist actions was frozen throughout the EU. Since September 11, 2001, authorities in Belgium, France, Germany, Italy, Spain, and the United Kingdom have arrested supporters of al Qaeda and other extremist groups. Also, according to State, Italian authorities arrested the leader of the group suspected of plotting to bomb the U.S. embassy in Rome. The government of Singapore detained 13 members of a terrorist group in December 2001, thereby disrupting a plot to bomb the U.S. embassy there. Some U.S. embassy and law enforcement agency officials expressed concern that eliminating the Visa Waiver Program could lessen countries’ cooperation in military and law enforcement operations related to the global coalition against terrorism. Participating countries may see their loss of visa waiver status as a sign that the United States views them as untrustworthy—more as security risks than as allies. If the United States decides to eliminate visa waiver status for participating countries, those countries’ governments could begin requiring Americans to obtain visas before visiting their countries. For example, if the United States requires a national from an EU member country to obtain a visa before entering the United States for 90 days or less, the EU may institute a provisional requirement that U.S. citizens obtain a visa before entering any of the EU member countries. Thereafter, if the U.S. visa policy continues, the EU Council may amend regulations to make the visa requirement permanent. As previously mentioned, Congress created the Visa Waiver Program, in part, to facilitate international travel and thereby increase the number of foreign travelers to the United States. A large proportion of international tourists to the United States comes from Visa Waiver Program countries. From 1991 to 2000, in terms of both the number of travelers and dollars spent, tourism from visa waiver countries accounted for more than half of the overseas visitor market. Visa waiver travelers generally spend more than other international travelers, and their spending helps to balance the U.S. trade accounts. Because of direct and indirect economic contributions from visa waiver travel, elimination of the Visa Waiver Program is a concern for the travel and tourism industry. One study commissioned by the Department of Commerce in 2002 estimated that discontinuation of the Visa Waiver Program will cost the U.S. economy more than $28 billion in tourism exports from 2003 to 2007. Travelers from visa waiver countries to the United States totaled approximately 17.6 million in 2000 and 14.7 million in 2001, according to the Commerce Department. As a share of total international arrivals, travelers from visa waiver countries grew from 25 percent in 1992 to 35 percent in 2000 (see fig. 2). Excluding arrivals from Canada and Mexico, the share of overseas arrivals from visa waiver countries has averaged 68 percent in the last 5 years. Using data from Commerce and the Travel Industry Association of America, we calculated that in 2000, travelers from visa waiver countries spent an estimated $39.6 billion in the United States, accounting for 57 percent of overseas tourist spending. Average spending per traveler from visa waiver countries in 2000 was $2,253, compared with $1,274 per traveler for other international tourists to the United States. A range of estimates from Commerce, the Travel Industry Association of America, and the World Travel and Tourism Council indicate that visa waiver travelers’ direct and indirect spending within the United States added between $75 billion and $102 billion to the U.S. gross domestic product in 2000. According to the Travel Industry Association of America, international tourism provides more than one million U.S. jobs, of which more than 60 percent are located in Florida, California, New York, and Hawaii. The association also estimates that in 2001, U.S. spending generated from international tourism contributed $16 billion in tax revenues. The Department of Commerce commissioned a study in 2002 on the economic effect of the Visa Waiver Program and estimated that, over a 5-year period, eliminating the program could result in a loss of 3 million visitors, $28 billion in tourism exports, and 475,000 jobs. The estimates of this study, together with anecdotal information, support the likelihood of a negative effect on tourism. According to the Travel Industry Association of America, the Visa Waiver Program enhances the competitiveness of the U.S. market as an international destination and elimination of the program could divert tourists to other destinations that do not require a visa for entry. Foreign Commercial Service Officers in Belgium and Spain reported visas to be a significant impediment to travel demand. State officials agreed that visas are an impediment to both tourist and business travel and added that any additional requirements, such as the collection of biometric indicators, could further discourage travel to the United States. The World Travel and Tourism Council and the World Tourism Organization also view visa requirements as an important factor in determining levels of tourism. Should the Congress decide to require visas from current visa waiver travelers, State would require more resources, such as personnel and facilities overseas, to handle the resulting increased visa processing and biometric collection workload. State estimates that if the individuals now traveling under the Visa Waiver Program were required to obtain visas, the number of applications would rise by 14 million. We estimated that State’s initial costs to process the additional workload would likely range between $739 million and $1.28 billion, and annual recurring costs would likely range between $522 million and $810 million. The ranges of our cost estimates are large because they reflect the uncertainty of key variables in our cost estimating model, such as costs for consular personnel, space, and supplies; the percentage of visa applicants that State interviews; and the method by which State collects biometrics. Given this uncertainty, actual costs could vary significantly. To estimate the costs of eliminating the Visa Waiver Program, we created a cost model that included information on a number of variables such as workload and staffing data (e.g., personnel and facility costs) from State’s Bureau of Consular Affairs and the time and costs involved in collecting biometrics. We used our model to forecast a range for both additional initial and recurring costs. Consistent with State assumptions, we assumed a “low” interview rate of 10 percent (about 1.4 million applicants) and a “high” interview rate of 95 percent (about 13.3 million applicants). (See app. I for more details of our methodology and assumptions.) Figure 3 shows estimated initial costs to State if the Visa Waiver Program were eliminated. These costs include elements such as hiring, training, and moving new consular personnel; installing additional equipment to collect and store biometrics; and building or renovating facilities in all visa waiver posts. We estimated that if State were to interview 10 percent of all visa applicants, initial costs would likely range from $739 million to $821 million. If State were to interview 95 percent of all visa applicants, initial costs would likely range from $1.12 billion to $1.28 billion. Figure 4 shows annual recurring costs, which include elements such as consular personnel salaries, biometric hardware and software maintenance, facility leasing and maintenance, and supplies. If State were to interview 10 percent of all visa applicants, recurring costs would likely range from $522 million to $587 million. If State were to interview 95 percent of all visa applicants, recurring costs would likely range from $723 million to $810 million. For fiscal year 2003, State requested $3.36 billion for ongoing operations related to diplomatic and consular programs, including the operation of all overseas facilities. It could take at least 2 to 4 years to put the necessary people and facilities in place to handle the increased workload, according to State officials. Using State’s staffing and workload assumptions, we estimated that the department would need, in addition to the approximately 840 Foreign Service officers who are currently overseas, more than 350 additional Foreign Service officers to handle the extra nonimmigrant visa workload if required to interview 10 percent of all applicants and more than 800 additional officers if required to interview 95 percent of all applicants. According to consular officials, hiring Foreign Service officers and training them for general Foreign Service and languages could take a year or more. It could take several months to hire Foreign Service nationals, depending on the availability of qualified candidates and their ability to pass the security background check. In cases where a significant number of new consular staff were added and new facilities were acquired, posts might also need to employ administrative staff such as human resource managers, post security guards, and additional facilities management and maintenance staff. A portion of the initial and recurring costs shown in figures 3 and 4 would be used for new or renovated facilities that the post would need in order to process an increased number of nonimmigrant visa applications. In some countries, including but not limited to Belgium, France, Italy, Slovenia, Spain, and the United Kingdom, State would need additional work and waiting room space to process applications; this could involve acquiring new facilities or reopening and renovating additional posts for the nonimmigrant visa workload. For example, in Italy, State officials said that they would need to renovate or reopen facilities in Naples, Sicily, Rome, Milan, and Florence. In some U.S. embassies, such as those in Slovenia and Uruguay, available space would have to be adapted for processing the additional workload. Identifying, procuring, and fitting out lease space can take 24 to 48 months, on average, according to State officials. State officials in most countries we visited and analysts in Washington said that until they acquired additional space for handling nonimmigrant visas, there would be long lines of visa applicants waiting outside the current posts, posing a potential security threat for both the applicants and U.S. embassy officials. Also, if additional space was acquired in unsecured buildings separate from the embassy, personnel working in such buildings would be put at risk until the space was upgraded for security. A U.S. ambassador pointed out that acquiring additional space for visas would conflict with the department’s efforts to consolidate Americans into joint space to improve their security and protect them. Although revenues from the surcharge for machine-readable visas would not cover the additional initial costs related to the elimination of the Visa Waiver Program, State could cover additional recurring costs over time. To pay for the costs associated with the processing and issuing of machine- readable visas and with State’s Border Security Program, State currently charges applicants a $65 fee each time they apply for a machine-readable visa. On November 1, 2002, State increased the fee to $100 to compensate for increases in the actual cost of providing visa service. State officials have not determined how they will fund the costs of collecting biometrics. The options they have discussed include requesting an appropriation from the Congress, passing the cost to the visa applicant, or a combination of the two. The Justice Department and the State Department provided written comments on a draft of our report. These comments, along with our responses to specific points, are reprinted in appendixes II and III. Justice expressed optimism that the requirements of recent border security laws will be met. Specifically, Justice stated that it does not anticipate significant delays in the incorporation of standardized, machine-verifiable biometrics in the national passports of most Visa Waiver Program countries. We continue to believe, however, that some countries may be unable to add biometrics to their passports by the 2004 deadline. Our assessment is based on the statements of U.S. State Department and law enforcement officials as well as the responses from several Visa Waiver Program countries concerning their ability to issue passports with biometrics. Justice also stated that our discussion of the entry–exit system leaves the impression that implementation of the system is not moving forward. We acknowledge that INS is taking steps to implement the system, and we have added information on INS’s progress to the report. However, the report points also out that an entry–exit system covering all nonimmigrant travelers to the United States has been required since 1996. State generally concurred with the report and stated that our comments on the Visa Waiver Program are in keeping with its assessment of the implications and costs resulting from a blanket suspension of the program. However, State expressed concern that the report did not discuss the border inspection process at the U.S. port of entry as an alternative solution to the visa application process to address perceived weaknesses in the program. We acknowledge the importance of the inspection process for aliens seeking to enter the United States under the Visa Waiver Program as well as with visas. We have added a discussion of the inspection process to the report. The Justice Department Inspector General and GAO have work under way that will provide a more thorough assessment of the border inspection process. We are sending copies of this report to interested congressional committees, the Secretary of State, the Attorney General, the Commissioner of the INS, and the Assistant to the President for Homeland Security. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128. Additional GAO contacts and staff acknowledgments are listed in appendix IV. To describe the process for assessing countries’ eligibility to participate in the Visa Waiver Program, we examined laws establishing the program, relevant congressional reports, regulations and agency protocols governing the program, Department of Justice Office of Inspector General reports, and other relevant documents. To assess steps being taken to increase the requirements for the program and enhance U.S. border security, we reviewed recent laws such as the USA PATRIOT Act and the Enhanced Border Security and Visa Entry Reform Act of 2002, Departments of State and Justice reports, and recent GAO reports. To describe U.S. national security issues related to the Visa Waiver Program, we reviewed Immigration and Naturalization Service (INS) data on terrorists who entered the United States under the Visa Waiver Program as well as with valid visas. We reviewed State, INS, Federal Bureau of Investigations (FBI), and Drug Enforcement Agency (DEA) data and databases on inadmissible aliens, the immigration status of criminals, the number of aliens refused entry to the United States, and the reasons aliens were refused entry. We also examined Justice officials’ testimony before Congress, the President’s National Strategy for Homeland Security, and GAO’s report Border Security: Visa Process Should Be Strengthened as an Antiterrorism Tool. Given the limited amount of data addressing this issue, we interviewed officials from State, including the Bureaus of Consular Affairs and Diplomatic Security, and Justice, including the INS, FBI, and DEA in the United States and in Argentina, Belgium, Italy, Slovenia, Spain, and Uruguay. We selected five of these countries because they were the first countries whose participation in the program was being evaluated by the Departments of Justice and State. We selected the sixth country, Spain, to provide a perspective on countries that had not been evaluated. We discussed with U.S. officials their views about whether eliminating the Visa Waiver Program would increase U.S. national security. To describe the importance of the Visa Waiver Program to U.S. relations with other countries, we reviewed government reports, including the U.S. Department of Defense’s Fact Sheet: International Contributions to the War Against Terrorism, the State Department’s Patterns of Global Terrorism—2001, and the U.K. Coalition Information Centre’s Campaign Against Terrorism: A Coalition Update. We reviewed European Union documents, including European Council positions and regulations. We also interviewed officials from the Departments of State, including the Bureaus of Consular Affairs and Diplomatic Security, and Justice, including the INS, FBI, and DEA in the United States and in Argentina, Belgium, Italy, Slovenia, Spain, and Uruguay. We discussed with them whether eliminating countries’ participation in the Visa Waiver Program could affect U.S. relations with those countries and, if so, what the effects might be. Because of the sensitivity of the issues, in four of the six countries, the State Department requested that we not meet with representatives from other countries’ governments or chambers of commerce. We met with the governments of Argentina and Uruguay and with the American Chamber of Commerce in Argentina. To determine whether requiring citizens of visa waiver countries to obtain visas would affect their decision to travel to the United States, we examined the existing economic literature on tourism and interviewed industry experts. We interviewed officials from State, Foreign Commercial Service Officers in overseas posts, the Department of Commerce’s Office of Travel and Tourism Industries, the Travel Industry Association of America, the World Travel and Tourism Council, and the World Tourism Organization. To determine the contribution of travel from visa waiver countries to the U.S. economy, we reviewed official travel data for 1991– 2001 from Commerce, a 2002 study from Commerce, and data from the Travel Industry Association of America and the World Travel and Tourism Council. To determine the potential effects that requiring visas and biometrics from current visa waiver travelers would have on State’s resources, we created a cost estimating model using workload and staffing data from State’s Bureau of Consular Affairs and information on the time and costs involved in collecting biometrics. Such information included analogies to the Integrated Automated Fingerprint Identification System, averages of biometric vendor costs, expert opinions from the field of biometrics, and cost estimates developed by the International Biometrics Group. We conducted a simulation that varied the cost estimating model approximately 1,000 times with information on variables such as personnel and facility costs to forecast a range for both initial and recurring costs. During our simulation, costs fell below the top of the shaded areas in Figures 3 and 4 in the report 90 percent of the time, while costs fell below the bottom of the shaded areas only 10 percent of the time. In other words, 80 percent of the times we varied our simulation, costs fell within our reported ranges. We chose to report large ranges of cost estimates to reflect the uncertainty of key variables in our cost estimating model, such as costs for consular personnel, space, and supplies; the percentage of visa applicants that State interviews; and the method by which State collects biometrics.We based our estimates on the following assumptions: All costs were expressed in constant fiscal 2002 dollars. The amount of additional visa applications for current visa waiver travelers would remain about 14 million per year. Cost estimates provided to us by State, such as Foreign Service national salaries and leasing and maintenance fees, could vary by about 10 percent, barring unforeseen circumstances. The ratio of Foreign Service nationals needed to assist each Foreign Service officer with nonimmigrant visa processing is 2.5 to 1 but can vary between 2 and 4 to 1. Under a “low interview” scenario, State would interview 10 percent of all visa applicants and, under a “high interview” scenario, State would interview 95 percent of all visa applicants. Estimates are based on a 4- minute interview. Consular officers would capture four flat fingerprints from each visa applicant at the embassy or consulate and would store the biometric data in a separate memory storage card from the visa. Resources would be in place at all visa-issuing posts to collect biometrics for the current 10.3 million visa applications. Some Foreign Service nationals would spend time both processing visa applications and collecting biometrics. Visa applicants whom State must interview would visit the embassy to be interviewed and have their biometrics collected on the same day. We also met with consular officials at the U.S. consulate in Buenos Aires, Argentina, to determine the effect that the elimination of the Visa Waiver Program had on their staff and facility levels. Similarly, we met with consular officials in U.S. consulates in Brussels, Belgium; Rome, Italy; Ljubljana, Slovenia; Madrid, Spain; and Montevideo, Uruguay, to determine how the elimination of the Visa Waiver Program would affect their resources. We performed our work from February 2002 through August 2002, in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Justice’s letter dated November 4, 2002. 1. Justice stated that it does not anticipate significant delays in the incorporation of standardized, machine-verifiable biometrics in the national passports of most Visa Waiver Program countries. We believe that some countries may not be able to establish programs to issue the passports by the 2004 deadline. Our assessment is based on the statements of U.S. State Department and law enforcement officials in Europe and the United States. Moreover, our concern is supported by additional information that we subsequently obtained from the State Department. As of October 2002, State found that only 3 of the 17 countries discussing their plans for issuing biometric passports would meet the deadline. Most of the respondents stated that they did not know if they would meet the deadline. Some of these respondents cited the lack of an international standard as a reason for the uncertainty. 2. Justice also commented that our discussion of the entry–exit system leaves the impression that implementation of the system is not moving forward. We acknowledge that INS has implemented systems, as of October 1, 2002, to fulfill the requirement for an automated system to monitor the entry and exit of aliens under the Visa Waiver Program. We have added this information to the report. However, we note that there have been delays in implementing the entry–exit system for Visa Waiver Program travelers. Implementation of such a system has been required since 1986. However, the report also points out that an entry–exit system covering all nonimmigrant travelers to the United States has been required since 1996. Moreover, the Justice Inspector General has reported that completion of the entire entry–exit system will take several years. The following are GAO’s comments on the Department of State’s letter dated November 7, 2002. 1. State commented that the discussion of Zacarias Moussaoui should include more details. We do not believe additional details are necessary. We discussed Moussaoui and the 19 individuals who carried out the attacks of September 11, 2001, merely as examples of anecdotal evidence about terrorists entering the United States under the Visa Waiver Program and with visas. 2. State commented that the draft report did not provide detailed information on the border inspection process. State also commented that the draft report overemphasizes the visa application as a solution to perceived weaknesses of the Visa Waver Program and overlooks the possibility that these weaknesses could be resolved through changes in border inspection procedures or other means. We acknowledge the importance of the inspection process for aliens seeking to enter the United States under the Visa Waiver Program as well as with visas. We have added a discussion of the inspection process to the report. The Justice Department Inspector General and GAO are conducting more thorough assessments of the border inspection process. In addition to the persons named above, Lyric Clark, Kendall Schafer, Bruce Kutnick, Mary Moutsos, and Reid Lowe made key contributions to this report. 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Since the terrorist attacks of September 11, 2001, the U.S. Congress, the administration, law enforcement officials, and the public have questioned the effectiveness of U.S. visa programs in protecting national security. Some have voiced concern that terrorists or other criminals may exploit one of these programs--the Visa Waiver Program--to enter the United States. The program enables citizens of 28 participating countries to travel to the United States for tourism or business for 90 days or less without first obtaining a visa. It was created, in part, to promote the effective use of government resources and to facilitate international travel without threatening U.S. security. GAO was asked to review the Visa Waiver Program, including the process for assessing countries' eligibility to participate in the program. GAO was also asked to determine the implications--specifically those affecting national security, foreign relations, tourism, and State Department resources--of eliminating the program. GAO analysts traveled to several visa waiver countries, including Belgium, Italy, Slovenia, Spain, and Uruguay, as well as to Argentina, whose participation in the program was recently revoked. To ensure that countries participating in the Visa Waiver Program pose a low risk to U.S. national interests, the Departments of Justice and State verify each country's political and economic stability and the security of its passport issuance process. However, laws passed since the terrorist attacks of September 11, 2001, affect the processes for determining eligibility for the program. The new laws expand passport requirements for visa waiver countries and call for a system to monitor visitors' movement into and out of the United States. Whether these requirements will be implemented by the specified deadlines remains uncertain. The implications for U.S. national security of eliminating the Visa Waiver Program are difficult to determine. It is clear, however, that eliminating the program could affect U.S. relations with other countries, U.S. tourism, and State Department resources abroad. Although the Departments of Justice and State generally agreed with our report, Justice was concerned that GAO did not fully take into account its progress in meeting certain requirements. State questioned whether GAO considered the border inspection process when discussing the national security implications of eliminating the Visa Waiver Program.
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As we report in our 2011 High-Risk Series update, Medicare remains on a path that is fiscally unsustainable over the long term. This fiscal pressure heightens the need for CMS to reform and refine Medicare’s payment methods to achieve efficiency and savings, and to improve its management, program integrity, and oversight of patient care and safety. CMS has made some progress in these areas, but many avenues for improvement remain. Since January 2009, CMS has implemented payment reforms for Medicare Advantage (Part C) and inpatient hospital, home health, and end-stage renal disease services. The agency has also begun to provide feedback to physicians on their resource use and is developing a value-based payment method for physician services that accounts for the quality and cost of care. Efforts to provide feedback and encourage efficiency are crucial because physician influence on use of other services is estimated to account for up to 90 percent of health care spending. In addition, CMS has taken steps to ensure that some physician fees recognize efficiencies when certain services are furnished together, but the agency has not targeted the services with the greatest potential for savings. Under the budget neutrality requirement, the savings that have been generated have been redistributed to increase physician fees for other services. Therefore, we recommended in 2009 that Congress consider exempting savings from adjusting physician fees to recognize efficiencies from budget neutrality to ensure that Medicare realizes these savings. Our examination of payment rates for home oxygen also found that although these rates have been reduced or limited several times, further savings are possible. As we reported in January 2011, if Medicare used the methodologies and payment rates of the lowest-paying private insurer of eight private insurers studied, it could have saved about $670 million of the estimated $2.15 billion it spent on home oxygen in 2009. Additionally, we found that Medicare bundles its stationary equipment rate payment for oxygen refills, but refills are required only for certain types of equipment, so a supplier may still receive payment for refills even if the equipment does not require them. Therefore, we suggested that Congress should consider reducing home oxygen payment rates and recommended that CMS remove payment for portable oxygen refills from payment for stationary equipment, and thus only pay for refills for the equipment types that require them. Our work has also shown that payment for imaging services may benefit from refinements. Specifically, CMS could add more front-end approaches to better ensure appropriate payments, such as requiring physicians to obtain prior authorization from Medicare before ordering an imaging service. CMS also has opportunities to improve the way it adjusts physician payments to account for geographical differences in the costs of providing care in different localities. We have recommended that the agency examine and revise the physician payment localities it uses for this purpose by using an approach that is uniformly applied to all states and based on the most current data. CMS agreed to consider the recommendation but was concerned about its redistributive effects. The agency subsequently initiated a study of physician payment locality adjustments. The study is ongoing, and CMS has not implemented any change. CMS’s implementation of competitive bidding for medical equipment and supplies and its new Medicare Administrative Contractors (MAC) have progressed, with some delays. Congress halted the first round of competitive bidding and required CMS to improve its implementation. In regard to contracting reform, because of delays resulting from bid protests filed in connection with the procurement process, CMS did not meet the target that it set for 2009 and 2010 in transferring workload to MACs. As of December 2010, CMS transferred Medicare fee-for-service claims workload to the new MACs in all but six jurisdictions. For those six jurisdictions, CMS is transferring claims workload in two jurisdictions and has ongoing procurement activity for the remainder. Some new MACs had delays in paying providers’ claims, but overall, CMS’s contractors continued to meet the agency’s performance targets for timeliness of claims processing in 2009. Regarding Medicare Advantage, CMS has not complied with statutory requirements to mail information on plan disenrollment to beneficiaries, but it did take steps to post this information on its Web site. In addition, the agency took enforcement actions for inappropriate marketing against at least 73 organizations that sponsored Medicare Advantage plans from January 2006 to February 2009. Of greater concern is that we found pervasive internal control deficiencies in CMS’s management of its contracting function that put billions of taxpayer dollars at risk of improper payments or waste. We recommended that CMS take actions to address them. Recently, CMS has taken several actions to address the recommendations and correct certain deficiencies we had noted, such as revising policies and procedures and developing a centralized tracking mechanism for employee training. However, CMS has not made sufficient progress to complete actions to address recommendations related to clarifying the roles and responsibilities for implementing certain contractor oversight responsibilities, clearing a backlog of contacts that are overdue for closeout, and finishing its investigation of over $70 million in payments we questioned in 2007. New directives, implementing guidance, and legislation designed to help reduce improper payments will affect CMS’s efforts over the next few years. The administration issued Executive Order 13520 on reducing improper payments in 2009 and related implementing guidance in 2010. In addition, the Improper Payments Elimination, and Recovery Act of 2010 amended the Improper Payments Information Act of 2002 and established additional requirements related to accountability, recovery auditing, compliance and noncompliance determinations, and reporting. CMS has already taken action in some areas—for example, as required by law, it implemented a national Recovery Audit Contractors (RAC) program in 2009 to analyze paid claims and identify overpayments for recoupment. CMS has set a key performance measure to reduce improper payments for Parts A and B (fee-for-service) and Part C and is developing measures of improper payments for Part D. CMS was not able to demonstrate sustained progress at reducing its fee-for-service error rate because changes made to improve the methodology for measurement make current year estimates noncomparable to any issued before 2009. Its 2010 fee-for-service payment error rate of 10.5 percent will serve as the baseline for setting targets for future reduction efforts. However, with a 2010 Part C improper payment rate of 14.1 percent, the agency met its target to have its 2010 improper payment rate lower than 14.3 percent. For Part D, the agency is working to develop a composite improper payment rate, and for 2010 has four non- addable estimates, with the largest being $5.4 billion. Other recent CMS program integrity efforts include issuing regulations tightening provider enrollment requirements and creating its Center for Program Integrity, which is responsible for addressing program vulnerabilities leading to improper payments. However, having corrective action processes to address the vulnerabilities that lead to improper payments is also important to effectively managing them. CMS did not develop an adequate process to address the vulnerabilities to improper payments identified by the RACs and we recommended that it do so. Further, our February 2009 report indicated that Medicare continued to pay some home health agencies for services that were not medically necessary or were not rendered. To help address the issue, we recommended that postpayment reviews be conducted on claims submitted by home health agencies with high rates of improper billing identified through prepayment review and that CMS require that physicians receive a statement of home health services that beneficiaries received based on the physicians’ certification. In addition, we recommended that CMS require its contractors to develop thresholds for unexplained increases in billing by providers and use them to develop automated prepayment controls as a way to reduce improper payments. CMS has not implemented these four recommendations. The agency indicated it had taken other actions; however, we believe these actions will not have the same effect. CMS’s oversight of Part D plan sponsors’ programs to deter fraud and abuse has been limited. However, CMS has taken some actions to increase it. For example, CMS officials indicated that they had conducted expanded desk audits and were implementing an oversight strategy. CMS’s oversight of the quality of nursing home care has increased significantly in recent years, but weaknesses in surveillance remain that could understate care quality problems. Under contract with CMS, states conduct surveys at nursing homes to help ensure compliance with federal quality standards, but a substantial percentage of state nursing home surveyors and state agency directors identified weaknesses in CMS’s survey methodology and guidance. In addition to these methodology and guidance weaknesses, workforce shortages and insufficient training, inconsistencies in the focus and frequency of the supervisory review of deficiencies, and external pressure from the nursing home industry may lead to understatement of serious care problems. CMS established the Special Facility Focus (SFF) Program in 1998 to help address poor nursing home performance. The SFF Program is limited to 136 homes because of resource constraints, but according to our estimate, almost 4 percent (580) of the roughly 16,000 nursing homes in the United States could be considered the most poorly performing. CMS’s current approach for funding state surveys of facilities participating in Medicare is ineffective, yet these surveys are meant to ensure that these facilities provide safe, high-quality care. We found serious weaknesses in CMS’s ability to (1) equitably allocate more than $250 million in federal Medicare funding to states according to their workloads, (2) determine the extent to which funding or other factors affected states’ ability to accomplish their workloads, and (3) guarantee appropriate state contributions. These weaknesses make assessing the adequacy of funding difficult. However, CMS has implemented many recommendations that we have made to improve oversight of nursing home care. Of the 96 recommendations made by GAO from July 1998 through March 2010, CMS has fully implemented 45, partially implemented 4, is taking steps to implement 29, and did not implement 18. Examples of key recommendations implemented by CMS include (1) a new survey methodology to improve the quality and consistency of state nursing home surveys and (2) new complaint and enforcement databases to better monitor state survey activities and hold nursing homes accountable for poor care. What Remains to Be Done When legislative and administrative actions result in significant progress toward resolving a high-risk problem, we remove the high-risk designation from the program. The five criteria for determining whether the high-risk designation can be removed are (1) a demonstrated strong commitment to, and top leadership support for, addressing problems; (2) the capacity to address problems; (3) a corrective action plan; (4) a program to monitor corrective measures; and (5) demonstrated progress in implementing corrective measures. CMS has not met our criteria for removing Medicare from the High-Risk List—for example, the agency is still developing its Part D improper payment estimate and has not yet been able to demonstrate sustained progress in lowering its fee-for-service and Part C improper payment estimates. CMS needs a plan with clear measures and benchmarks for reducing Medicare’s risk for improper payments, inefficient payment methods, and issues in program management and patient care and safety. One important step relates to our recommendation to develop an adequate corrective action process to address vulnerabilities to improper payments. Without a corrective action process that uses information on vulnerabilities identified by the agency, its contractors, and others, CMS will not be able to effectively address its challenges related to improper payments. CMS has implemented certain recommendations of ours, such as in the area of nursing home oversight. However, further action is needed on our recommendations to improve management of key activities. To refine payment methods to encourage efficient provision of services, CMS should take action to ensure the implementation of an effective physician profiling system; better manage payments for services, such as imaging; systematically apply payment changes to reflect efficiencies achieved by providers when services are commonly furnished together; and refine the geographic adjustment of physician payments by revising the physician payment localities using an approach uniformly applied to all states and based on current data. In addition, further action is needed by CMS to establish policies to improve contract oversight, better target review of claims for services with high rates of improper billing, and improve the monitoring of nursing homes with serious care problems. – – – – – Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the subcommittee may have. For further information about this statement, please contact Kathleen M. King at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Sheila Avruch, Assistant Director; Kelly Demots; and Roseanne Price were key contributors to this statement. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Medicare Home Oxygen: Refining Payment Methodology Has Potential to Lower Program and Beneficiary Spending. GAO-11-56. Washington, D.C.: January 21, 2011. Medicare Recovery Audit Contracting: Weaknesses Remain in Addressing Vulnerabilities to Improper Payments, Although Improvements Made to Contractor Oversight. GAO-10-143. Washington, D.C.: March 31, 2010. Medicare Contracting Reform: Agency Has Made Progress with Implementation, but Contractors Have Not Met All Performance Standards. GAO-10-71. Washington, D.C.: March 25, 2010. Nursing Homes: Addressing the Factors Underlying Understatement of Serious Care Problems Requires Sustained CMS and State Commitment. GAO-10-70. Washington, D.C.: November 24, 2009. Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program. GAO-10-27. Washington, D.C.: November 6, 2009. Centers for Medicare and Medicaid Services: Deficiencies in Contract Management Internal Control Are Pervasive. GAO-10-60. Washington, D.C.: October 23, 2009. Medicare Physician Payments: Fees Could Better Reflect Efficiencies Achieved When Services Are Provided Together. GAO-09-647. Washington, D.C.: July 31, 2009. Medicare: Improvements Needed to Address Improper Payments in Home Health. GAO-09-185. Washington, D.C.: February 27, 2009. Medicare Advantage: Characteristics, Financial Risks, and Disenrollment Rates of Beneficiaries in Private Fee-for-Service Plans. GAO-09-25. Washington, D.C.: December 15, 2008. Medicare Part B Imaging Services: Rapid Spending Growth and Shift to Physician Offices Indicate Need for CMS to Consider Additional Management Practices. GAO-08-452. Washington, D.C.: June 13, 2008. Medicare: Focus on Physician Practice Patterns Can Lead to Greater Program Efficiency. GAO-07-307. Washington, D.C.: April 30, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In the February 2011 High-Risk Series update, GAO continued designation of Medicare as a high-risk program because its complexity and susceptibility to improper payments, combined with its size, have led to serious management challenges. In 2010, Medicare covered 47 million people and had estimated outlays of $509 billion. The Centers for Medicare & Medicaid Services (CMS) has estimated fiscal year 2010 improper payments for Medicare fee-for-service and Medicare Advantage of almost $48 billion. This statement focuses on the nature of the risk in the program, progress made, and specific actions needed. It is based on GAO work developed by using a variety of methodologies--including analyses of Medicare claims, review of policies, interviews, and site visits--and information from CMS on the status of actions to address GAO recommendations. As GAO reported in its 2011 High-Risk Series update, Medicare remains on a path that is fiscally unsustainable over the long term. This fiscal pressure heightens CMS's challenges to reform and refine Medicare's payment methods to achieve efficiency and savings, and to improve its management, program integrity, and oversight of patient care and safety. CMS has made some progress in these areas, but many avenues for improvement remain. Reforming and refining payments. Since January 2009, CMS has implemented payment reforms for Medicare Advantage and inpatient hospital and other services, and has taken other steps to improve efficiency in payments. The agency has also begun to provide feedback to physicians on their resource use, but the feedback effort could be enhanced. CMS has taken steps to ensure that some physician fees recognize efficiencies when certain services are furnished together, but the agency has not targeted the services with the greatest potential for savings. Other areas that could benefit from payment method refinements include oxygen and imaging services. Improving program management. CMS's implementation of competitive bidding for medical equipment and supplies and its transfer of fee-for-service claims workload to new Medicare Administrative Contractors have progressed, with some delays. Of greater concern is that GAO found pervasive internal control deficiencies in CMS's management of contracts that increased the risk of improper payments. While the agency has taken actions to address some GAO recommendations for improving internal controls, it has not completely addressed recommendations related to clarifying the roles and responsibilities for implementing certain contractor oversight responsibilities, clearing a backlog of contacts that are overdue for closeout, and finishing its investigation of over $70 million in payments GAO questioned in 2007. Enhancing program integrity. CMS has implemented a national Recovery Audit Contractors (RAC) program to analyze paid claims and identify improper overpayments for recoupment, set performance measures to reduce improper payments, issued regulations to tighten provider enrollment, and created its Center for Program Integrity. However, the agency has not developed an adequate process to address vulnerabilities to improper payments identified by RACs, nor has it addressed three other GAO recommendations designed to reduce improper payments, including one to conduct postpayment reviews of claims submitted by home health agencies with high rates of improper billing. Overseeing patient care and safety. The agency's oversight of the quality of nursing home care has increased significantly in recent years, but weaknesses in the survey methodology and guidance for surveillance could understate care quality problems. In addition, CMS's current approach for funding state surveys of facilities participating in Medicare is ineffective. However, CMS has implemented, or is taking steps to implement, many recommendations GAO has made to improve nursing home oversight. CMS needs a plan with clear measures and benchmarks for reducing Medicare's risk for improper payments, inefficient payment methods, and issues in program management and patient care and safety. Further, CMS's effective implementation of recent laws will be critical to helping reduce improper payments. CMS also needs to take action to address GAO recommendations, such as to develop an adequate corrective action process, improve controls over contracts, and refine or better manage payment for certain services.
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While there are no federal requirements or standards specific to the operation of federal ombudsman offices, several professional organizations have published relevant standards of practice for ombudsmen, such as those published by the American Bar Association (ABA), The Ombudsman Association, and the U.S. Ombudsman Association. For example, the ABA’s standards define the core characteristics as follows: Independence—An ombudsman must be and appear to be free from interference in the legitimate performance of duties and independent from control, limitation, or penalty by an officer of the appointing entity or a person who may be the subject of a complaint or inquiry. Impartiality—An ombudsman must conduct inquiries and investigations in an impartial manner, free from initial bias and conflicts of interest. Confidentiality—An ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. Records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman’s office. In addition to the core principles, some associations also stress the need for accountability and a credible review process. Accountability is generally defined in terms of the publication of periodic reports that summarize the ombudsman’s findings and activities. Having a credible review process generally entails having the authority and the means, such as access to agency officials and records, to conduct an effective investigation. The ABA recommends that an ombudsman issue and publish periodic reports summarizing the findings and activities of the office to ensure its accountability to the public. Our July 2001 report made a number of recommendations to strengthen the independence, impartiality, and accountability of the national hazardous waste ombudsman and to address impairments to the independence of the regional ombudsmen. Specifically, we recommended that EPA (1) modify its organizational structure so that the ombudsman is located outside of the Office of Solid Waste and Emergency Response and (2) provide the ombudsman with a separate budget and, subject to applicable civil service requirements, the authority to hire, fire, and supervise his own staff. To ensure the adequacy of the ombudsman’s resources and provide greater accountability, we recommended that EPA require the ombudsman to (1) develop written criteria for selecting and prioritizing cases for investigation; (2) maintain records on his investigations and other activities sufficient to serve as a basis for a reasonable estimate of resource needs; (3) establish a consistent policy for preparing written reports on investigations, consulting with agency officials and other affected parties to obtain their comments before findings are made public, and including written agency comments when reports are published; and (4) file an annual report summarizing his activities and make it available to the public. With regard to the regional ombudsmen, we recommended that EPA (1) assess the demand for ombudsman services nationwide to determine where these resources are needed and, (2) in those locations where regional ombudsmen are warranted, ensure that their operations are consistent with the relevant professional standards for independence. In general, EPA is implementing its reorganization of the ombudsman function by adapting the OIG’s organizational framework to include the national ombudsman and applying the OIG’s existing policies and procedures to the ombudsman’s operations. EPA is still considering how the national ombudsman will interact with the ombudsmen located in the agency’s 10 regional offices. While EPA’s reorganization is still in its early stages, discussions with OIG officials, their recent testimony, and other documents provided the following insights on key aspects of the ombudsman function: Organizational location. Within the OIG, the national ombudsman will report to a newly created Assistant Inspector General for Congressional and Public Liaison. In addition to the ombudsman function, the new Assistant Inspector General has responsibility for the OIG hotline and congressional and media relations. According to EPA, the national ombudsman was moved from the Office of Solid Waste and Emergency Response to the OIG to strengthen the ombudsman’s independence. EPA officials believe that certain characteristics of the OIG—independence, credibility, experience, and freedom from political influence—are also important elements of an effective ombudsman function. While EPA officials acknowledge that the ombudsman is not an independent entity within the OIG, they maintain that the position is independent by virtue of the OIG’s independence. EPA did not include the regional ombudsmen in the transfer of the ombudsman function to the OIG, but retained them in the positions they were in prior to the reorganization. Scope of responsibilities. Prior to the reorganization, the national ombudsman’s jurisdiction was limited to the hazardous waste programs managed by EPA’s Office of Solid Waste and Emergency Response. When the ombudsman was relocated to the OIG, EPA decided to expand the scope of the ombudsman’s responsibilities across the spectrum of EPA- administered programs, including those related to air pollution, water pollution, safe drinking water, and others. EPA and the OIG have not explicitly clarified the programmatic jurisdiction of regional ombudsmen, but their position is referred to as “regional Superfund ombudsman” and most of them are located within units responsible for Superfund and other waste management programs. Authority over budget resources. According to OIG officials, the national ombudsman will not have a separate budget allocation. Rather, the Office of Congressional and Public Liaison will have a specific allocation within the OIG budget, consistent with budget operations for similar OIG offices. The ombudsman’s resource needs will be determined in conjunction with the needs of the new Office of Congressional and Public Liaison—and the OIG as a whole—in the context of the priorities identified in the OIG’s annual work planning process. EPA officials noted that in a broader sense, relocating the ombudsman to the OIG increases the function’s financial independence; in effect, the ombudsman’s budget is outside EPA’s control because the OIG’s budget appropriation is separate from EPA’s. Authority over staff resources. Within the OIG, each Assistant Inspector General is responsible for assigning staff resources, including hiring. According to OIG officials, decisions on staff resources are largely based on the advice and recommendations of senior staff or project leads, such as the national ombudsman. Initially, the OIG assigned eight full-time staff to inventory and organize the case files transferred from the former ombudsman’s office—more than double the staff that had been assigned to the ombudsman function when it was located within the Office of Solid Waste and Emergency Response. In part, this exercise will help determine the ombudsman’s caseload and an appropriate allocation of resources. OIG officials noted that the ombudsman now has access to other OIG resources as needed, including scientists, auditors, attorneys, engineers, and investigators as well as staff with expertise in specific subject matters, such as hazardous waste and water pollution. At the time of our review, OIG officials were still finalizing operating policies and procedures for the ombudsman function in a number of areas, including the assignment of other OIG resources to ombudsman cases. However, in testimony before the Senate Committee on Environment and Public Works, the Inspector General stated that the OIG is a matrix organization in which staff and other resources are assigned to projects on a priority basis, drawing from the pool of OIG resources. In addition, according to draft operating procedures for the ombudsman, staff will be temporarily assigned from OIG Resource Centers (field offices) to perform detailed field work on ombudsman assignments under the technical direction of the ombudsman or a designee. Case selection and prioritization. In general, OIG officials told us that the Inspector General has the overall responsibility for the work performed by the OIG, and no single staff member—including the national ombudsman—has the authority to select and prioritize his or her own caseload independent of all other needs. Prior to the reorganization, the ombudsman had authority to determine which cases warrant further investigation. According to the OIG’s draft operating procedures for the ombudsman, all complaints, allegations, concerns, and inquiries submitted to the ombudsman will be logged into a tracking system, subject to initial screening, and, ultimately, assessed against the OIG’s priorities, as established in its annual work planning process. Informational inquiries will be referred to the appropriate EPA office or to other federal or state agencies if the inquiries are not related to EPA programs or operations. Decisions on which matters warrant a more detailed review will be made by the Assistant Inspector General for Congressional and Public Liaison in consultation with the national ombudsman and other OIG staff. Complaints, allegations, and concerns deemed to warrant further investigation will be assessed to determine if they can be incorporated into ongoing or planned OIG assignments. Otherwise, the cases will be proposed as new work, evaluated, and prioritized for staffing according to the OIG’s work planning evaluation criteria to ensure that staff are assigned to the highest priority work. The criteria include potential environmental risk; fraud, waste, or abuse risk; the potential for increasing EPA’s economy, efficiency, and effectiveness; and the extent of interest by external stakeholders, among other things. Recordkeeping and accountability. In testimony before the Senate Committee on Environment and Public Works, the Inspector General agreed that public reporting on the ombudsman’s caseload, activities, and accomplishments is a vital and important responsibility. She also endorsed public accountability as a means of strengthening the credibility of a reviewer’s findings and stated that the OIG would publish, at least annually, a report summarizing the ombudsman’s work, including a status report on cases opened and recommendations or findings made to the agency. The OIG’s draft operating procedures for the ombudsman indicate that they incorporate existing OIG operating policy and procedures, including those for tracking, documenting, and reporting the results of investigations. For example, the current tracking system will be used to separately track the status of ombudsman cases and provide annual or semiannual activity reports on the ombudsman’s activities. With regard to reporting on individual cases, OIG officials indicated that rather than issue reports to complainants, the national ombudsman’s reports will be addressed to the EPA Administrator, consistent with the reporting procedures for other OIG offices. Status of the regional ombudsman. EPA has also not yet fully defined the role of its regional ombudsmen or the nature of their relationship with the national ombudsman in the OIG. According to officials from the Office of Solid Waste and Emergency Response and the OIG and draft operating procedures for the ombudsman, the investigative aspects of the ombudsman function will be assigned to the OIG and the regional ombudsmen will respond to inquiries and have a role in informally resolving issues between the agency and the public before they escalate into complaints about how EPA operates. For the time being, EPA officials expect the regional ombudsmen to retain their line management positions. EPA officials told us that the relationship between the national ombudsman and regional ombudsmen is a “work in progress” and that EPA and the OIG will be developing procedures for when and how interactions will occur. EPA’s reorganization of the ombudsman function does not fully address the issues we raised in our July 2001 report and, as noted in our subsequent testimonies, raises some new concerns as well. First, several aspects of EPA’s reorganized ombudsman function are not consistent with existing professional standards for ombudsmen. For example, among the key indicators of independence identified in the ABA standards are a budget funded at a level sufficient to carry out the ombudsman’s responsibilities; the ability to spend funds independent of any approving authority; and the power to appoint, supervise, and remove staff. However, under EPA’s reorganization, the national ombudsman will not be able to exercise independent control over budget and staff resources, even within the general constraints that are faced by federal agencies. While the national ombudsman will be consulted about the hiring, assignment, and supervision of staff, overall authority for staff resources and the budget allocation rests with the Assistant Inspector General for Congressional and Public Liaison, to whom the ombudsman reports. OIG officials pointed out that the concern our July 2001 report raised about control over budget and staff resources was closely linked to the ombudsman’s placement within the Office of Solid Waste and Emergency Response. The officials believe that once the national ombudsman function was relocated to the OIG, the ombudsman’s inability to control resources became much less significant as an obstacle to operational independence. They maintain that although the ombudsman is not an independent entity within the OIG, the position is independent by virtue of the OIG’s independence. Nonetheless, we note that the national ombudsman will also lack authority to independently select and prioritize cases that warrant investigation. If both the ombudsman’s budget and workload are outside his or her control, then the ombudsman will be unable to ensure that the resources for implementing the function are adequate. As we noted in our July 2001 report, the ombudsmen in the other federal agencies we looked at—including the Agency for Toxic Substances and Disease Registry, the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service—report to the highest levels of the agency. In addition, although ombudsmen at other federal agencies must live within a budget and are subject to the same spending constraints as other offices within their agencies, they can set their own priorities and decide how their funds will be spent. Depending on how EPA ultimately defines the role of its regional ombudsmen, concerns about their independence could remain. In our July 2001 report, we concluded that the other duties assigned to the regional ombudsmen—primarily line management positions within the Superfund program—hamper their independence. Among other things, we cited guidance from The Ombudsman Association, which states that an ombudsman should serve “no additional role within an organization” because holding another position would compromise the ombudsman’s neutrality. Although it appears that EPA’s regional ombudsmen will not participate in investigations, perceptions about their lack of independence could affect their ability to play a role in informally mediating disagreements between the agency and the public. When we looked at how other federal agencies dealt with regional ombudsmen as part of our July 2001 report, we found that the ombudsmen in two of the other four federal agencies we examined, the Federal Deposit Insurance Corporation and the Internal Revenue Service, had staff located in regional offices. In both instances, the regional staffs devote 100 percent of their time to the ombudsman function; they are considered part of the national ombudsman’s office for budget purposes and report directly to the national ombudsman. From a broader perspective, EPA’s reorganization of the ombudsman function also raises issues about consistency with the way the role is typically defined within the ombudsman community. Specifically, the role of an ombudsman typically includes program operating responsibilities, such as helping to informally resolve program-related issues and mediating disagreements between the agency and the public. However, EPA has chosen to omit such responsibilities from the national ombudsman’s role within the OIG. Including them would have conflicted with the Inspector General Act, as amended, which prohibits an agency from transferring any function, power, or duty involving program responsibilities to its OIG.According to OIG officials, the national ombudsman’s role will be limited to reviewing complaints about EPA’s programs and operations; the ombudsman will not be disseminating basic information about the agency’s programs and operations or become an advocate for individuals or groups. OIG officials acknowledge that the reorganized ombudsman function differs from the accepted definition in some respects, but say that they do not intend to have a “traditional” ombudsman function. Under similar circumstances, having an ombudsman function that is not consistent with the way the position is typically defined has raised concerns within ombudsman community. In an April 2001 report on the role of ombudsmen in dispute resolution, we noted that some federal experts in the field were concerned that among the growing number of federal “ombuds” or “ombuds offices,” there are some individuals or activities that do not generally conform to the standards of practice for ombudsmen. A related issue is that ombudsmen generally serve as a key focal point for interaction between the government, or a particular government agency, and the general public. By placing the national ombudsman function within its OIG, EPA appears to be altering the relationship between the function and the persons who make inquiries or complaints. Ombudsmen typically see their role as being responsive to the public without being an advocate. However, EPA’s reorganization signals a subtle change in emphasis: OIG officials see the ombudsman function as a source of information regarding the types of issues that the OIG should be investigating. In addition, where possible, the OIG plans to incorporate complaints made to the ombudsman into ongoing or planned OIG investigations. Finally, as noted earlier, OIG officials expect that the national ombudsman’s reports will be addressed to the EPA Administrator rather than to complainants, consistent with the reporting procedures for the OIG. However, the officials told us that their procedures for the national ombudsman function, which are still being developed, could provide for sending a copy of the final report or a summary of the investigation to the original complainant along with a separate cover letter when the report is issued to the Administrator. Finally, EPA’s reorganization of the ombudsman function raises issues about consistency with the role of the OIG. In reorganizing the ombudsman function, EPA had to consider statutory restrictions on the Inspector General’s activities. However, although it appears that EPA has successfully defined the ombudsman’s role in a way that avoids conflict with the Inspector General Act, the reorganization raises concerns about the effect on the OIG. With the ombudsman function a part of the OIG, the Inspector General can no longer independently audit and investigate that function, as is the case at other federal agencies where the ombudsman function and the OIG are separate entities. As we noted in a June 2001 report on certain activities of the OIG at the Department of Housing and Urban Development, under applicable government auditing standards the OIG cannot independently and impartially audit and investigate activities in which it is directly involved. Also of potential concern are situations in which the national ombudsman receives an inquiry or complaint about a matter that has already been investigated by the OIG. For example, OIG reports are typically transmitted to the EPA Administrator after a review by the Inspector General. A process that requires the Inspector General to review an ombudsman-prepared report that is critical of, or could be construed as reflecting negatively on, previous OIG work could pose a conflict for the Inspector General. EPA’s reorganization of its ombudsman function has addressed some of the recommendations contained in our July 2001 report. For example, the agency modified its organizational structure so that the national ombudsman is located outside of the Office of Solid Waste and Emergency Response. In addition, as we recommended, EPA’s ombudsman function now has written criteria for selecting and prioritizing cases for investigation and, by virtue of its relocation to the OIG, will be adopting many of that office’s existing procedures for tracking, documenting, and reporting the results of investigations and summarizing annual activities in a public report. Notwithstanding the positive aspects of EPA’s reorganization, other concerns remain. While the move to the OIG provides a measure of budgetary independence, the national ombudsman will continue to lack independent control over budget and staff resources. In addition, EPA has not yet resolved concerns about the independence of its regional ombudsmen. Moreover, in relocating the national ombudsman to the OIG, EPA has created a position that will not function as a “true” ombudsman in interactions with the public and may adversely affect the independence of the OIG. To ensure that EPA’s national ombudsman (1) is consistent with what the ombudsman community and the public have come to expect from that position and (2) does not adversely affect the independence of the agency’s OIG, we recommend that the Administrator, EPA, reconsider placement of the national ombudsman in the OIG. EPA and the OIG commented on a draft of this report. Specifically, we received comments from the Assistant Administrator of the Office of Solid Waste and Emergency Response and the Inspector General. These comments are contained in appendix I and appendix II, respectively. In addition, we incorporated technical comments from the OIG as appropriate throughout the report. EPA commented that its reorganization of the ombudsman function achieves the “spirit” of the ABA standards for ombudsmen and cited the OIG’s independence, objectivity, and quality of work as reasons why the relocation of the national ombudsman to the OIG was a sound and correct decision. More specifically, EPA said that locating the ombudsman in the OIG ensures that the function operates within ABA’s standards of practice for ombudsmen: independence, impartiality, and confidentiality. Similarly, the comments from the OIG raised a number of points relating to the appropriateness of housing the ombudsman in the OIG. Among other things, the OIG said that it intends to perform the ombudsman function in the same manner in which the office performs its audit, program evaluation, and investigative functions. The OIG also maintained that its independence—in terms of controlling budget and staff resources, selecting and prioritizing cases, and reporting—are characteristics that also surround the ombudsman function by virtue of the function’s location within the OIG. In response to our concerns about the reorganization’s impact on the role of the OIG, the office commented that its framework of internal and external checks and balances is adequate to ensure that OIG officials can objectively monitor the quality of internal work processes, including those of the ombudsman, and address problems if necessary. These checks and balances would also ensure objectivity in the OIG’s review of any ombudsman reports critical of OIG work, according to the Inspector General. We disagree with the premise underlying the comments by EPA and the OIG—that there is little or no distinction between the functions performed by ombudsmen and the OIG. We believe that these functions are fundamentally different and, as such, should not be housed together. The OIG intends to perform its ombudsman function in the same manner in which the office performs its audit, program evaluation, and investigative functions, but doing so means that EPA will have an ombudsman in name only. ABA’s standards clearly define the ombudsman’s role as including certain responsibilities that have been omitted from the OIG’s conception of the ombudsman function. Specifically, according to ABA, ombudsmen “work for the resolution of particular issues” and, among other things, are engaged in “developing, evaluating, and discussing options available to affected individuals” and “facilitating, negotiating, and mediating.” If EPA and the OIG are intent on maintaining their reorganization, we concur with ABA’s position that “those who are now called ombudsmen but do not meet these Standards may provide important or valuable services. But, it would be far better if entities that established these positions were to call them a term more fitting of the function they provide and to reserve the term ‘ombudsman’ for those who do in fact meet certain basic authorities and essential characteristics.” EPA also commented that based on its preliminary research, some of the ombudsmen in other federal agencies we contacted may not have as much independence as our report suggests. Specifically, EPA stated that the ombudsmen at the Food and Drug Administration and the Internal Revenue Service (1) do not have independence from agency decision- making processes and (2) do not have independent budgets because their budgets are allocated according to decisions by their respective commissioners and subject to competing demands from other priorities. We disagree. Both the Food and Drug Administration and the Internal Revenue Service, whose ombudsmen report to their respective commissioners, have adopted measures to help ensure that the ombudsmen are isolated from agency decision-making processes likely to be the subject of investigations. Consistent with the ABA standards, these ombudsmen have both “sufficient stature in the organization to be taken seriously by senior officials” and “placement in an organization at the highest possible level and at least above the heads of units likely to generate the most complaints.” Regarding budgetary independence, our report acknowledges that ombudsmen at other federal agencies must live within a budget and are subject to the same spending constraints as other offices within their agencies. In contrast to EPA’s national ombudsman, however, the other federal ombudsmen have a specifically allocated budget, can set their own priorities, and can decide how their funds will be spent. Finally, EPA commented that its Community Involvement and Outreach Center provides “an avenue for active community involvement and participation in Superfund issues” and is specifically charged with responding to community concerns. However, we believe that the center serves a different purpose than an ombudsman. While the center may help alleviate community concerns, its focus is limited to Superfund issues and providing greater community access and participation, not fulfilling an ombudsman role, particularly with respect to the independent investigation and resolution of individual complaints. To determine how EPA is implementing its reorganization of the ombudsman function, we met with key officials from EPA’s Office of Inspector General and Office of Solid Waste and Emergency Response. We also reviewed relevant testimony by EPA and OIG officials and other pertinent documents, such as the OIG’s new case selection criteria for the ombudsman and EPA’s response to congressional inquiries about the reorganization. To identify issues raised by the reorganization, we followed up on preliminary observations provided in our testimony of June 2002 and July 2002. As part of this effort, we used information developed for our July 2001 report, including information on relevant professional standards for ombudsmen, such as those published by ABA, The Ombudsman Association, and the U.S. Ombudsman Association. We also reviewed legislation applicable to Inspector General offices and other relevant GAO reports. We conducted our review from June 2002 through September 2002 in accordance with generally accepted government auditing standards. 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 Administrator, EPA, 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 questions about this report, please call me at (202) 512-3841. Key contributors to this assignment were Ellen Crocker, Les Mahagan, Richard Johnson, and Cynthia Norris. The following are GAO’s comment on the Office of Inspector General’s letter dated October 11, 2002.
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Federal ombudsmen help their agencies be more responsive to the public through the impartial investigation of citizens' complaints. Professional standards for ombudsmen incorporate certain core principles, such as independence and impartiality. In July 2001, GAO reported that key aspects of EPA's hazardous waste ombudsman were not consistent with professional standards, particularly with regard to independence. (See GAO-01-813 .) Partly in response to GAO's recommendations, EPA reorganized its ombudsman function and removed the national ombudsman from the Office of Solid Waste and Emergency Response. GAO made preliminary observations on these changes in testimony in June and July 2002. (See GAO-02-859T and GAO-02-947T). This report provides information on (1) the current status of EPA's reorganization of the ombudsman function and (2) issues identified in our prior report and testimonies that have not yet been addressed. EPA's national ombudsman now reports to a newly created Assistant Inspector General for Congressional and Public Liaison within the Office of Inspector General (OIG), unlike other federal agencies whose ombudsmen report to the highest levels of the agency. Control over the budget and staff resources for EPA's ombudsman is held by the Assistant Inspector General and not the ombudsman. Similarly, overall responsibility for the work performed by the OIG rests with the Inspector General; the ombudsman no longer has the authority to decide which complaints warrant further review, as was the case prior to the reorganization. Regarding the recordkeeping and accountability aspects of the ombudsman function, OIG officials say that they will likely adopt many of the office's existing procedures for tracking, documenting, and reporting the results of investigations. While EPA's reorganization addresses some of the concerns raised in GAO's July 2001 report and subsequent testimonies, other issues remain. For example, EPA removed the national ombudsman from the Office of Solid Waste and Emergency Response, whose decisions the ombudsman was responsible for investigating. However, the ombudsman still will not be able to exercise independent control over budget and staff resources as called for by relevant professional standards. Relocating the ombudsman to the OIG also raises some new issues regarding (1) the extent to which the position will function as a "true" ombudsman in interactions with the public and (2) the potential impact of the reorganization on the OIG's role. Although the role of an ombudsman typically includes program operating responsibilities, such as helping to informally resolve disagreements between the agency and the public, for legal reasons such responsibilities have been omitted from the ombudsman's role within the OIG. In addition, with the ombudsman function a part of the OIG, the Inspector General can no longer independently audit and investigate that function, as is the case at other federal agencies where the ombudsman and the OIG are separate entities.
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Since the publication of a 1957 report by the National Academy of Sciences, a geologic repository has been considered the safest and most secure method of isolating spent nuclear fuel and other types of nuclear waste from humans and the environment. During the 1950s and 1960s, managing spent nuclear fuel received relatively little attention from policymakers. The early regulators and developers of nuclear power viewed spent fuel disposal primarily as a technical problem that could be solved when necessary by application of existing technology. Attempts were made to reprocess the spent nuclear fuel, but they were not successful because of economic issues and concerns that reprocessed nuclear materials raised proliferation risks. The Atomic Energy Commission, a predecessor to DOE, attempted to develop high-level waste repositories in Kansas and New Mexico in the late 1960s and early 1970s, but neither succeeded because of local community and state opposition. NWPA established the disposal of spent nuclear fuel and high-level nuclear waste as a federal responsibility. Briefly, NWPA provided for the development of two geologic repositories and directed the Secretary of Energy to recommend three candidate sites and conduct studies to characterize each site. This same process was to be used for a second set of sites for the second repository. Table 1 summarizes some of the key decisions and events just prior to and as a result of NWPA. In the Secretary of Energy’s February 2002 recommendation to the President that Yucca Mountain be developed as the site for an underground repository for spent fuel and other radioactive wastes, the Secretary described the three criteria to make the determination that Yucca Mountain was the appropriate site. Specifically: Is Yucca Mountain a scientifically and technically suitable site for a repository? Are there compelling national interests that favor proceeding with the decision to site a repository there? Are there countervailing considerations that would outweigh those interests? The Secretary also described the steps DOE had taken to inform residents and others. Specifically, DOE held meetings in the vicinity of the prospective site to inform the residents of the site’s consideration as a repository and receive their comments, as directed by NWPA. The Secretary added that DOE went beyond NWPA’s requirements for providing notice and information prior to the selection of Yucca Mountain. He concluded that the Yucca Mountain site was qualified as the site for the repository and accordingly recommended the site to the President. Since the Secretary’s recommendation was made, the nation’s inventory of commercial spent nuclear fuel has continued to grow. The nation currently has about 70,000 metric tons of commercial spent nuclear fuel stored at 75 sites in 33 states (see fig. 1). This inventory is expected to more than double by 2055—assuming that the nation’s current reactors continue to produce spent nuclear fuel at the same rate and that no new reactors are brought online, and that some decline in the generation of spent fuel takes place as reactors are retired. Although some elements of spent nuclear fuel cool and decay quickly, becoming less dangerous, others remain dangerous to human health and the environment for tens of thousands of years. Most commercial spent nuclear fuel is stored at operating reactor sites; it is immersed in pools of water designed to cool and isolate it from the environment. Without a nuclear waste repository to move the spent nuclear fuel to, the racks in the pools holding spent fuel have been rearranged to allow for more dense storage of the spent fuel. Even with this rearrangement, spent nuclear fuel pools are reaching their capacities. As reactor operators have run out of space in their spent nuclear fuel pools, they have turned increasingly to dry cask storage systems that generally consist of stainless steel canisters placed inside larger stainless steel or concrete casks. A dry storage facility typically consists of security and safety mechanisms, such as a defensive perimeter with intrusion detection devices and radiation monitors surrounding a concrete pad with the dry storage casks emplaced on it. Regulatory requirements for radiation exposure for this type of facility are significantly different from those of a repository. For example, spent fuel need only be stored safely for the life of the storage facility, currently 40 years, which is in contrast to the 1 million year period for which safe storage must be demonstrated under the Environmental Protection Agency regulation promulgated for the Yucca Mountain repository. In August 2012, we reported that reactors at nine sites have been retired and that seven of these sites have completely removed spent fuel from their pools, as well as removing all infrastructure except that needed to safeguard the spent fuel. Since then, an eighth site has also emptied its pool, and is in the process of removing associated infrastructure. These sites serve no other purpose than to continue storing this spent fuel. As additional reactors retire, reactor operators will likely move all their spent nuclear fuel to dry storage and remove all other structures. We reported in November 2009 that experts we spoke with stated that dry cask storage systems are expected to be able to safely store spent nuclear fuel for at least 100 years. The experts said that, if these systems degrade over time, the spent nuclear fuel may have to be repackaged, which could require construction of new spent nuclear fuel pools or other structures to safely transfer the spent nuclear fuel to new storage systems. In addition, the experts said that spent fuel in centralized interim storage could present future security risks because, as spent fuel cools, it loses some of its self-protective qualities, potentially making it a more attractive target for sabotage or theft. NWPA also authorized DOE to contract with commercial nuclear reactor operators to take custody of their spent nuclear fuel for disposal at the repository beginning in January 1998. Ultimately, DOE was unable to meet this 1998 date. As we reported in August 2012, because DOE did not take custody of the spent fuel starting in 1998, as required under NWPA, DOE reported that, as of September 2011, 76 lawsuits had been filed against it by utilities to recover claimed damages resulting from the delay. In August 2012, we reported that these lawsuits have resulted in a cost to taxpayers of about $1.6 billion from the U.S. Treasury’s judgment fund. We also reported that DOE estimated that future liabilities would In November 2012, total about an additional $21 billion through 2020.DOE reported that the cost to taxpayers is now $2.6 billion and that future liabilities are now approximately $19.7 billion for a total of about $22.3 billion. DOE has also estimated that future liabilities may cost about $500 million each year after 2020. In November 2009, we reported on the attributes and challenges of a Yucca Mountain repository. We reported that DOE had spent billions of dollars for design, engineering, and testing activities for the Yucca Mountain site and had submitted a license to the Nuclear Regulatory Commission. If the repository had been built as planned, we stated that it would have provided a permanent solution for the nation’s nuclear waste, including commercial nuclear fuel, and would have minimized the uncertainty of future waste safety. Based on a review of key documents and interviews with DOE, Nuclear Regulatory Commission, and numerous other officials, we also reported in November 2009 that the construction of a repository at Yucca Mountain could have allowed the government to begin taking possession of the nuclear waste in about 10 to 30 years. DOE had reported in July 2008 that its best achievable date for opening the repository, if it had received Nuclear Regulatory Commission approval, would have been 2020. If the Yucca Mountain repository was completed and operational sooner than one or more temporary storage facilities or an alternative repository, it could have helped address the federal liabilities resulting from industry lawsuits related to continued storage of spent nuclear fuel at reactor sites. We also reported in August 2012 that states and community groups had raised concerns that the Nuclear Regulatory Commission was extending the licenses of current reactors or approving licenses for new reactors without a long-term solution for the disposition of spent nuclear fuel. If Yucca Mountain was licensed and constructed and began accepting spent nuclear fuel for disposal by 2027, which was the earliest likely opening date we estimated in our August 2012 report, some of these concerns could have been addressed. GAO-11-229. face challenges in reconstituting its work force. According to DOE, contractor, and former DOE officials we spoke with, it could take years for DOE to assemble the right mix of experts to restart work on the license application. When DOE terminated its licensing efforts, many of the federal and contractor staff working on the program retired or moved on to other jobs. Third, project funding could continue to be a challenge. As we reported, DOE’s budget for the Yucca Mountain repository program was not predictable because annual appropriations varied by as much as 20 percent from year to year. We recommended that Congress consider a more predictable funding mechanism for the project, which the Blue Ribbon Commission also recommended in its January 2012 report. We reported in November 2009 on several positive attributes of centralized interim storage—a near-term temporary storage alternative for managing the spent fuel that has accumulated and will continue to accumulate. First, centralized interim storage could allow DOE to consolidate the nation’s nuclear waste after reactors are decommissioned, thereby decreasing the complexity of securing and overseeing the waste located at reactor sites around the nation and increasing the efficiency of waste storage operations. Second, by moving spent nuclear fuel from decommissioned reactor sites to DOE’s centralized interim storage facility and taking custody of the spent fuel, DOE would begin to address the taxpayer financial liabilities stemming from industry lawsuits. Third, centralized interim storage could prevent utilities from having to build additional dry storage to store nuclear waste at operating reactor sites. Fourth, centralized interim storage could also provide the nation with some flexibility to consider alternative policies or new technologies by giving more time to consider alternatives and implement them. For example, centralized interim storage would keep spent fuel in a safe, easily accessible configuration for future recycling, if the nation decided to pursue recycling as a management option in the future. However, centralized interim storage also presents challenges. First, as we reported in November 2009 and August 2012, a key challenge confronting centralized interim storage is the uncertainty of DOE’s statutory authority to provide centralized storage. Provisions in NWPA that allow DOE to arrange for centralized storage have either expired or are unusable because they are tied to milestones in repository development that have not been met. It is not clear what other authority DOE or an independent entity might use for providing centralized interim storage of spent nuclear fuel. A second, equally important, challenge is the likelihood of opposition during site selection for a centralized interim storage facility. As we reported in November 2009, even if a community might be willing to host such a facility, finding a state that would be willing to host it could be extremely challenging, particularly since some states have voiced concerns that a centralized interim facility could become a de facto permanent disposal site. In 2011, the Western Governors Association passed a resolution stating that no centralized interim storage facility for spent nuclear fuel can be established in a western state without the expressed written consent of the governors. Third, centralized interim storage may also present transportation challenges. As we reported in August 2012, it is likely that the spent fuel would have to be transported twice—once to the centralized interim storage site and once to a permanent disposal site. The total distance over which the spent fuel would have to be transported would likely be greater than with other alternatives. The Nuclear Energy Institute has reported that of all the spent fuel currently in dry storage, only about 30 percent is directly transportable because of its current heat load, particularly since the nuclear industry packaged some spent nuclear fuel in dry storage containers to maximize storage capacity. We also reported in August 2012 that officials from a state regional organization that we spoke with said that transportation planning could be a complex endeavor, potentially taking 10 years to reach agreement on transportation routes and safety and security procedures. Fourth, although DOE had previously estimated that it could site, license, construct, and begin operations of a centralized interim storage facility within 6 years, it could take considerably longer depending on how long it takes to find a willing state and community, as well as license and construct the facility. Finally, as we reported in November 2009, developing centralized interim storage would not ultimately preclude the need for final disposal of the spent nuclear fuel. As we reported in November 2009, siting, licensing, and developing a permanent repository at a location other than Yucca Mountain could provide the opportunity to find a location that might achieve broader acceptance than the Yucca Mountain repository program. If a more widely accepted approach or site is identified, it carries the potential for avoiding costly delays experienced by the Yucca Mountain repository program. In addition, a new approach that involves a new entity for spent fuel management, as we concluded in our April 2011 report and the Blue Ribbon Commission recommended in January 2012, could add to transparency and consensus building. However, there are also key challenges to developing an alternative repository. First, as we reported in April 2011, developing a repository other than Yucca Mountain will restart the likely time-consuming and costly process of siting, licensing, and developing a repository. We reported that DOE had spent nearly $15 billion on the Yucca Mountain It is not yet clear how much it will ultimately cost to begin the project.process again and develop a repository at another location. Moreover, it is uncertain what legislative changes might be needed, if any, in part because the Nuclear Waste Policy Act, as amended, directs DOE to terminate all site specific activities at candidate sites other than Yucca Mountain. Second, it is unclear whether the Nuclear Waste Fund will be sufficient to fund a repository at another site. The fund was established under NWPA to pay industry’s share of the cost for the Yucca Mountain repository and was funded by a fee of one-tenth of a cent per kilowatt- hour of nuclear-generated electricity. The fund paid about 65 percent, or about $9.5 billion, of the expenditure for Yucca Mountain. According to DOE’s fiscal year 2012 financial report, the Nuclear Waste Fund currently has about $29 billion and grows by over $1 billion each year from accumulated fees and interest. However, utilities only pay into the fund for as long as their reactors are operating, and it is not clear how much longer reactor operators will be paying into the fund. For example, two utilities have announced plans—one in 2010 and the other in 2013—to shut down two reactor sites prior to their license expiration. As reactors are retired, they will need to be replaced by new reactors paying into the fund, or according to DOE officials, the fund might be drawn down faster than it can be replenished when developing a new repository. When more comprehensive information becomes available both about the process that DOE, or another agency, will be using to select a site and possible locations for a permanent repository, additional positive attributes as well as challenges may also come to light. Chairman Frelinghuysen, Ranking Member Kaptur, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff 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. Janet Frisch, Assistant Director, and Kevin Bray, Robert Sánchez, and Kiki Theodoropoulos made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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.
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Spent nuclear fuel, the used fuel removed from commercial nuclear power reactors, is one of the most hazardous substances created by humans. Commercial reactors have generated nearly 70,000 metric tons of spent fuel, which is currently stored at 75 reactor sites in 33 states, and this inventory is expected to more than double by 2055. The Nuclear Waste Policy Act of 1982, as amended, directs DOE to investigate the Yucca Mountain site in Nevada--100 miles northwest of Las Vegas--to determine if the site is suitable for a permanent repository for this and other nuclear waste. DOE submitted a license application for the Yucca Mountain site to the Nuclear Regulatory Commission in 2008, but in 2010 DOE suspended its licensing efforts and instead established a blue ribbon commission to study other options. The commission issued a report in January 2012 recommending a new strategy for managing nuclear waste, and DOE issued a new nuclear waste disposal strategy in 2013. This testimony is primarily based on prior work GAO issued from November 2009 to August 2012 and updated with information from DOE. It discusses the key attributes and challenges of options that have been considered for storage or disposal of spent nuclear fuel. GAO is making no new recommendations at this time. In November 2009, GAO reported on the attributes and challenges of a Yucca Mountain repository. A key attribute identified was that the Department of Energy (DOE) had spent significant resources to carry out design, engineering, and testing activities on the Yucca Mountain site and had completed a license application and submitted it to the Nuclear Regulatory Commission, which has regulatory authority over the construction, operation, and closure of a repository. If the repository had been built as planned, GAO concluded that it would have provided a permanent solution for the nation's commercial nuclear fuel and other nuclear waste and minimized the uncertainty of future waste safety. Constructing the repository also could have helped address issues including federal liabilities resulting from industry lawsuits against DOE related to continued storage of spent nuclear fuel at reactor sites. However, not having the support of the administration and the state of Nevada proved a key challenge. As GAO reported in April 2011, DOE officials did not cite technical or safety issues with the Yucca Mountain repository project when the project's termination was announced but instead stated that other solutions could achieve broader support. Temporarily storing spent fuel in a central location offers several positive attributes, as well as challenges, as GAO reported in November 2009 and August 2012. Positive attributes include allowing DOE to consolidate the nation's nuclear waste after reactors are decommissioned. Consolidation would decrease the complexity of securing and overseeing the waste located at reactor sites around the nation and would allow DOE to begin to address the taxpayer financial liabilities stemming from industry lawsuits. Interim storage could also provide the nation with some flexibility to consider alternative policies or new technologies. However, interim storage faces several challenges. First, DOE's statutory authority to develop interim storage is uncertain. Provisions in the Nuclear Waste Policy Act of 1982, as amended, that allow DOE to arrange for centralized interim storage have either expired or are unusable because they are tied to milestones in repository development that have not been met. Second, siting an interim storage facility could prove difficult. Even if a community might be willing to host a centralized interim storage facility, finding a state that would be willing to host such a facility could be challenging, particularly since some states have voiced concerns that an interim facility could become a de facto permanent disposal site. Third, interim storage may also present transportation challenges since it is likely that the spent fuel would have to be transported twice--once to the interim storage site and once to a permanent disposal site. Finally, developing centralized interim storage would not ultimately preclude the need for a permanent repository for spent nuclear fuel. Siting, licensing, and developing a permanent repository at a location other than Yucca Mountain could provide the opportunity to find a location that might achieve broader acceptance, as GAO reported in November 2009 and August 2012, and could help avoid costly delays experienced by the Yucca Mountain repository program. However, developing an alternative repository would restart the likely costly and time-consuming process of developing a repository. It is also unclear whether the Nuclear Waste Fund--established under the Nuclear Waste Policy Act of 1982, as amended, to pay industry's share of the cost for the Yucca Mountain repository--will be sufficient to fund a repository at another site.
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The Gulf Coast hurricanes formed a catastrophe that was one of the most devastating natural disasters in U.S. history. In August 2005, Hurricane Katrina struck first on the East Coast of Florida before hitting the northern Gulf Coast region, including Louisiana and Texas, resulting in a substantial loss of life and widespread devastation. The storm also caused substantial damage in the Florida panhandle, Georgia, and Alabama. In September 2005, Hurricane Rita caused substantial devastation and deaths near the Texas and Louisiana border. In October 2005, Hurricane Wilma made landfall in Florida, and also caused fatalities and created a significant amount of damage and destruction there. The federal government provides funding and assistance to individuals and businesses after disasters, primarily through FEMA and SBA. FEMA is responsible for coordinating response and recovery efforts under presidential disaster declarations. FEMA works with other federal, state, and local agencies to assist victims after major disasters, and volunteer organizations such as the American Red Cross also participate in these efforts. Following a presidential disaster declaration, FEMA will open Disaster Recovery Centers where disaster victims can meet with representatives, obtain information about the recovery process, and register for federal disaster assistance. Victims may also register with FEMA by telephone or via FEMA’s Internet site. FEMA provides housing assistance to disaster victims through the Individuals and Households Program (IHP). Under the IHP, FEMA can make grants available to repair or replace housing damaged in a disaster that is not covered by insurance. However, the IHP is a minimal repair program that is designed to make the victim’s home habitable and functional, not to restore the home to its predisaster condition. When disaster victims register for FEMA assistance, they are asked to provide their approximate household income. If the applicant’s income exceeds certain thresholds, FEMA automatically refers them to SBA’s Disaster Loan Program. SBA’s Disaster Loan Program is the primary federal program for funding long-range recovery for private sector, nonfarm disaster victims and the only form of SBA assistance not limited to small businesses. The Small Business Act authorizes SBA to make available the following two types of disaster loans: Physical disaster loans—These loans are for permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property. They are available to homeowners, renters, businesses of all sizes, and nonprofit organizations. These loans are intended to repair or replace the disaster victims’ damaged property to its predisaster condition. Economic injury disaster loans—These loans provide small businesses with necessary working capital until normal operations resume after a disaster declaration. They cover operating expenses the business could have paid had the disaster not occurred. The act restricts economic injury disaster loans to small businesses only. A key element of SBA’s loan program is that the disaster victim must have repayment ability before a loan can be approved. If SBA determines that a victim cannot afford a loan, SBA will automatically refer the individual back to FEMA where they may be eligible for other grant assistance. FEMA may be able to provide funds for “other than housing” needs, however, this additional help is not available to businesses. FEMA’s additional help is intended to meet necessary expenses and serious needs not met by any other form of help, including insurance and SBA disaster loans. In 2004, SBA began a process to realign its Office of Disaster Assistance’s organizational structure (referred to as “workforce transformation”) that was designed to allow the agency to better provide disaster assistance, leverage technology such as DCMS, and reduce operating costs. Previously, SBA maintained four area offices nationwide that generally operated independently of one another. For example, each area office had its own customer service duties and loan processing functions, and provided administrative support within a geographic area. As a result of its transformation effort, SBA centralized its Disaster Loan Program’s customer service function in its Buffalo office and its loan processing function in its Ft. Worth office. Additionally, SBA established two field operations centers in both Sacramento and Atlanta that are responsible for all disaster field operations, public information, and congressional relations functions. The centers also provide space for SBA’s Field Inspection Team, which conducts property inspections in order to verify loan applicants’ losses. SBA collocated its administrative and personnel support center in Herndon, Va., with the DCMS operations center. Figure 1 shows SBA’s revised structure as of June 2006. Prior to Hurricane Katrina, SBA’s Office of Disaster Assistance had a staff of approximately 800 individuals, including about 350 to 400 permanent staff and about 400 temporary staff (who had generally been hired to process disaster loan applications associated with the four hurricanes that struck Florida in 2004). However, due to the volume of disaster loan applications associated with the Gulf Coast hurricanes, SBA had increased the size of its disaster loan staff to more than 4,300 employees by January 2006, primarily through hiring temporary employees. SBA largely hired these temporary employees through advertisements in newspapers and on local radio stations. Our previous reports and reports of others as well as disaster experts have stated that advance contingency planning is a crucial element in helping organizations function and respond to large-scale disasters. However, we found that prior to the Gulf Coast hurricanes, SBA had generally not engaged in such comprehensive planning efforts in either headquarters or in field offices. SBA had not (1) taken practical steps to help ensure that there would be additional trained and experienced staff available to process applications, (2) established plans to secure additional office space configured to meet the needs of the agency, and (3) established adequate telecommunications support for the customer call center in Buffalo. While SBA partnered with GSA on an ad hoc basis to help address these challenges, in some cases it was fortunate to obtain the necessary logistical capacity. In the wake of the Gulf Coast hurricanes, SBA officials said that they had initiated steps to better plan and prepare for potential disasters, including developing more advanced disaster forecasting techniques and establishing measures to help ensure the availability of additional trained and experienced staff. SBA has also taken steps to expedite the process for disbursing approved disaster loans. However, SBA’s planning approach appears to be limited in that the agency has not established a time frame for completing key aspects of its comprehensive disaster management plan, such as cross-training other agency staff to provide backup support in a disaster and has not assessed whether it could leverage outside resources—such as the results of disaster simulations or catastrophe models—to enhance its disaster planning processes. Further, SBA has not developed a strategy to help strengthen its long-term ability to obtain suitable office space in the event of a major disaster. As we have stated in a previous report and in testimony, the ability of the United States to prepare for, respond to, and recover from catastrophic disasters can be enhanced through strong advance contingency planning, both within and among organizations responsible for responding to such disasters. Our work has also identified instances where advance planning allowed federal agencies to respond effectively to the Gulf Coast hurricanes. For example, we found that the Coast Guard, Social Security Administration, and the National Finance Center were able to continue their services to Gulf Coast disaster victims with minimal interruptions because of their disaster planning initiatives. In contrast, our work identified other federal agencies, which did not engage in comprehensive planning prior to the Gulf Coast hurricanes, and thereby faced significant challenges in fulfilling their disaster response and recovery obligations. For example, as discussed previously, our July 2006 report found that SBA’s limited information technology planning prior to the Gulf Coast hurricanes negatively affected the agency’s capacity to process disaster loan applications. SBA based its information technology processing requirements primarily on the Northridge earthquake experience of 1994, which was the largest disaster that the agency had previously experienced, and did not evaluate the consequences of other potentially more severe disaster scenarios that were available from existing disaster simulations or catastrophe risk model results. For example, SBA did not take part in the Hurricane Pam disaster simulation, which FEMA organized in 2004 to help prepare for a hurricane striking New Orleans. In an earlier report, we found that a lack of advance planning at all levels of government hindered response and recovery efforts to Hurricane Andrew, which struck South Florida in 1992. In addition to findings from our previous studies, other studies have concluded that a lack of contingency planning can affect an organization’s ability to carry out its mission and meet program goals at the time of a major disaster, and that there is no substitute for thorough preparation. Thus, these reports, such as Department of Homeland Security studies, congressional and White House reports, as well as private studies all identified the necessity for conducting rigorous planning. For example, a study by the Association of Contingency Planners (ACP) emphasized the need for organizations to formally train their staff in disaster planning and engage in thorough disaster simulations, particularly worst case scenarios, to help ensure adequate preparation. In addition, the Department of Homeland Security Inspector General reported, in March 2006, that FEMA lacked final plans that specifically addressed the types of challenges the agency could be expected to face in catastrophic circumstances. The Inspector General recommended that FEMA develop a comprehensive plan to aid in responding to potential disasters. Disaster experts we interviewed agreed that sound planning can help organizations—such as federal agencies—prepare for potential disasters. The experts said that the failure to have an established plan can negatively affect an agency’s response and recovery efforts. Additionally, the experts said that the failure to establish a plan requires agencies to relearn experiences from one disaster to the next, thereby further slowing agency recovery efforts. One expert stated that, to provide for an effective agency response to a disaster, a comprehensive plan should address, to a certain extent, components of command, operations, logistics, finance, and administrative needs. For example, the expert said that the logistical component should entail a detailed staffing plan to help ensure an organization’s ability to fulfill its mission at the time of a major catastrophe. The individual noted that most organizations, including federal agencies, did not have staffing plans in place at the time of the Gulf Coast hurricanes. However, the experts cautioned that an agency’s disaster contingency plan must be a flexible blueprint that can respond to changing circumstances and disaster scenarios. In estimating the potential consequences of varying disaster scenarios, another expert advised that organizations could benefit from the further use catastrophe models, given that such technology has been available for about 20 years. As was the case with SBA’s limited planning efforts for the implementation of DCMS, the agency also did not engage in comprehensive disaster planning for other logistical areas prior to the Gulf Coast hurricanes. For example, SBA had not completed a formal, centralized staffing plan to help manage the surge in disaster loan applications that could be anticipated under various disaster scenarios. SBA headquarters officials said that they had not developed agency wide disaster planning guidance due to their view that field office staff were in a better position to plan their response in the event of a crisis. That is, the SBA headquarters staff said that agency field office staff had a vast level of knowledge and experience that allowed them to establish plans for a range of potential disaster scenarios and that, given the uncertainty of disaster scenarios, centralized advance planning would likely yield limited benefits. SBA management said they considered this decentralized approach as appropriate and viewed headquarters’ role as being more of a resource that the field offices could rely on for policy and high-level strategic guidance. However, at the time of the Gulf Coast hurricanes, SBA field offices had not completed written plans to guide their efforts in the event of a disaster. One field office official said, while SBA headquarters encouraged field offices to establish written disaster plans, field offices were not required to do so. While SBA had not engaged in comprehensive contingency planning, the agency had projected various logistical requirements during a disaster largely based on the expertise of its staff and experiences in responding to previous disasters (none of which reached the magnitude of destruction of the Gulf Coast hurricanes, as discussed earlier). SBA officials said that they did not use other information—such as the results of disaster simulations or catastrophe models—in developing their logistical projections. We recognize that even if SBA had engaged in comprehensive planning prior to the Gulf Coast hurricanes, it likely would have encountered logistical challenges (staffing, space acquisition, and technological support) in providing timely disaster assistance due to the volume of loan applications, including erroneous applications. However, information obtained during the course of our review indicates that SBA’s limited disaster planning process, including the lack of a written plan for staffing requirements associated with surges in loan applications under varying disaster scenarios, further impeded the efficiency of the agency’s response. For example, officials at SBA’s Ft. Worth disaster loan processing center said that they developed staffing requirements as Hurricane Katrina struck the Gulf Coast and in its immediate aftermath. The officials said they initially estimated that the hurricane would require enough staff to process 150,000 to 200,000 loan applications, but they doubled the staffing estimate after the levees in New Orleans failed, based on reports from the media, FEMA, and SBA loss verification teams. During the immediate aftermath of Hurricane Katrina, SBA had to move urgently to hire more than 2,000 staff by January 2006 at the Ft. Worth center, which previously had a permanent and temporary staff of about 325 on board including 40 supervisors (see fig. 2). SBA officials said that most of the individuals hired to work in the Ft. Worth center were temporary employees who received notice of the job opportunities through SBA advertisements in newspapers and other media outlets. Additionally, the SBA officials said that ensuring the appropriate training and supervision in hiring such a large number of inexperienced staff proved challenging. Moreover, in preparing for potential disasters, SBA did not take practical steps to help ensure the availability of additional trained and experienced staff as described below: SBA did not have a system for “cross-training” its staff so that individuals not normally associated with disaster assistance could help out in the case of an emergency. With such cross-training, SBA could have potentially quickly leveraged the expertise of loan officers who are normally involved in the agency’s other small business lending programs to help process disaster loan applications. We note that, subsequent to Hurricane Katrina’s landfall, SBA’s former Administrator directed some of the agency’s district offices to request that staff not normally involved in disaster assistance volunteer to process disaster loans. However, SBA officials at one district office we visited said that staff who volunteered to processes disaster loans lacked access to the agency’s loan processing system—DCMS—and, consequently, this presented further challenges in their ability to process disaster loan applications in a timely manner. For example, without access to DCMS, the district staff needed to take additional time to contact SBA’s Ft. Worth disaster loan processing center to verify data and other information contained in disaster applications. Moreover, the Ft. Worth staff, as mentioned in our previous report, had to engage in a labor- intensive process of shipping files to the district office and manually inputting information into DCMS because the district office staff lacked access to the system. SBA did not maintain the status of a reserve group of potential voluntary employees with expertise in the agency’s disaster assistance programs. According to an SBA official, in approximately 2001, the agency had in place a disaster reserve corps of about 600 individuals, who had a background in areas such as finance, accounting, property inspections, and customer service who could be asked to volunteer as temporary employees in the event of a crisis. SBA officials said that the agency’s disaster reserve corps includes retirees and students who must be willing to locate within 48 hours of notification that their services are required to assist in an emergency. As discussed in our 2003 report, SBA officials believed that the disaster reserve corps facilitated the agency’s capacity to process the surge in disaster loan applications associated with the September 11, 2001, terrorist attacks. However, SBA officials said that the agency did not subsequently maintain the status of the disaster reserve corps afterwards, and after the terrorist attacks, it largely dissolved. While an official said that SBA was in the process of rebuilding the corps when Hurricane Katrina struck, a senior agency official said the corps had fewer than 100 individuals at that time. Moreover, SBA did not have adequate plans in place to help ensure that it had adequate office space to house its expanded workforce—particularly in the Ft. Worth and Buffalo offices—or telecommunications support in Buffalo. While SBA partnered with GSA on an ad hoc basis to address its logistical challenges after Hurricane Katrina made landfall, in some cases, the agency was fortunate to quickly obtain the needed capacity. The following provides specific information regarding SBA’s Ft. Worth and Buffalo offices at the time of and after the Gulf Coast hurricanes: At the Ft. Worth office, SBA did not initially have adequate space to accommodate the more than 2,000 employees that were hired to process disaster loans or an established plan to acquire such space (e.g., the Ft. Worth center could only accommodate 500 out of the 2,700 staff that were ultimately employed, by September 2006, to process Gulf Coast hurricane- related disaster loan applications). In September 2005, SBA worked with GSA on an ad hoc basis in an effort to locate additional space for the newly hired staff and was able to identify available offices near its existing facility. However, SBA officials said that the newly acquired space was not configured to serve as a disaster loan processing center, so the agency had to upgrade the space to accommodate its needs. Even so, we note that SBA still lacked sufficient capacity in Ft. Worth to process the growing backlog of disaster loan applications. To address this challenge, SBA was also able to reestablish the loan processing function at its Sacramento office, which had previously been discontinued as a result of its workforce transformation initiative. The Sacramento office space was available shortly after Hurricane Katrina struck because the lease had not yet expired. SBA established a workforce of approximately 250 individuals at the Sacramento office, and the office played a significant role in reducing the backlog of Gulf Coast hurricane disaster loan applications. In June 2006, SBA also leased a 60,000 square foot facility in Ft. Worth, which, upon acquisition, was configured to meet the agency’s needs to house the staff that are processing disaster loans associated with the Gulf Coast hurricanes, according to officials. SBA’s Buffalo office did not initially have sufficient space to serve as a customer call center in a catastrophic disaster situation. In June 2005, SBA closed a loan processing facility in Niagara Falls, New York, and opened a facility in Buffalo, with the intention of it becoming the agency’s customer service center (i.e., call center) at a later date. While SBA provided us with planning documents that recognized that the Buffalo office lacked sufficient space in order to expand during an emergency, the agency did not develop a contingency plan to guide its efforts in identifying suitable space to accommodate an expanded workforce if a major disaster occurred. As was the case in Ft. Worth, SBA collaborated with GSA on an ad hoc basis after Hurricane Katrina and was able to locate nearby available space in a federal office building. Further, SBA faced challenges due to limited support for the telecommunications system at its disaster loan customer service call center in Buffalo. According to SBA field managers, while the customer service call center’s telephone system processed calls as required, vendor service and support for the system were inadequate. An SBA official said that there was only one vendor in the Buffalo region that services the type of phone system that the agency uses. The SBA official said that limited support and maintenance for the agency’s phone system impacted the agency’s ability to be able to efficiently respond to inquiries from disaster loan applicants. Further, an SBA official said that the phone system was not designed to interface with other key agency systems, which also affected the center’s operations. For example, due to limitations in the phone system’s design, SBA customer service managers were forced to manually track and tally critical information necessary to effectively manage the center, such as the number of inbound/outbound calls received in a given time period. According to an SBA field official, this information is necessary in order for the office’s workforce manager to accurately forecast staffing needs, but tracking this data manually is time consuming and inefficient. SBA officials said that they have initiated a review of the Buffalo phone system and are considering options to upgrade it. In the wake of the Gulf Coast hurricanes, SBA officials said that they recognized the importance of further enhancing their disaster planning and have developed a master plan and initiated measures based on “lessons learned” from the experience. In particular, SBA convened a Disaster Oversight Council composed of senior agency leadership, to better leverage the resources of the agency as a whole, and incorporate new ideas and best practices into the agency’s preparedness capability. In September 2006, SBA also appointed a single individual to coordinate the agency’s disaster preparedness planning and coordination efforts. Further, SBA officials said that the agency is taking steps to address limitations that existed in its disaster planning prior to the Gulf Coast hurricanes and weaknesses in disbursing approved disaster loan applications as follows: Developing enhanced disaster forecasting and response capabilities. SBA officials said that the agency is developing automated models to better estimate loan application volumes when disasters strike. The officials said that these models are based on data from the agency’s experiences in responding to previous disasters, including the Gulf Coast hurricanes. The officials said that the models allow the agency, for example, to estimate the number of loan applications that can be expected under varying disaster scenarios. Officials said that the models’ estimates can be refined, after disasters occur, based on information provided by FEMA and SBA loss verification teams. SBA officials also said that they are developing the capacity to better estimate resource requirements—- such as staffing requirements—-to better respond to potential disaster scenarios. Additionally, SBA stated that DMCS has been tested and verified to support a minimum of 8,000 concurrent users (the agency maintained a workforce of about 4,300 at its peak in January 2006 to respond to the Gulf Coast hurricanes). SBA stated that it continues to explore the best means of upgrading DCMS’ capacity. Ensuring additional trained and experienced staff in the event of a disaster. SBA officials said that the agency is developing a plan to cross- train staff agencywide to provide disaster loan assistance. They also said SBA is planning to develop partnerships with private sector lenders who could assist SBA with loan processing and loan closing activities in the event of a major disaster. Additionally, SBA officials said that the agency has reestablished a disaster reserve corps of about 750 individuals, the majority of whom have been trained in the agency’s policies and systems. An SBA official added that the agency plans to ensure that corps members will be able to quickly obtain government identification and credit cards to help ensure their immediate availability in the event of a disaster. However, SBA officials said that maintaining the status of the corps may prove challenging over the longer term if their services are not required for long periods. The officials said it can be difficult to ensure the training of potential volunteers or their continued availability. Acquiring office space to provide additional capacity. SBA officials said that the agency has acquired additional facilities to house its disaster assistance staff. As described previously, for example, SBA officials said that, in June 2006, they leased a third facility in Ft. Worth with 60,000 square feet of space that has been configured to serve as a disaster loan processing center (this facility has a 2-year lease). However, SBA officials said that there are trade-offs associated with maintaining such space over the longer term. A senior SBA official also said that, if the space is ultimately no longer required to process Gulf Coast hurricane-related loan applications, SBA would be required to incur lease costs at a time when funding for federal agency operations is limited. Revising the existing approach to processing disaster loan applications to help ensure expedited fund disbursements. According to senior SBA officials, in July 2006, they reviewed the agency’s approach to disbursing approved Gulf Coast hurricane disaster loan applications and found that inefficiencies in the process were contributing to substantial disbursement delays. Senior SBA officials said that the previous loan disbursement approach was an “assembly-line” type process wherein loan applications moved from one stage to another (e.g., from loss verification to the legal department) and that mistakes or delays in any one stage could result in significant disbursement backlogs. Further, SBA officials said that the previous approach lacked accountability and made it difficult for applicants to find the status of their application or to obtain consistent information from the agency. Subsequently, SBA officials said that they have instituted a “case-manager” model in which each loan application is assigned to a case manager to ensure accountability, and the loan review units use in a team-oriented approach. According to SBA officials, the revised approach reduced the backlog of disbursed loans associated with the Gulf Coast hurricanes from about 93,000 in August 2006 to approximately 35,000 in November 2006. SBA officials also said that the revised approach should allow the agency to more efficiently disburse approved disaster loans in a future catastrophe. While SBA’s announced changes address key limitations in its disaster planning process and preparedness efforts prior to the Gulf Coast hurricanes, agency officials have not established a time line for completing key elements of the disaster management plan. SBA officials explained that the planning process is ongoing and that they intend to review and implement a variety of changes in the agency’s Office of Disaster Assistance in coming years. However, we note that several elements of SBA’s planning and preparedness process are discrete tasks that lend themselves to the establishment of a time line for completion. These elements include cross-training agency staff to provide backup support for disaster assistance services and reaching agreements with private sector lenders to process a surge in loan applications associated with disasters. Without the establishment of reasonable time frames for completing such planning and preparedness elements, it is difficult for SBA management, Congress, the public, and others to assess the progress of the agency’s efforts to better prepare for future disasters. Moreover, until recently, SBA had not taken steps to assess whether it could leverage outside resources to enhance its disaster planning and preparation efforts. SBA officials said that they had contacted other organizations, including FEMA, the National Weather Service, and the U.S. Geological Survey, in developing the agency’s enhanced model for forecasting loan application volumes when disasters strike. However, as discussed previously, SBA officials said that they were largely relying on the agency’s previous disaster experiences in enhancing their forecasting capacity, which is similar to the agency’s disaster planning approach prior to the Gulf Coast hurricanes. SBA officials said that they had not used other outside resources, such as the results of disaster simulations or catastrophe models, in the disaster planning process. A senior SBA official said that the agency has not determined how catastrophe models could be incorporated into its planning process, given the differences that exist between the insurance sector and SBA’s Disaster Loan Program. For example, the official noted that insurers use the models to limit their financial losses, due to hurricanes or earthquakes of varying severity, in specific areas where they insure properties, whereas SBA covers uninsured homes and businesses on a nationwide basis. While we recognize these differences, as discussed in our report on SBA’s implementation of DCMS, the results of disaster simulations or catastrophe models could provide SBA with additional insight into potential disaster loan application volumes, and related agency logistical resource requirements, for particularly severe events that potentially rival or surpass the scope of disasters that the agency has previously encountered, including the Gulf Coast hurricanes. In December 2006, SBA took initial steps to assess whether an available catastrophe model could help enhance its disaster planning efforts. SBA contacted FEMA regarding a catastrophe model that the agency has developed, referred to as HAZUS, that is designed to help estimate the damages associated with potential hurricanes, earthquakes, and floods, as well as the potential financial losses associated with varying disaster scenarios. SBA informed FEMA that the agency was interested in exploring the use of HAZUS as part of its disaster planning program. SBA requested that FEMA brief the agency’s senior managers on HAZUS, as well as the types of training on the system that is available. It remains to be seen the extent to which SBA will decide to incorporate the HAZUS system into its disaster planning efforts. Finally, while we acknowledge that SBA would incur lease and other costs associated with maintaining facilities in anticipation of disasters, developing pragmatic strategies to help ensure the timely acquisition of suitable space over the long-term should be a key component of the agency’s disaster contingency planning. Currently, SBA has a substantial amount of office space leased in Ft. Worth, for example, to complete the processing of Gulf Coast hurricane-related disaster applications, and which agency officials said could be used if another disaster occurs in the near term. However, if no such disaster occurs, and SBA reduces its office space inventory in Ft. Worth over the next several years to save costs, and the agency closes its Sacramento satellite loan processing facility in fiscal year 2007 as planned, the agency would lack adequate loan processing space to respond to a future disaster the size of the Gulf Coast hurricanes or larger. Under such a scenario, a repeat of the steps SBA took during the Gulf Coast hurricanes (i.e., contacting GSA after Hurricane Katrina made landfall) could similarly compromise the agency’s capacity to provide efficient and timely disaster services. Analyzing the cost-effectiveness of obtaining and retaining certain office facilities over the long-term could improve SBA’s preparedness for future disasters. SBA took a number of steps, under trying conditions, to reach out to Gulf Coast hurricane victims to provide information and assistance regarding disaster recovery loan assistance services. For example, the agency mobilized its staff members to reach out to victims by speaking at organized events and by advertising in a variety of media including the Internet. However, various factors (including the fact that many people do not equate SBA with disaster assistance) may have limited the effectiveness of the agency’s efforts. For example, due to the number and dislocation of the hurricane victims, the catastrophic damage caused by the storms, and limited agency resources, SBA was not able to comply with an informal policy of conducting follow-up calls with all individuals who were mailed disaster assistance loan applications. According to SBA officials, the agency has initiated a review of its outreach to Gulf Coast hurricane victims and is developing a plan to better provide such outreach in future disasters. SBA officials told us that they took a variety of steps to explain the agency’s disaster assistance programs to the victims of the Gulf Coast hurricanes. After Hurricane Katrina made landfall, officials from SBA’s field operations centers said they acted quickly to mobilize their staff and sent them to the Gulf Coast region to begin assisting the victims by providing information about their Disaster Loan Program. These officials told us that staff members shared information about SBA’s Disaster Loan Program at meetings with various groups including congressional offices, chambers of commerce, community-based organizations, and local businesses. According to an SBA official, staff members from one field operations center attended more than 600 of these meetings between October 1, 2005, and May 15, 2006. This official said that the number of meetings they participated in was more than were typically held, due to the increased needs of the hurricane victims. SBA also provided information about its Disaster Loan Program to Small Business Development Centers, as well as state and local disaster management agencies. Further, SBA staff members provided outreach at FEMA- established Disaster Recovery Centers where they conducted initial interviews with disaster victims to determine whether the victim and the damaged property were generally eligible for the loan program and to explain the application forms and process. SBA also established Business Recovery Centers to provide business owners with information on how disaster loans could help them in financing recovery from the hurricanes. In addition, SBA advertised through various forms of media such as the SBA Internet site, radio, television, and newspapers. Figure 3 shows an example of a newspaper advertisement SBA placed following Hurricane Katrina. SBA advertisements about its Disaster Loan Program are intended to inform potential loan applicants where to obtain loan applications and otherwise to assist victims in applying for disaster loans. Following the Gulf Coast hurricanes, field operations center staff members also posted informational flyers throughout the declared disaster areas, according to SBA officials. An SBA official also told us that many of these outreach activities were not just localized to the declared disaster areas, but staff members also conducted these activities in the cities where victims had relocated. However, SBA officials said that the agency’s outreach efforts face challenges even under normal (nondisaster) circumstances, which can limit their effectiveness. For example, agency officials said that most people tend to equate SBA with small business lending activities rather than its disaster assistance programs. In a limited survey of 62 Gulf Coast hurricane victims who filed SBA disaster loan applications, we found that more than half reported not being aware of the agency’s disaster assistance program prior to August 2005. Additionally, an SBA official said that the public tends to confuse SBA’s disaster assistance programs with those of FEMA. As noted previously, this potential for confusion was heightened when, in the wake of the Gulf Coast hurricanes, FEMA referred many disaster loan applications to SBA even though such applications did not meet SBA’s creditworthiness standards. Furthermore, SBA’s outreach efforts may face substantial challenges when disasters of the magnitude of the Gulf Coast hurricanes or greater strike. In such cases, millions of people may be relocated throughout the United States, and widespread telephone and electrical service disruptions may take place. To illustrate the potential impact that a large-scale disaster can have on SBA’s outreach efforts, we note that the agency was not able to comply with an informal policy requiring follow-up phone calls to all individuals who did return disaster assistance loan applications after the Gulf Coast hurricanes. While such phone calls are not mandatory, SBA officials said that in previous disasters they had attempted to contact 100 percent of all individuals who did not return applications that had been mailed to them. The officials said that such follow-up phone calls provided the agency with another opportunity to explain the Disaster Assistance Loan Program and potentially assist victims. While SBA mailed about 2 million disaster loan applications to victims of the Gulf Coast hurricanes, it only received about 400,000 completed applications in return. SBA officials said that the agency made follow up phone calls to 800,000 individuals who did not return the applications but was unable to contact the remaining 800,000. Although SBA officials said the agency makes it a practice to make such follow up phone calls, it lacked the necessary staff resources to do so and that contacting people who may be relocated in such circumstances is highly challenging. According to SBA officials, the agency has initiated a follow-up internal review of its outreach to victims of the Gulf Coast hurricanes. An SBA official said that the agency is developing a plan to strengthen its outreach communication and coordination and that this plan will be submitted to the SBA Administrator in early 2007. According to this official, SBA has consulted internal outreach staff as well as federal disaster relief agencies, including FEMA, and local agencies to conduct the evaluation of its outreach efforts. Additionally, the SBA official said that the agency has created a revised brochure to explain its disaster outreach services to the public and that the SBA Administrator has held forums with the public in the Gulf Coast region to explain the agency’s assistance services. While the unprecedented volume of disaster loan applications clearly affected SBA’s capability to provide timely assistance to Gulf Coast hurricane victims, the absence of a comprehensive and sophisticated planning process beforehand also likely limited the efficiency of the agency’s initial response. SBA officials said that they recognize the importance of better disaster planning and are in the process of developing a disaster plan that is designed to addresses key limitations in the agency’s previous planning approach (e.g, strengthening loan surge capacity through potential agreements with private sector lenders and reestablishing the disaster reserve corps). Additionally, according to SBA officials, the agency has significantly revised its loan processing approach to reduce the backlog of approved, but not disbursed, disaster loan applications associated with the Gulf Coast hurricanes. SBA officials said that the revised approach should allow the agency to more efficiently disburse approved disaster loans in a future catastrophe. However, SBA has not established a time frame for competing key elements of the disaster management plan such as cross-training other agency staff to provide backup support, and has not assessed whether the plan would benefit from the supplemental use of available resources, such as the results of disaster simulations or catastrophe models (although SBA did recently contact FEMA about using its catastrophe model). Further, while we recognize that maintaining unused office space would not be cost- effective, SBA has not developed a long-term strategy to help ensure that it could acquire necessary and suitable office space in an emergency. Consequently, SBA should take additional steps to help ensure that it would be better prepared to provide timely and effective assistance to the victims of a future disaster. To better position SBA to prepare for and respond to potential disasters, we recommend that the Administrator of SBA direct the Office of Disaster Assistance to take the following two actions: develop time frames for completing key elements of the disaster management plan and a long-term strategy for acquiring adequate office space; and direct staff involved in developing the disaster management plan to further assess whether the use of disaster simulations or catastrophe models would enhance the agency’s disaster planning process. We provided SBA with a draft of this report for review and comment. The Associate Administrator for Disaster Assistance provided written comments that are presented in appendix II. The agency also provided technical comments, which we have incorporated as appropriate. In its comments, SBA stated that the agency is better prepared to respond to potential disasters as a result of the measures that have been initiated since the Gulf Coast hurricanes. Additionally, SBA stated that it agreed with the report’s recommendations. Specifically, SBA stated that the agency will (1) establish clear time-lines for completing key disaster planning initiatives discussed in the report and (2) assess the more extensive use of disaster simulations and external catastrophe models to enhance its disaster planning process. SBA also said that it had taken steps to help strengthen its capacity to ensure the availability of adequate office space in the event of a future disaster. In particular, SBA stated that it will retain 100,000 square feet of additional office space that it obtained in Ft. Worth after Hurricane Katrina to process disaster loans. SBA said that the additional space should allow the agency to respond to the initial surge in loan applications of a future disaster while allowing time for it to work with GSA to obtain additional space as needed. We contacted SBA to obtain additional information about its space acquisition plans. SBA officials said that the agency will retain a 60,000 square foot facility in Ft. Worth that has been specifically configured to process disaster loans and plan to expand it by another 40,000 square feet. Further, the officials said that SBA will retain the facility for at least 5 years (the facility originally had a 2-year lease) and may retain it longer. We acknowledge that such an approach, if implemented, is a step that is consistent with the development of a comprehensive disaster management plan. We are sending copies of this report to appropriate congressional committees, the Administrator of the SBA, and other interested parties, and 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 are your staff have questions regarding this report, please contact me at (202)512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of this report were to (1) assess the Small Business Aministration’s (SBA) logistical planning efforts prior to the Gulf Coast hurricanes and current disaster planning efforts and (2) discuss SBA’s outreach efforts to Gulf Coast hurricane victims. To address the first objective, we reviewed our previous studies related to disaster planning as well as similar studies by other organizations and available disaster simulation reports. We also interviewed disaster experts to obtain their insight and views on appropriate planning efforts and the aspects that a comprehensive disaster plan should entail. Further, we reviewed relevant SBA planning and other documentation including the agency’s standard operating procedures, internal policy memos, and the Office of Disaster Assistance’s 2003-2008 strategic plan. Moreover, we reviewed SBA documentation regarding the agency’s workforce transformation initiative, which aided our assessment of the logistical challenges that SBA encountered in its response to the Gulf Coast hurricanes. These documents included an organizational impact study and a cost-benefit analysis. We also interviewed officials from SBA’s Office of Disaster Assistance (ODA) in headquarters regarding the agency’s disaster planning initiatives both before and after the Gulf Coast hurricanes. Additionally, we conducted site visits to each of SBA’s four disaster loan field offices to discuss the agency’s disaster planning initiatives. Finally, we visited the Gulf Coast region and met with federal, state and local officials, as well as disaster victims. To address the second objective, we reviewed SBA’s various methods and techniques for informing and educating disaster victims about the disaster loan program. Further, we reviewed the section of SBA’s 2003-2008 strategic plan that described the agency’s goals and objectives for promoting public awareness, which includes outreach. We also interviewed officials in SBA’s headquarters and the public information officers in the Atlanta and Sacramento field offices to discuss the agency’s outreach efforts during the Gulf Coast hurricanes, as well as current plans to evaluate such outreach efforts. To obtain further insight into SBA’s outreach efforts, we conducted a limited structured telephone survey of 62 Gulf Coast hurricane victims who had applied for an SBA disaster assistance loan. Using data from its Disaster Credit Management System (DCMS), SBA provided us with a list of the 414,289 loan applications, for either a home or business physical disaster loan, or an economic injury disaster loan in response to losses due to the Gulf Coast hurricanes. We selected a stratified random sample of 400 loan applications based on the type of loan—business and economic injury, home, and economic injury only—and loan decision—approved, withdrawn, declined, or pending—in order to get coverage across loan type and decision outcomes. We attempted to reach 168 loan applicants by phone and were able to contact and complete telephone interviews with a total of 62 applicants. Of the 62 respondents to our survey, 46 were affected by Hurricane Katrina, 9 by Hurricane Wilma, and 7 by Hurricane Rita. Of those, 28 had applied for home loans, 22 had applied for economic injury and business loans, and 12 had applied for economic injury loans. At the time we surveyed the applicants, SBA had approved loans for 24 of the applicants, declined loans for 26 of the applicants, and had decisions pending for 6 of the applicants. The other 6 applicants had either withdrawn their applications or had their applications withdrawn by SBA. From the survey, among other things, we obtained the loan applicants’ views on how and when they learned of the disaster loan program. In developing the survey questions, we relied on SBA’s 2003-2008 strategic plan, strategic operation plans, SBA 2003-2005 customer satisfaction surveys, and other information that SBA officials provided to us through interviews as it related to our request. We pretested our survey with five loan applicants who represented a mix of home, business, and economic injury loans, as well as decisions that were approved and withdrawn. We conducted analysis using the Statistical Analysis System (SAS) version 9 with appropriate checks for missing data and incorrect responses and deemed it to be sufficiently reliable for the purpose of this report. Because of the small sample size, the survey results are limited to those we spoke with but may also be considered as indicative of how Gulf Coast victims might have responded; however, results could not be projected to the entire population. We conducted our work in Washington, D.C.; Sacramento, Calif.; Atlanta, Ga.; Ft. Worth, Texas; Buffalo, N.Y.; and in state and local offices in Louisiana and Mississippi from November 2005 to January 2007, and in accordance with generally accepted government auditing standards. In addition to the individual named above, Wesley Phillips, Assistant Director; Daniel Blair; Tania Calhoun; William Chatlos; Landis Lindsey; Marc Molino; David Pittman; Cheri Truett; and Michelle Zapata made key contributions to this report.
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The Small Business Administration (SBA) is the federal government's primary provider of disaster loans to businesses, homeowners, and renters. In a previous report (GAO- 06-860), GAO found that SBA's limited information systems planning contributed to delays in processing disaster loans for the victims of the 2005 Gulf Coast Hurricanes (Katrina, Rita, and Wilma). To provide further insight into how SBA's disaster preparedness could be enhanced, this second report, initiated under the Comptroller General's authority, assesses other logistical issues (e.g., staffing and space acquisition) that may have affected the efficiency of the agency's response to the hurricanes. Specifically, this report (1) assesses SBA's logistical planning efforts prior to the Gulf Coast hurricanes and current planning efforts and (2) discusses SBA's outreach services to hurricane victims. GAO reviewed disaster planning reports, interviewed SBA officials, and visited the Gulf Coast region. SBA engaged in limited logistical disaster planning prior to the Gulf Coast hurricanes, which, in retrospect, likely contributed to the initial challenges that the agency faced in processing the related surge in disaster loan applications on a timely basis. GAO reports, reports by other investigative agencies, and disaster management experts have stated that comprehensive planning and the supplementary use of sophisticated techniques (e.g., simulations of varying disaster scenarios) can help organizations prepare for potential disasters and mitigate their effects. However, SBA did not engage in or complete comprehensive disaster plans prior to the Gulf Coast hurricanes, in part, due to the view by headquarters agency officials that such planning yielded limited benefits and that local agency officials were in the best position to estimate logistical requirements. With better planning, available evidence suggests the agency could have been better positioned to provide initial disaster assistance to hurricane victims in an organized and efficient manner. In particular, SBA faced challenges in training and supervising thousands of temporary employees hired to process loan applications, had not taken steps to help ensure additional trained staff would be available, and encountered difficulties in obtaining suitable office space for the expanded workforce. In the wake of the Gulf Coast hurricanes, SBA officials said that they recognized the importance of disaster planning and have initiated a planning process designed to address key areas, which includes cross-training other agency staff to provide disaster assistance and recruiting and training a reserve of potential temporary employees. SBA has also taken steps to expedite the process for disbursing approved disaster loans. However, GAO continues to have concerns about several limitations in SBA's current planning process, including the lack of a timetable for competing key elements of its disaster management plan and the fact that the agency has not assessed whether its disaster plan would benefit from the supplemental use of disaster simulations or catastrophe models. SBA took a variety of steps under trying conditions to inform victims of the Gulf Coast hurricanes about its assistance programs, but several factors may have limited the effectiveness of these outreach efforts. SBA staff members reached out to disaster victims by speaking at about 600 organized events and advertising. However, the effectiveness of SBA's outreach efforts may have been reduced by, among other things, both the extensive damage and victim relocations associated with the hurricanes. According to SBA officials, the agency has initiated an internal review of the outreach that it provided to victims of the Gulf Coast hurricanes and is developing a plan to better provide such outreach in future disasters.
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Over time, federal surveys have consistently found that DHS employees are less satisfied with their jobs than the governmentwide average. Shortly after DHS was formed, 2004 federal survey data indicated a disparity between DHS and governmentwide averages in job satisfaction. At that time, 56 percent of DHS employees responded that they were satisfied with their jobs, compared to the 68 percent governmentwide.subsequent years when comparative data were available using the job satisfaction index, the disparity continued—ranging from a difference of 8 percentage points in 2006 to a 4 percentage point difference in 2008, 2010, and 2011. In 2011, DHS employees also consistently indicated less satisfaction on key items in OPM’s 2011 FEVS than employees in the rest of the federal government. On the basis of its analysis of its FEVS, OPM determined that responses to these items—called impact items— make a difference in whether people want to come, stay, and contribute their fullest to an agency. Specifically, DHS employees were less positive on 14 of the 16 impact items. In some key areas, DHS’s percentage of positive responses was lower than the rest of the federal government averages. For example: Slightly less than half of the DHS employees surveyed reported positive responses to the statement “My talents are used well in the workplace,” nearly 12 percentage points less than the rest of the federal government average of 61.6 percent. DHS employees had nearly 10 percentage points fewer positive responses to the statements “I am given a real opportunity to improve my skills in my organization” and “Managers communicate the goals and priorities of the organization” than the rest of the federal government averages of 66.0 and 65.3 percent respectively. In two areas, DHS’s percentage of positive responses was nearly the same or higher than the rest of the federal government average. Specifically: DHS’s percentage of positive responses to the statement “Considering everything, how satisfied are you with your pay?” was not statistically different than the rest of the federal government average, with responses of 62 percent for DHS and 63 percent for the rest of the federal government. DHS was nearly 2 percentage points higher than the rest of the federal government average for the statement “My workload is reasonable.” The percentage of DHS respondents with positive responses on each of 16 impact items and the difference between DHS and the rest of the federal government appear in appendix I. OPM calls for federal leaders to pay attention to the 16 impact items as key indicators of engagement and commitment to continued service. While improvement in any of the impact items that OPM identified could help DHS improve its attractiveness as an employer of choice, the items for which DHS is farthest behind the rest of the federal government could provide a focus for targeting improvement efforts. The 2011 job satisfaction data also indicate that satisfaction levels vary across components within DHS. For example, as shown in table 1, job satisfaction index results for the 2011 FEVS show the Transportation Security Administration (TSA) as 11 percentage points below governmentwide averages while other large components, such as U.S. Customs and Border Protection (CBP) and the U.S. Coast Guard (Coast Guard), posted above average results. Identifying this variation across components could help target efforts to improve employee satisfaction. TSA performed analysis of its 2011 FEVS results to gain a better understanding of whether employee satisfaction varies across location, program office, or level. This analysis identified variation in job satisfaction within the component; specifically, with Federal Security Director staff at airports providing more positive responses for job satisfaction (69 percent positive) than the airport screening workforce (54 percent positive), as shown in figure 1. DHS has taken steps to identify where it has the most significant employee satisfaction problems and has developed plans for addressing those problem areas. DHS has conducted some analysis of employee survey results and developed action plans to address some employee satisfaction problems, but it has not yet addressed the key goals related to job satisfaction—to improve DHS’s scores on OPM’s job satisfaction index, among other indexes, and to improve its ranking on the Partnership’s Best Places to Work in the Federal Government. The results from our prior work at DHS and other departments identify a wide variety of issues that can lead to employee morale problems. Thus, conducting an analysis of the root causes of employee satisfaction problems and developing plans to address them are important. DHS’s job satisfaction scores could pose challenges to DHS in recruiting, motivating, and retaining talented employees that DHS needs to meet its mission requirements. Specifically, an agency’s reputation is a key factor in recruiting and hiring applicants. A Partnership for Public Service report published in 2010 noted that a good reputation is the most frequently mentioned factor in choosing potential employers, and agencies with high satisfaction and engagement scores were seen as desirable by college graduates seeking employment. Similarly, the Merit Systems Protection Board (MSPB) reported that employees’ willingness to recommend the federal government or their agency as a place to work can directly affect an agency’s recruitment efforts, the quality of the resulting applicant pool, and the acceptance of employment offers. In addition, MSPB noted that prospective employees would rather work for an agency billed as one of the best places to work compared to an agency at the bottom of the list. DHS has taken or has a variety of actions under way or planned to address employee satisfaction problems, including analyzing the results of employee surveys and developing action plans to improve employee satisfaction. Components and DHS have used a variety of approaches to analyze survey results to gain insight about employee satisfaction. As part of our ongoing work on employee morale, we reviewed survey analyses conducted by DHS’s Office of the Chief Human Capital Officer, TSA, and U.S. Immigration and Customs Enforcement (ICE). DHS. DHS completed an evaluation of the 2008 Federal Human Capital Survey results to determine root causes of job satisfaction departmentwide, according to DHS officials. In that analysis, DHS determined that the drivers of employee satisfaction across DHS included the DHS mission, senior leadership effectiveness, and supervisor support. According to DHS officials, DHS is currently working with a contractor on a departmentwide analysis of root causes of employee morale. As of March 2012, this analysis was not complete. TSA. TSA’s analysis focused on areas of difficulty across groups, such as pay and performance appraisal concerns, and also provides insight on which employee groups within TSA may be more dissatisfied with their jobs than others. The analysis results are descriptive, showing where job satisfaction problem areas may exist, and do not identify the causes of dissatisfaction within employee groups. For the 2011 FEVS, TSA benchmarked its results against CBP results, as well as against DHS and governmentwide results. When comparing CBP and TSA scores, TSA found that the greatest differences in scores were on questions related to satisfaction with pay and with whether performance appraisals were a fair reflection of performance. TSA scored 40 percentage points lower on pay satisfaction and 25 percentage points lower on performance appraisal satisfaction. In comparing TSA results to DHS and governmentwide results, TSA found that TSA was below the averages for all FEVS dimensions. TSA also evaluated FEVS results across employee groups by comparing dimension scores for headquarters staff, the Federal Air Marshals, Federal Security Director staff, and the screening workforce. TSA found that the screening workforce scored at or below scores for all other groups across all of the dimensions. ICE. ICE analyzed the 2011 FEVS results by identifying ICE’s top FEVS questions with high positive and negative responses. ICE found that its top strength was employees’ willingness to put in the extra effort to get a job done. ICE’s top negative result was employees’ perception that pay raises did not depend on how well employees perform their jobs. ICE did not perform demographic analysis of the survey results or identify the roots causes of employee satisfaction problems, but did benchmark its results against DHS and governmentwide results, identifying those questions and Human Capital Assessment and Accountability Framework ICE (HCAAF) indices where ICE led or trailed DHS and the government. found, among other things, that employee views on the fairness of its performance appraisals were above DHS’s average but that views on employee preparation for potential security threats were lower. When comparing ICE’s results with governmentwide figures, ICE found, among other things, that ICE was lower on all of the HCAAF indices, including job satisfaction. The HCAAF indices provide metrics for measuring progress toward OPM goals for federal agencies, which include employee job satisfaction, leadership effectiveness and knowledge management, a results-oriented performance culture, and effective talent management. DHS and the components are taking actions that could improve employee satisfaction, with a focus on improving components’ positive responses to selected survey items. DHS’s Integrated Strategy for High Risk Management. In December 2011, DHS provided us with its updated Integrated Strategy for High Risk Management (Integrated Strategy), which summarized the department’s plans for addressing its implementation and transformation high-risk designation. In the Integrated Strategy, DHS identified corrective actions to improve employee job satisfaction scores, among other things. The corrective actions include the Secretary issuing guidance to component heads to address gaps in the 2011 FEVS results; launch of an Employee Engagement Executive Steering Committee, which held its first meeting in February 2012; implementation in June 2009 of an online reporting and action planning tool for components; and execution of a DHS-wide exit survey in January 2011 for departing employees to gain additional insight into why employees are leaving the department. According to the Integrated Strategy, DHS has begun implementing corrective actions but has not yet achieved its key outcome related to job satisfaction—to improve DHS’s scores on OPM’s job satisfaction index, among other indexes, and to improve its ranking on the Partnership’s Best Places to Work in the Federal Government. According to the Integrated Strategy, FEVS index scores did not improve appreciably relative to governmentwide averages from 2010 to 2011. DHS’s Partnership ranking also remains near last among federal agencies. Within the Integrated Strategy action plan for improving job satisfaction scores, DHS reported that three of six efforts were hindered by a lack of resources. For example, fewer resources were available than anticipated for DHS’s Office of the Chief Human Capital Officer to consult with components in developing action plans in response to 2011 FEVS results. Similarly, fewer resources were available than planned to deploy online focus discussions on job satisfaction-related issues. Sufficient resource planning to address the key high-risk human capital outcome of enhanced employee satisfaction scores is essential as DHS works to transform itself into a high-performing department. DHS and component action plans. We reviewed the most recent DHS action plans to address 2011 FEVS outcomes departmentwide as well as component plans for TSA, the Coast Guard, CBP, and ICE. The plans state objectives and identify actions to be taken, among other things. Examples of initiatives from the plans are listed in table 2. As part of our ongoing work, we are comparing DHS and component action plans with OPM guidance for action planning and will report on our results in September 2012. Our prior work at DHS and other departments and agencies illustrates the variety of issues that can lead to morale problems. In July 2009, we reported that the funding challenges FPS faced in fiscal year 2008 and its cost savings actions to address them resulted in adverse implications for its workforce, primarily low morale among staff and increase attrition. In June 2011, we reported that the Federal Emergency Management Agency’s (FEMA) human capital plan did not have strategies to address retention challenges, among other things.experienced frequent turnover in key positions and divisions that could result in lost productivity, a decline in institutional knowledge, and a lack of continuity for remaining staff. We recommended that FEMA develop a comprehensive workforce plan that addressed retention issues, among other things. FEMA concurred with the recommendation and noted that a contractor had begun work on a new human capital plan. In August 2011, we reported that the Forest Service’s centralization of human resources management and information technology services contributed to several agencywide improvements, but it has also had widespread, largely negative effects on field-unit employees. Under centralization, the agency relies on a self-service approach whereby employees are generally responsible for independently initiating or carrying out many related business service tasks. Field-unit employees consistently told us that these increased administrative responsibilities, coupled with problems with automated systems and customer support, have negatively affected their ability to carry out their mission work and have led to lower employee morale. In June 2009, we reported that employees from a number of different agencies and pay systems worked overseas in proximity to one another. Each of these pay systems was authorized by a separate statute that outlines the compensation to which employees under that system are entitled, certain elements of which are set without regard to the location in which the employees are working. We reported that when these employees are assigned overseas and serve side by side, the differences in pay systems may become more apparent and may adversely affect morale. In September 2008, we reported that the 2004 and 2006 employee survey results for the Small Business Administration (SBA) showed a lack of respect for and trust in SBA leadership and a concern about training opportunities. The SBA Administrator’s efforts to address the survey results included soliciting information from employees and visiting field locations to obtain their input on how to improve agency operations and morale. The variation in potential issues that can result in morale problems underscores the importance of looking beyond survey scores to understand where problems, such as low employee satisfaction, are taking place within the organization, along with the root causes of those problems. Effective root cause analysis can help agencies better target efforts to develop action plans and programs to address the key drivers of employee satisfaction. Given the critical nature of DHS’s mission to protect the security and economy of our nation, it is important that DHS employees are satisfied with their jobs so that DHS can retain and attract the talent required to complete its work. We will continue to monitor and assess DHS’s efforts to address employee job satisfaction through our ongoing work and expect to issue a report on our final results in September 2012. Chairman McCaul, Ranking Member Keating, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For questions about this statement, please contact David C. Maurer at (202) 512-9627 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Sandra Burrell, Assistant Director; Ben Atwater, Analyst-in- Charge; and Jean Orland. Other contributors include Alice Feldesman, Tracey King, Kirsten Lauber, Margaret McKenna, Lara Miklozek, and Jeff Tessin. Key contributors for the previous work that this testimony is based on are listed in each product. Survey question My talents are used well in the workplace. I am given a real opportunity to improve my skills in my organization. Managers communicate the goals and priorities of the organization. Employees have a feeling of personal empowerment with respect to work processes. How satisfied are you with your involvement in decisions that affect your work? How satisfied are you with the policies and practices of your senior leaders? My work gives me a feeling of personal accomplishment. How satisfied are you with the information you receive from management on what’s going on in your organization? How satisfied are you with the recognition you receive for doing a good job? I have a high level of respect for my organization’s senior leaders. How satisfied are you with your opportunity to get a better job in your organization? How satisfied are you with the training you receive for your present job? Overall, how good a job do you feel is being done by your immediate supervisor/team leader? Considering everything, how satisfied are you with your pay? Department of Homeland Security: Continued Progress Made Improving and Integrating Management Areas, but More Work Remains. GAO-12-365T. Washington, D.C.: March 1, 2012. Forest Service Business Services: Further Actions Needed to Re- examine Centralization Approach and to Better Document Associated Costs. GAO-11-769. Washington, D.C.: August 25, 2011. FEMA: Action Needed to Improve Administration of the National Flood Insurance Program. GAO-11-297. Washington, D.C.: June 9, 2011. High-Risk Series: An Update. GAO-11-278. .Washington, D.C.: February 2011. Department of Homeland Security: Progress Made in Implementation and Transformation of Management Functions, but More Work Remains. GAO-10-911T. Washington, D.C.: September 30, 2010. Homeland Security: Preliminary Observations on the Federal Protective Service’s Workforce Analysis and Planning Efforts. GAO-10-802R. Washington, D.C.: June 14, 2010. Homeland Security: Federal Protective Service Should Improve Human Capital Planning and Better Communicate with Tenants. GAO-09-749. Washington, D.C.: July 30, 2009. Human Capital: Actions Needed to Better Track and Provide Timely and Accurate Compensation and Medical Benefits to Deployed Federal Civilians. GAO-09-562. Washington, D.C.: June 26, 2009. Small Business Administration: Opportunities Exist to Build on Leadership’s Efforts to Improve Agency Performance and Employee Morale. GAO-08-995. Washington, D.C.: September 24, 2008. High-Risk Series: Strategic Human Capital Management. GAO-03-120. Washington, D.C.: January 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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.
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DHS is the third largest cabinet-level agency in the federal government, employing more than 200,000 employees in a broad range of jobs. Since its creation in 2003, DHS has faced challenges implementing its human capital functions, and its employees have reported having low job satisfaction. GAO designated the implementation and transformation of DHS as high risk because it represented an enormous and complex undertaking that would require time to achieve in an effective and efficient manner. This testimony presents preliminary observations regarding: (1) how DHSs employees workforce satisfaction compares with that of other federal government employees, and (2) the extent to which DHS is taking steps to improve employee job satisfaction. GAOs comments are based on ongoing work on DHSs employee job satisfaction survey results and its actions and plans to improve them, as well as reports issued from January 2003 through February 2012 on high-risk and morale issues in the federal government and at DHS. To conduct its ongoing work, GAO analyzed DHS and component planning documents, interviewed relevant DHS officials about employee morale, and analyzed 2011 federal employee job satisfaction survey results. Over time, federal surveys have consistently found that Department of Homeland Security (DHS) employees are less satisfied with their jobs than the government-wide average. In the 2004 Office of Personnel Managements federal employee surveya tool that measures employees perceptions of whether and to what extent conditions characterizing successful organizations are present in their agency56 percent of DHS employees responded that they were satisfied with their jobs, compared to 68 percent government-wide. In subsequent years, the disparity continuedranging from a difference of 8 percentage points in 2006 to a 4 percentage point difference in 2008, 2010, and 2011. In 2011, DHSs percentage of positive responses was lower than the averages for the rest of the federal government. For example, slightly less than half of the DHS employees surveyed reported positive responses to the statement My talents are used well in the workplace, nearly 12 percentage points less than the rest of the federal government average. In two areas, DHSs percentage of positive responses was nearly the same or higher than the rest of the federal government average. For example, DHSs percentage of positive responses to the statement Considering everything, how satisfied are you with your pay? was not statistically different than the rest of the federal government average. Job satisfaction data for 2011 show that satisfaction levels vary across DHS components. For example, job satisfaction index results show the Transportation Security Administration as 11 percentage points below government-wide averages while other components, such as U.S. Customs and Border Protection, posted above average results. DHS has taken steps to identify where it has the most significant employee satisfaction problems and developed plans to address those problems, but has not yet improved DHS employee satisfaction survey results. For example, to determine root causes of job satisfaction department-wide, DHS conducted an evaluation of the 2008 Federal Human Capital Survey results, according to DHS officials. In that analysis, DHS determined that the drivers of employee satisfaction across DHS included the DHS mission, senior leadership effectiveness, and supervisor support. According to DHS officials, DHS is working with a contractor on a new department-wide analysis of root causes of employee morale. As of March 2012, this analysis was not complete. DHS and its components are also taking steps to improve components positive response rates to selected survey items. For example, DHSs Integrated Strategy for High Risk Management identified corrective actions to improve employee job satisfaction scores, such as the launch of the Employee Engagement Executive Steering Committee. GAO has previously reported on a variety of issues, including concerns about pay and a lack of trust in leadership that can lead to morale problems. This variation in potential issues that can result in morale problems underscores the importance of looking beyond survey scores to understand the root causes of those problems and developing plans to address them. Given the critical nature of DHSs mission to protect the security and economy of the United States, it is important that DHS employees are satisfied with their jobs so that DHS can attract and retain the talent required to complete its work. GAO will continue to assess DHSs efforts to address employee job satisfaction and expects to issue a report on its results in September 2012.
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Recessions mark a distinct phase of the overall business cycle, beginning with a business cycle “peak” and ending with a business cycle “trough.” Between trough and peak the economy is in an expansion. The National Bureau of Economic Research (NBER) identifies dates for national recessions, which can vary in overall duration and magnitude. While NBER sets dates for the peaks and troughs of national recessions, no dates are set for turning points in state economies. State economic downturns vary in magnitude, duration, and timing, and do not necessarily coincide with dates identified for national recessions. NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales. NBER uses several monthly indicators to identify national recessions. These indicators include measures of GDP and gross domestic income (GDI), real personal income excluding transfers, the payroll and household measures of total employment, and aggregate hours of work in the total economy. Since 1973, NBER has identified six national recessions. These recessions have varied considerably in duration and magnitude (table 1). For example, real GDP declined by 4.1 percent over the course of the 2007- 2009 recession, which lasted 18 months. Similarly, real GDP declined by about 3 percent during the 1973-1975 and 1981-1982 recessions, both of which lasted 16 months. In contrast, real GDP declined 1.4 percent and 0.7 percent in the 1990 and 2001 recessions, respectively, both of which lasted 8 months. States are affected differently by national recessions. For example, unemployment rates have varied across states during past recessions. During the course of the 2007-2009 recession, the national unemployment rate nearly doubled, increasing from 5.0 percent to 9.5 percent. The unemployment rate in individual states increased between 1.4 and 6.8 percentage points, with a median change of 4 percentage points (figure 1). In contrast, a smaller national unemployment rate increase of 1.3 percentage points during the 1990-1991 recession reflected unemployment rate changes in individual states ranging from -0.2 to 3.4 percentage points. Recent economic research suggests that while economic downturns within states generally occur around the same time as national recessions, their timing—or entrance into and exit out of the economic downturn— and duration varies. Some states may enter or exit an economic downturn before or after a national recession. Other states’ economies may expand while the country as a whole is in recession. States can also experience an economic downturn not associated with a national recession. States’ differing characteristics, such as industrial structure, contribute to these differences in economic activity. For example, manufacturing states tend to experience economic downturns sooner than other states in a recession, while energy sector states are often out of sync with the country as a whole. The federal government has multiple policy options at its disposal for responding to national recessions, although federal policy responses are not necessarily limited to the time periods of national recession. For example, in response to the recession beginning in December 2007, the federal government and the Federal Reserve together acted to moderate the downturn and restore economic growth when confronted with unprecedented weakness in the financial sector and the overall economy. The Federal Reserve used monetary policy to respond to the recession by pursuing one of the most significant interest rate reductions in U.S. history. In concert with the Department of the Treasury, it went on to bolster the supply of credit in the economy through measures that provide Federal Reserve backing for a wide variety of loan types, from mortgages to automobile loans to small business loans. The federal government also used fiscal policy to confront the effects of the recession. Existing fiscal stabilizers, such as unemployment insurance and progressive aspects of the tax code, kicked in automatically in order to ease the pressure on household income as economic conditions deteriorated. In addition, Congress enacted legislation providing temporary tax cuts for businesses and a tax rebate for individuals in the first half of 2008 to buoy incomes and spending and created the Troubled Asset Relief Program in the second half of 2008 to give Treasury authority to act to restore financial market functioning. The federal government’s largest response to the recession to date came in early 2009 with the passage of the Recovery Act, the broad purpose of which is to stimulate the economy’s overall demand for goods and services, or aggregate demand. Fiscal stimulus programs are intended to increase aggregate demand—the spending of consumers, business firms, and governments—and may be either automatic or discretionary. Unemployment insurance, the progressive aspects of the tax code, and other fiscal stabilizers provide stimulus automatically by easing pressure on household incomes as economic conditions deteriorate. Discretionary fiscal stimulus, such as that provided by the Recovery Act, can take the form of tax cuts for households and businesses, transfers to individuals, grants-in-aid to state and local governments, or direct federal spending. In response, households, businesses, and governments may purchase more goods and services than they would have otherwise, and governments and businesses may refrain from planned workforce cuts or even hire additional workers. Thus, fiscal stimulus may lead to an overall, net increase in national employment and output. The federal government may have an interest in providing fiscal assistance to state and local governments during recessions because doing so could reduce actions taken by these governments that could exacerbate the effects of the recession. Output, income, and employment all tend to fall during recessions, causing state and local governments to collect less revenue at the same time that demand for the goods and services they provide is increasing. Since state governments typically face balanced budget requirements and other constraints, they adjust to this situation by raising taxes, cutting programs and services, or drawing down reserve funds, all but the last of which amplify short-term recessionary pressure on households and businesses. Local governments may make similar adjustments unless they can borrow to make up for reduced revenue. By providing assistance to state and local governments, the federal government may be able to forestall, or at least moderate, state and local governments’ program and service cuts, tax increases, and liquidation of reserves. The federal government has provided varied forms of assistance directly to state and local governments in response to three of the past six recessions (figure 2). States have been affected differently during each of these recessions. For example, unemployment rates, entry into, and exit out of economic downturns have varied across states during past recessions. See appendix III for a description of each piece of legislation. Congressional decisions about whether to provide fiscal assistance to state and local governments ultimately depend on what role policymakers believe the federal government should take during future national recessions. Perspectives on whether and the extent to which the federal government should provide fiscal assistance to state and local governments are far-ranging—some advocate for not creating an expectation that federal fiscal assistance will be provided, while others argue for a greater federal role in providing fiscal assistance to state and local governments in response to national recessions. Some policy analysts warn against creating an expectation that federal assistance will be available to state and local governments. These analysts contend that federal fiscal assistance can distort state and local fiscal choices and induce greater spending of scarce state funds. For example, the matching requirements of federal grants can induce state governments to dedicate more resources than they otherwise would to areas where these resources are not necessarily required. According to these analysts, federal fiscal assistance to state and local governments reduces government accountability and erodes state control by imposing federal solutions on state problems. Those who hold this perspective see little justification for insulating state governments from the same fiscal discipline that other sectors of the economy follow during a recession. In contrast, other policy analysts favor a federal role in promoting the fiscal health of state and local governments during economic downturns. Proponents of this view contend that during economic downturns, state and local governments face the dilemma that demand for social welfare benefits increases at the same time that state and local governments’ ability to meet these demands is constrained as a result of decreasing tax revenues. General revenues collected by state and local governments over the past three decades are procyclical—typically increasing when the national economy is expanding and decreasing during national recessions, relative to their long-run trend. Own-source revenues, which made up about 80 percent of state and local general revenues in 2008, and total tax revenues, which made up about 68 percent of state and local own-source revenues in 2008, display similar cyclical behavior. In addition, state and local revenue growth lagged the resumption of national economic growth after the 2001 and 2007-2009 recessions, but preceded it during the 1981-1982 and 1990- 1991 recessions. State and local governments’ current tax receipts have declined in each of the six national recessions since 1973. However, both the severity of these revenue declines and the time it has taken for revenues to recover has varied (figure 3). During the most recent recession, state and local governments experienced more severe and long-lasting declines in revenue than in past recessions. For example, over the course of the 2007- 2009 recession, current tax receipts declined 9.2 percent—from $1.4 trillion in the fourth quarter of 2007 to $1.2 trillion in the second quarter of 2009—and had not yet returned to the peak level 5 quarters after the end of the recession. In contrast, the recessions beginning in 1980, 1981, and 1990 were less severe. For example, over the course of the 1990-1991 recession, current tax receipts declined less than 1 percent—from $789 billion in the third quarter of 1990 to about $785 billion in the first quarter of 1991—and recovered as the recession ended in the first quarter of 1991. Larger revenue declines during the two most recent recessions have coincided with increased volatility in state and local government revenues during the past two decades. This increased volatility can be attributed to the fact that since 1973, states have become increasingly reliant on individual income taxes, which are usually more volatile than other revenues. Income tax receipts rose from 15 percent of current tax receipts in 1973 to 20 percent in 2009. Analysts have attributed the increase in income tax as a portion of state revenues to state policy changes favoring income taxes and changes in the ways workers are compensated. Over time, state and local government revenues have become more volatile due to an increased reliance on income tax and a decreased reliance on sales tax. Several factors have contributed to these shifts, including sales tax exemptions for certain items, such as food and medicine; an increase in the share of consumption represented by services, as services are often excluded from sales tax; and increased Internet sales, which can reduce opportunities for state tax collections. Revenue fluctuations during national recessions vary substantially across states. Analysts have reported that this is due in part to states’ differing tax structures, economic conditions, and industrial bases. The aggregate revenue levels described earlier mask varying trends among individual state and local governments, as some state and local governments experience minimal or no revenue declines during national recessions, while others face severe reductions in tax revenues. For example, the median decline in state tax collections from the first quarter of 2008 to the first quarter of 2009 was 11 percent. While variations ranged from a 72 percent decline to a 15 percent increase during this period, most individual state tax collections declined between 16 percent and 6 percent. To better understand the extent to which an individual state’s government tax revenues decline during national recessions, we estimated how responsive state government tax revenues are to changes in total wages, a proxy for the amount of economic activity. We found that, on average, state tax revenues decrease by 1 percent when wages decrease by about 1 percent. However, this effect varies substantially across individual states, with state tax revenues falling by anywhere from about 0.2 percent to about 1.8 percent in response to a 1 percent decline in wages. This means that given the same reduction in wages, one state’s tax revenues may fall at up to nine times the rate of another state. General expenditures by state and local governments are procyclical (table 2). General expenditures also tend to lag the national business cycle by one to two years, so they tend to decline relative to trend later than GDP and also to increase relative to trend later than GDP. However, general expenditures by state and local governments grew at an average annual rate of about 4 percent during the period from 1977 to 2008, so declines in general expenditures relative to trend do not necessarily correspond to absolute declines in the level of general expenditures. Both of the main components of general expenditures—capital outlays and current expenditures—are procyclical. Capital outlays, which made up about 13 percent of general expenditures in 2008, are expenditures on the purchase of buildings, land, and equipment, among other things. Current expenditures, which made up the remaining 87 percent of general expenditures in 2008, include all non-investment spending, such as supplies, materials, and contractual services for current operations; wages and salaries for employees; and cash assistance to needy individuals. Capital outlays show a stronger procyclical relationship than current expenditures, and therefore typically fall relative to trend more than current expenditures during national recessions. Trends in capital outlays and current expenditures tend to lag the national business cycle by 1 to 2 years. However, like general expenditures, both capital outlays and current expenditures by state and local government grew by approximately 4 percent per year between 1977 and 2008, so declines below their long-run trends do not imply that the levels of either capital outlays or current expenditures declined. Spending associated with social safety net programs appears to behave differently over the business cycle than other types of spending. For example, current expenditures on health and hospitals and on public welfare–expenditures associated with social safety net programs such as Medicaid and Temporary Assistance for Needy Families (TANF)— typically increase relative to trend during national recessions (i.e., these expenditures are countercyclical). In contrast, current expenditures on elementary and secondary education, higher education, highways, and police and corrections typically decrease relative to trend during economic downturns (i.e., these expenditures are procyclical). Current expenditures on health and hospitals and on public welfare may be countercyclical because the number of people living in poverty is one of the main drivers of both types of expenditures, and the number of people living in poverty tends to increase during national recessions and to decrease during national expansions. In addition, current expenditures on some functions seem to lag the business cycle more than others. For example, current expenditures on elementary and secondary education and higher education seem to lag the business cycle by 1 to 2 years, while current expenditures on other functions do not seem to lag the business cycle. Thus, while state and local governments tend to reduce total current expenditures relative to trend during national recessions, they do not do so for every service. Furthermore, current expenditures on some services, such as education, take longer to recover than others after the recession is over. However, current expenditures on all the services we analyzed grew every year on average during the period of 1977 to 2008, so declines relative to trend were not necessarily absolute declines in spending on these services. If state and local government expenditures are typically procyclical, then state and local governments may have difficulties providing services during recessions. Reduced expenditures relative to trend during recessions may be reflecting reduced revenues relative to trend rather than reduced desire for services. For example, current expenditures on elementary and secondary education tend to fall relative to trend during recessions, but the population of elementary and secondary school-age children is unlikely to vary much as a result of the business cycle. Current expenditures on higher education also tend to fall relative to trend during recessions even though enrollment in colleges and universities may increase during recessions. Furthermore, the finding that current expenditures on health and hospitals and on public welfare tend to increase relative to trend during recessions does not definitively indicate the extent to which these increases are meeting increased demand during recessions. For example, we have previously reported that economic downturns in states result in rising unemployment, which can lead to increases in the number of individuals who are eligible for Medicaid coverage, and in declining tax revenues, which can lead to less available revenue with which to fund coverage of additional enrollees. Between 2001 and 2002, Medicaid enrollment rose 8.6 percent, which was largely attributed to states’ increases in unemployment. During this same period, state tax revenues fell 7.5 percent. The extent to which state governments maintained the capacity to fund their Medicaid programs differed during past recessions. These differences reflect variations in state unemployment rate increases and varied increases in Medicaid enrollment during recession periods. As revenues decline and demand increases for programs such as Medicaid and unemployment insurance during national recessions, state governments make fiscal choices within the constraints of their available resources. These decisions typically entail raising taxes, tapping reserves, reducing spending (as described earlier), or using other budget strategies to respond to revenue declines. In our analysis of the discretionary changes state governments have made to their revenue policies since 1990, we found that—in the aggregate— state governments made policy changes to increase taxes and fees during or after every national recession since state fiscal year 1990 (figure 4). For example, tax and fee increases as a percent of state general fund revenue peaked at about 5.1 percent in state fiscal year 1992, about 1.8 percent in state fiscal year 2004, and about 3.9 percent in state fiscal year 2010. From state fiscal years 1995 to 2001, states reduced taxes and fees by amounts ranging from 0.7 percent to 1.5 percent of general fund revenues. From state fiscal years 2003 to 2008, discretionary changes in states’ taxes and fees ranged from -0.3 percent to 1.8 percent. Within these national trends, individual state revenue policy choices varied considerably during our period of analysis. For example, in state fiscal year 1992, state governments enacted changes equal to 5.1 percent of general fund revenues for all states in the aggregate. However, during that fiscal year, individual states’ policy changes ranged from reducing taxes and fees by 1.4 percent to raising taxes and fees by 21.3 percent of general fund revenues. In state fiscal year 2008, aggregate state policy changes were about 0 percent of general fund revenues, but individual state policy changes ranged from decreasing taxes and fees by 6.1 percent to increasing taxes and fees by 19.3 percent. As we have previously reported, most state governments prepare for future budget uncertainty by establishing fiscal reserves. NASBO has reported that 48 states have budget stabilization funds, which may be budget reserves, revenue-shortfall accounts, or cash-flow accounts. State governments have tapped fiscal reserves to cope with revenue shortfalls during recent national recessions, as indicated by their reported total balances, which are comprised of general fund ending balances and the amounts in state budget stabilization “rainy day” funds (figure 5). Prior to the recessions beginning in 2000 and 2007, state governments built large balance levels, in the aggregate. According to NGA and NASBO’s Fiscal Survey of States, these balance levels reached 10.4 percent of expenditures in state fiscal year 2000 and 11.5 percent in 2006. Total balances typically reached their lowest points during or just after national recessions. By state fiscal year 2003, states’ total balances dropped to 3.2 percent of expenditures, and in fiscal year 2010 they had fallen to 6.4 percent. These total balance levels appear inflated, however, because individual state governments’ reserves can vary substantially. For example, NASBO reports that for state fiscal year 2010, two states (Texas and Alaska) represented $25.4 billion—more than 64 percent—of all state governments’ total balances. Removing these states, total balances were 2.4 percent of expenditures for the remaining 48 state governments. Since 1973, state and local governments have, in general, borrowed more and saved less during national recessions. Net lending or net borrowing by state and local governments—which is comprised of total receipts minus total expenditures—has fallen after the peak of each business cycle since 1973 (figure 6). While the state and local government sector increased its borrowing substantially during recent recessions, the sector did not increase net investments to the same extent. For example, net borrowing increased from 0.2 percent of GDP in the first quarter of 2006 to 1.15 percent of GDP in the third quarter of 2008 for all state and local governments in the aggregate. In contrast, state and local government investment ranged from 1.1 percent to 1.2 percent of GDP during the same period. The level of total state and local government debt per capita varies substantially across states. Our analysis found that on average state and local government total debt per capita was $7,695 in fiscal year 2008; however, within individual states debt ranged from a minimum of $3,760 per capita to a maximum of $14,513 per capita. As a percentage of gross state product (GSP), total state and local government debt averaged 16.9 percent and ranged from 6.6 percent to 25.4 percent in fiscal year 2008. State and local government total debt levels appear to correlate with GSP, suggesting that state and local governments within states with more fiscal resources tend to hold more debt. State budget officials have used other short-term budget measures to address revenue declines while avoiding broad-based tax increases. Some of these strategies include: shifting revenues or expenditures across fiscal years, securitizing revenue streams, reducing payments or revenue sharing to local governments, deferring infrastructure maintenance, borrowing from or transferring funds from outside the general fund to address revenue shortfalls, and reducing funding levels for pensions. In addition, a number of state governments have redesigned government programs to improve efficiency and reduce expenditures. According to the National Governor’s Association Center for Best Practices (NGA Center), a recession provides state fiscal managers with an opportunity for cutting back inefficient operations. The NGA Center tracked state governments’ efforts to restructure government, and in fiscal years 2009 and 2010, a broad range of budget cuts and programmatic changes were enacted in areas such as corrections, K-12 education, higher education, and employee costs (salaries and benefits). While some of these changes were temporary, the NGA Center contends these changes reflect a “new normal” for state government in the long term. The NGA Center found that at least 15 state governments conducted governmentwide reviews to improve efficiency and reduce costs; at least 18 state governments reorganized agencies; and more than 20 state governments altered employee compensation, including enacting pension reforms. Evaluations of prior federal fiscal assistance strategies have identified considerations to guide policymakers as they consider the design of future legislative responses to national recessions. To ensure that federal fiscal assistance is effective, we and others have said that policymakers can benefit from considering the following when developing a policy strategy. Timing/triggering mechanisms—Fiscal assistance that begins to flow to state and local governments when the national economy is contracting is more likely to help state and local governments avoid actions that exacerbate the economic contraction, such as increasing taxes or cutting expenditures. Since it takes time for state and local government revenues and service demands to return to pre-recession levels, fiscal assistance that continues beyond the end of a recession may help state and local governments avoid similar actions that slow the economic recovery. Federal policy strategies specifically intended to stabilize state and local governments’ budgets may have to be timed differently than those designed to stimulate the national economy, because state budget difficulties often persist beyond the end of a recession. Securing legislative approval of fiscal assistance through Congress can result in a time lag before such assistance is available. For example, the Recovery Act was passed in February 2009, nearly five quarters after the national recession began in December 2007. There can also be a second lag that results from the time it takes for the federal government to distribute fiscal assistance to the states. Further, state governments often have to set up mechanisms for channeling the funds into the necessary programs. All of this slows the process of spending the money during a recession. In the case of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), for example, we found that the first federal funds were distributed 19 months after the end of the national recession. A trigger could automatically provide federal assistance, or it could prompt policymakers to take action. Economists at the Federal Reserve Bank of Chicago have described the ideal countercyclical assistance program as one having an automatically activated, pre-arranged triggering mechanism that could remove some of the political considerations from the program’s design and eliminate delays inherent to the legislative process. Such a trigger could also specify criteria for ending assistance. Targeting—If federal fiscal assistance to state and local governments is targeted based on the magnitude of the recession’s effect on each state’s economy, this approach can facilitate economic recovery and moderate fiscal distress at the state and local level. Targeting requires careful consideration of the differences in individual states’ downturns while also striking a balance with other policy objectives. As discussed below, effective targeting of federal fiscal assistance is dependent upon the selection of indicators that correspond to the specific purpose(s) of the particular policy strategy. Temporary—As a general principle, federal fiscal assistance provided in response to national recessions is temporary. While a federal fiscal stimulus strategy can increase economic growth in the short run, such efforts can contribute to the federal budget deficit if allowed to run too long after entering a period of strong recovery. The program can be designed so that the assistance ends or is phased out without causing a major disruption in state government budget planning. If federal assistance is poorly timed, badly targeted, or permanently increases the budget deficit, the short-term benefits of the assistance package may not offset the long-term cost. Consistency with other policy objectives—The design of federal fiscal assistance occurs in tandem with consideration of the impact these strategies could have on decision makers’ other policy objectives. Such considerations include competing demands for federal resources and an assessment of states’ ability to cope with their economic conditions without further federal assistance. As the Peterson-Pew Commission on Budget Reform recently noted in its report, current budget practices recognize the costs of economic emergencies only when these events occur. Although we do not know when recessions will occur or how severe future recessions will be, the current practice of waiting to act until these economic events occur can result in greater public costs than if policy objectives of advance preparation (such as reduced consumption and increased savings during economic upswings) were incorporated into federal fiscal assistance strategies. A standby federal fiscal assistance policy could induce moral hazard by encouraging state or local governments to expect similar federal actions in future crises, thereby weakening their incentives to properly manage risks. For example, states could have less incentive to build, maintain, and grow their rainy day or other reserve funds if they believe they may receive assistance from the federal government during future recessions. Another consideration is the policy objective of maintaining accountability while promoting flexibility in state spending. Past studies have shown that unrestricted federal funds are fungible and can be substituted for state funds, and the uses of such funds can be difficult or impossible to track. When policymakers select indicators to time and target federal fiscal assistance in response to a national recession, their selection depends on the specific purposes of the proposed assistance program. For example, during a recession, policymakers may choose to provide general fiscal assistance or assistance for specific purposes such as supporting states’ Medicaid or education programs. The indicators chosen to time and target general fiscal assistance could differ from those chosen for the purpose of supporting Medicaid or education. Indicators chosen for Medicaid could also differ from those chosen to provide assistance for education. In addition, different indicators may be needed to determine the timing (triggering on), the targeting (allocating), and the halting (triggering off) of federal fiscal assistance. For example, policymakers could use a national labor market indicator to begin assistance and a state-level indicator to halt assistance. We previously reported on a policy strategy intended to support state Medicaid programs during economic downturns. This strategy used state unemployment rates to trigger the flow of aid on and off. This strategy used state unemployment rates along with an additional indicator—relative state Medicaid costs—to determine the amount of aid each state receives. Policymakers could select indicators with the intent of responding to the effects of a particular recession. For example, if policymakers want to begin providing fiscal assistance to state and local governments as states enter an economic downturn, they are challenged by the fact that different states may enter into economic downturns at different times. Policymakers would need to select an indicator that provides information on the overall amount of economic activity in individual states, that is frequent enough to distinguish between different phases of the business cycle, and is available with relatively little lag time. Timely, state-level, publicly available indicators can be found primarily in labor market data, but are also found in housing market and personal income data. The indicators in table 3 are all commonly used measures of national macroeconomic activity that are also available at the state level. At the national level, indicators such as employment, weekly hours, and housing units authorized by building permits are procyclical, while other indicators, such as unemployment, are countercyclical. The indicators in table 3 are published either monthly or quarterly, and thus cover periods shorter than the length of the typical national recession. These indicators are available with less than a 6-month publication lag, as indicators with publication lags greater than 6 months may not reveal the downturn until it is already over and the recovery has begun. The illustrative indicators shown in the table above exclude indicators of fiscal stress (such as declines in tax receipts or budget gaps) because they are dependent on state governments’ policy choices and because state definitions and measurement techniques vary for calculations such as budget gaps. For example, the list does not include state governments’ quarterly tax receipts because this measure reflects policy decisions within each state. Data sources detailing state-level participation in intergovernmental benefit programs are also excluded because program enrollment data can understate the number of individuals eligible for the program. For example, we did not include unemployment insurance claim data from the Employment and Training Administration because BLS has reported that unemployment insurance information cannot be used as a source for complete information on the number of unemployed. We excluded this indicator because claims data may underestimate the number of unemployed because some people are still jobless when their benefits run out, some are not eligible, and some never apply for benefits. Recent research suggests that some indicators may be better able to trigger assistance on and off than other indicators, depending on the specific purpose of the assistance. Economists from the Federal Reserve Bank of Chicago found that a trigger based on the national aggregate of the Federal Reserve Bank of Philadelphia’s State Coincident Indexes— which are comprised of nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements—would turn assistance on close to the beginning of a national recession and would turn assistance off close to the end of a national recession. They found that a trigger based on the national unemployment rate also triggered the flow of assistance on close to the beginning of a national recession, but did not trigger the assistance off until well after the national economic recovery was under way, reflecting the lag in employment recovery after recessions. If the goal of aid is to maintain state and local government spending only during the recession, then the State Coincident Indexes may be an appropriate indicator. However, if the goal of aid is to maintain state and local government spending until an individual state’s economy fully recovers, the unemployment rate may be an appropriate indicator. Knowledge of the results, challenges, and unintended consequences of past policy actions can inform deliberations as policymakers determine whether and how to provide federal fiscal assistance in response to future national recessions. Federal responses to prior recessions have included providing various forms of federal fiscal assistance directly to state and local governments as well as decisions not to provide fiscal assistance in response to national recessions. When the federal government has provided fiscal assistance, such assistance has fallen into two general categories: (1) unrestricted or general purpose fiscal assistance, which can include general revenue sharing programs; and (2) federal fiscal assistance through grants for specific purposes. This second category of assistance has included funding for existing grant programs (including both categorical and formula grants) as well as funding for new grant programs to state and local governments. Unrestricted or general purpose grants to states and localities maximize spending discretion for state and local governments. This approach has included antirecession payments and general revenue sharing funds to increase state and local expenditures or forestall potential tax increases. Because there are minimal restrictions on the use of these funds, they offer the advantage of not interfering with state spending priorities as well as the opportunity to use the funds quickly. However, our past evaluations, as well as work by others, have noted that this approach also presents challenges and unintended consequences. Due to the nature of such assistance, state and local governments may use unrestricted federal funds for activities that would have otherwise been funded using non-federal sources. Also, in an example from the 1970s, federal antirecession payments were provided through the Antirecession Fiscal Assistance (ARFA) program, which distributed more than $3 billion between July 1976 and September 1978 to state and local governments. State and local governments could use the ARFA funds for the maintenance of basic services customarily provided by these governments, such as public welfare, education and police protection. The ARFA funds were intended to facilitate state spending. However, because the funds were subject to states’ standard appropriations procedures, this slowed states’ spending of the funds. In its study of ARFA, the Department of the Treasury reported that states appropriated ARFA funds on average 7 months later than the states appropriated their own revenues, thereby delaying entry of the funds into the states’ spending stream. More recently, we found similar issues in our 2004 review of the component of the JGTRRA that provided $10 billion in unrestricted, temporary fiscal relief payments to states that were allocated on a per capita basis. We found that these fiscal relief funds were not targeted to individual states based on the impact of the recession and found it doubtful that these payments were ideally timed to achieve their greatest possible economic stimulus. JGTRRA fiscal relief payments were first distributed to the states in June 2003, about 19 months after the end of the 2001 recession and after the beginning of the economic expansion. However, because employment levels continued to decline even after the economy entered an expansion period, we found that the JGTTRA fiscal relief payments likely helped resolve ongoing state budgetary problems. Some prior federal fiscal assistance strategies have included use of existing grant programs to deliver assistance to states. This approach has the advantage of targeting funding to reflect federal policy priorities while avoiding the delays involved in establishing and implementing entirely new programs. For example, an amendment to the Comprehensive Employment and Training Act of 1973 (CETA) created Title VI, Emergency Jobs Programs (Title VI), which provided federal fiscal assistance in response to the recession that began in 1973. Title VI adapted the existing CETA federal jobs program to mitigate cyclical unemployment by providing funding to temporarily hire employees in federal, state, and local governments. While policy analysts found that Title VI provided visible and useful services to communities and fiscal relief to some localities, they also found that there were unintended consequences resulting from implementation of the program. According to our prior work, and the work of others, these consequences included the practice by some state governments of laying off current employees and later rehiring the same employees using Title VI funds, instead of using their existing state government funds. The federal government’s responses to the recessions beginning in March 2001 and December 2007 provide recent examples of the use of existing grant structures to expedite the implementation of fiscal assistance. The federal response to both recessions included temporarily increasing the rate at which states are reimbursed for Medicaid expenditures through an increase to the existing Federal Medical Assistance Percentage (FMAP) formula. Both JGTRRA and the Recovery Act distributed increased FMAP funds to states through the existing Medicaid payment management system. We have reported that increased FMAP funds provided by the Recovery Act were better timed and targeted for state Medicaid needs than funds provided following the 2001 national recession. Overall, the timing of the initial provision of Recovery Act funds responded to state Medicaid needs because assistance began during the 2007 national recession while nearly all states were experiencing Medicaid enrollment increases and revenue decreases. However, state budget officials also referred to the temporary nature of the funds and the fiscal challenges expected to extend beyond the timing of funds provided by the Recovery Act. Officials discussed a desire to avoid what they referred to as the “cliff effect” associated with the dates when the funding ends. The increased FMAP funds provided by the Recovery Act were well targeted for state Medicaid enrollment growth based on changes in state unemployment rates. However, the Recovery Act did not allocate assistance based on state variation in the ability to generate revenue. As a result, the increased FMAP funding did not reflect varying degrees of decreased revenue that states had for maintaining Medicaid service. The increased FMAP funds provided to states following the 2001 recession were provided well after the recession ended and not targeted based on need. The Recovery Act also increased funding for other existing grant programs to provide fiscal assistance to state and local governments. For example, the Recovery Act provided an additional $2 billion in funds for the Edward Byrne Memorial Justice Assistance Grant (JAG) Program. Consistent with the pre-existing program, states and localities could use their Recovery Act JAG grant funds over a period of 4 years to support a range of activities in seven broad statutorily established program areas including law enforcement, crime prevention, and corrections. In a recent report, we found that of the states we reviewed, all reported using Recovery Act JAG funds to prevent cuts in staff, programs, or essential services. Recipients of Recovery Act JAG funding received their money in one of two ways— either as a direct payment from the Bureau of Justice Assistance or as a pass-through from a state administering agency (SAA)—and they reported using their funds primarily for law enforcement and corrections. Localities and SAAs that received funds directly from the Department of Justice expended their awards at varying rates, and the expenditure of Recovery Act JAG funds generally lagged behind the funds awarded by the SAAs. Federal fiscal assistance using existing grant programs can also result in the unintended consequence of hindering the countercyclical intent of the particular assistance program. This can occur because funds flow to states through existing funding formulas typically established for purposes other than providing federal fiscal assistance in response to a national recession. For example, in the case of Medicaid, the regular (base) FMAP formula is based on a 3-year average of a state’s per capita income (PCI) relative to U.S. per capita income. PCI does not account for current economic conditions in states, as lags in computing PCI and implementing regular (base) FMAP rates mean that the FMAP rates reflect economic conditions that existed several years earlier. In the case of Recovery Act JAG funding, the Bureau of Justice Assistance allocated Recovery Act JAG funds the same way it allocated non-Recovery Act JAG funds by combining a statutory formula determined by states’ populations and violent crime statistics with the statutory minimum allocation to ensure that each state and eligible territory received some funding. This approach offers expedience by relying on the existing formula. However, the purpose of the formula does not take into account states’ fiscal circumstances during national recessions. Prior federal fiscal assistance provided for specific purposes has also included funding for new grant programs. For example, the Recovery Act created a new program, the State Fiscal Stabilization Fund (SFSF), in part to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other essential government services, such as public safety. SFSF funds for education distributed under the Recovery Act had to first be used to alleviate shortfalls in state support for education to local education agencies and public institutions of higher education. States had to use 81.8 percent of their SFSF formula grant funds to support education and use the remaining 18.2 percent to fund a variety of educational or noneducational entities including state police forces, fire departments, corrections departments, and health care facilities and hospitals. In our prior work, we found budget debates at the state level delayed the initial allocation of education-related funds in some states. In contrast to these approaches to providing fiscal assistance, in three of the six recessions since 1974, the federal government did not provide fiscal assistance directly to state and local governments (Jan. to July 1980, July 1981 to Nov. 1982, and July 1990 to March 1991). Our prior report has noted that by providing state and local governments with fiscal assistance during downturns, the federal government may risk discouraging states from taking the actions necessary to prepare themselves for the fiscal pressures associated with future recessions. Other analysts have suggested that a recession provides state and local officials with an opportunity for cutting back inefficient operations. If the federal government immediately steps in with fiscal assistance, such an opportunity may be lost. Consequently, policymakers could respond to a future recession by deciding that the federal government should encourage state and local government accountability for their own fiscal circumstances by not providing federal fiscal assistance. As a possible alternative to direct federal fiscal assistance to state governments, policy analysts have also considered the concept of a federally sponsored tool to help states prepare for future recessions. We previously discussed proposals for other new programs that would help states respond to recessions but may not provide direct federal fiscal assistance. Examples of these proposed strategies include a national rainy day fund and an intergovernmental loan program that would help states cope with economic downturns by having greater autonomy over their receipt of federal assistance. None of these options have been included in federal fiscal assistance legislation to date. A national rainy day fund would require individual state governments to pay into a fund that would assist states during economic downturns, while a quasigovernmental agency would administer the fund. The concept of a national rainy day fund is based on establishing a national risk pool to provide countercyclical assistance to states during economic downturns. The national rainy day fund could be modeled on the private unemployment compensation trust fund in that states would be given experience ratings that would require larger contributions based on their individual experience using their own rainy day funds. Proponents of the national rainy day fund argue that it could reduce state governments’ fiscal uncertainty by allowing states to use national rainy day funds instead of raising taxes or modifying or cutting programs. An intergovernmental loan program could be an alternative to a national rainy day fund program. The funding for such a loan program could come from either the federal government or from the private capital market, and it could be subsidized and possibly guaranteed by the federal government. These alternative strategies to direct federal fiscal assistance to state governments face several design and implementation challenges. Convincing each state to fully fund its required contribution would be an initial challenge to the viability of a national rainy day program. With regard to an intergovernmental loan program, such a program could also delay state governments’ budget decisions, as states may need to dedicate portions of future budgets to pay for interest on loans. Determining the appropriate amount of money each state should pay into a national rainy day fund and controlling the risk and cost of any direct intergovernmental loan program would present additional challenges. In addition, representatives from the state organizations and think tanks we spoke with told us they did not see proposals for a national rainy day fund or intergovernmental loan programs as politically feasible. The skepticism regarding these programs included concerns such as accountability issues with a national rainy day program, as well as issues with states’ ability to pay back loan interest in a program patterned after the unemployment insurance trust fund. We are sending copies of this report to interested congressional committees. 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 letter, please contact Stanley J. Czerwinski at (202) 512-6806 or [email protected], or Thomas J. McCool at (202) 512-2700 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix describes our the work w local budgets during national recessi that exist to provid governments. We also include a list of the organiza during the course of our work. The American Reinvestment and Recovery Act of 2009 (Recovery Act) required GAO to evaluate how national economic downturns have affected states over the past several decades. Pub. L. No. 111-5, Div. B, title V, § 5008, 123 Stat. 115 (Feb. 17, 2009). nance variable is procyclical if the correlation of its cyclical component To describe the cyclical behavior of state and local government revenues and expenditures, we first plotted the cyclical components of the finance variables and the cyclical component of GDP—our benchmark indicator the business cycle—to visually examine how they move in relation to one another. We then estimated the correlations of the cyclical components the finance variables with the cy clical component of GDP for the same year, for 1 to 3 years in the past, and 1 to 3 years in the future. In general, a fi with the cyclical component of GDP for the same year is positive, and a finance variable is countercyclical if the correlation of its cyclical component with the cyclical component of GDP for the same year is negative. Specifically, we correlation was greater than or equal to 0.2 and as countercyclical if the correlation was less than or equal to -0.2. The larger the correlation is in absolute value, t relationship. A maximum correlation for, say, the previous year indicates that a finance variable tends to lag the business cycle by 1 year. identified a finance variable as procyclical if the he stronger the procyclical or countercyclical e used three alternative methods to estimate the cyclical components of W the state and local government finance variables and of GDP: (1) by linearly detrending the natural logarithms of the variables, (2) by usin Baxter-King bandpass filter, and (3) by using the Christiano-Fitzgerald random walk bandpass filter. Figures 7-9 graph the cyclical compo selected finance variables and GDP as estimated by linear detrending. Table 4 shows the correlations we calculated using the cyclical components of the finance variables and GDP as estimated by linear detrending. All three methods produced similar results. nents of nd loc ver e dar y cal ye ach g ear-b ars. t financ nt’s own rting pe lly, a survey yea e vari fisca riod t ables we use are collect l ye er tha hat t, ar basis, ed n a s which governments maintain their financial records. Any attempt to standardize the time frame for more than 80,000 governments would create an insurmountable data collection challenge and would be cost prohibitive. We analyzed data from BEA NIPA table 3.3 “State and Local Government Current Receipts and Expenditures” to identify tre owing, inds in state and loca gox recvernme net borreipts,nt tanvestm nt and savings from 1e to 2010. W ed theP price in GDe usrted BEA to deflate value dex repoow revenss hars. Tes vaween states durby ue declind beter-year changes in states’ rie 2009 dollear-ov o asse the most recent recession, we calculated y quarterly tax receipt d a from the U.S. Census Bureau. We calculated at variation ment ded local gopita acrosbt per cain state ans statvern es us Census Bureau. Finally, we reviewed fiscal year 2008 data from the U.S. economic and finance literature to better understand how state budgets are affected during national business cycles. To identify strategies for providing federal assistance to state and local governments during national recessions, we reviewed federal fiscal assistance programs enacted since 1973. We identified these programs and potential considerations for designing a federal assistance program by reviewing GAO, Congressional Research Service (CRS), and Congressional Budget Office (CBO) reports and conducting a search for relevant legislation. The federal fiscal programs we selected to review for this report were designed to help state governments address the fiscal effects of national recessions. This legislation was not intended to address long- term fiscal challenges facing state and local governments. We analyzed the legislative history and statutory language of past federal assistance programs, as well as any policy goals articulated in the statutes themselves. Finally, we interviewed analysts at associations and think tanks familiar with the design and implementation of federal fiscal assistance legislation. To identify factors policymakers should consider when selecting indicators to time and target federal countercyclical assistance, we reviewed reports from GAO, CBO, CRS, Federal Reserve Banks, the U.S. Department of the Treasury (Treasury), and academic institutions. We considered indicators’ availability at the state level and timeliness (in terms of frequency and publication lag time) to identify indicators policymakers could potentially use to target and time countercyclical federal assistance during downturns. We used several decision rules to assess indicators’ availability and timeliness. In terms of availability, indicators created by private sources were excluded because they may be available only for a fee, may not produce the data in the future, or th methodology may be proprietary, making analysis of the data’s reliability difficult. In terms of timeliness, we selected indicators that were publish at least quarterly and with less than a 6-month publication lag. Quarterly publication ensures the indicator covers time periods that are shorter th the length of the typical economic downturn, as indicators that cover mor than 3 months may not be able to differentiate between phases of the business cycle. We selected indicators with a relatively short publication lag because indicators with publication lags greater than 6 months may not reveal the downturn until it is already over and the recovery has begun. For example, we did not include Treasury’s total taxable resources—a measure of states’ relative fiscal capacity—as a potential indicator because it is available on an annual basis with a 3-year lag. s’ We also excluded indicators that may be influenced by state government policy choices. This includes indicators of fiscal stress, such as declines in tax receipts or budget gaps. For example, tax receipts reflect states’ policy choices, as states may change tax rates in response to declining revenues able in a recession. We excluded state governments’ tax receipts from the tbecause this measure is heavily dependent on and reflects policy decisions within each state. In addition, by choosing an indicator independent of policy choices, policymakers may reduce the potential for unintended consequences such as discouraging states from preparing for budge uncertainty (sometimes referred to as moral hazard) when desig federal fiscal assistance program. We also excluded data intergovernmental benefit programs because program enrollment data . For may understate the number of individuals eligible for the program example, we did not include unemployment insurance claims data fr the Department of Labor’s Employment and Training Administration because the Bureau of Labor Statistics (BLS) has reported that unemployment insurance information cannot be used as a source for e complete information on the number of unemployed. This is becaus claims data may underestimate the number of the unemployed because some people are still jobless when their benefits run out, some individua are not eligible for unemployment assistance, and some individuals ne apply for benefits. sources detailing state-level participation in The indicators discussed in this report are not an exhaustive list of indicators available to time and target federal fiscal assistance to states. Depending on the specific policy strategy used, policymakers may want to combine the indicators with other information, such as data on increased demand for specific programs, to target assistance for specific programs or state circumstances. For example, GAO has reported on a policy strategy that combined information on the change in a state’s unemployment rate with an index of the average level of Medicaid expenditures by state. We contacted representatives of state and local government organizati ons and public policy and research organizations to (1) gain insight into publicpolicy strategies and potential indicators for timing and targeting assistance to states; (2) validate our selection of strategies and discuss considerations for designing federal fiscal assistance to state and local governments during national recessions; and (3) obtain views regard the feasibility and potential effects of these strategies. The o we contacted included: American Enterprise Institute, Center for State & Local Government Excellence Center on Budget and Policy Priorities, Federal Reserve Bank of Chicago, Federal Reserve Bank of St. Louis, National Association of State Budget Officers, National Governors Association, National Conference of State Legislatures, National League of Cities The Nelson A. Rockefeller Institute of Government, and The Pew Center on the States. We assessed the reliability of the data we used for this review and determined that they were sufficiently reliable for our purposes. We conducted this performance audit from February 2010 to March 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to o btain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. . This appendix provides summaries of the U.S. Census Bureau’s definition of state and local government revenues and expenditures used in our analyses of how state and local government budgets are affected during national recessions. These summaries are adapted from U.S. Census Bureau, Government Finance and Employment Classification Manual, October 2006. We have excluded categories that were not discussed in this report. Employee and retiree health benefits and government pension contributions on behalf of current employees are accounted for in the sector (e.g., education) for which the employees work. General expenditures—All expenditures except those classified as utilit liquor store, or social insurance trust expenditures. 1. Capital outlays—Direc contract or government employee, construction of buildings and other improvements; for purchase of land, equipment, and existing structures; and for payments on capital leases. t expenditures for purchase or construction, by 2. Current expenditures—Direct expen officers and employees and for supplies, materials, and contractual services except any amounts for capital outlay (current operations), amounts paid for the use of borrowed money (interest on debt), direct cash assistance to foreign governments, private individuals, and nongovernmental organizations neither in return for goods and services nor in repayment of debt and other claims against the government (assistance and subsidies), and amounts paid to other governments for performance of specific functions or for general financial support (intergovernmental expenditure), including the following categories: ditures for compensation of own a. Elementary and secondary education—Current expenditures for the operation, maintenance, and construction of public schools and facilities for elementary and secondary education, vocational- technical education, and other educational institutions except tho for higher education; operations by independent governments (scho districts) as well as those operated as integral agencies of state, county, municipal, or township governments; and financial support of public elementary and secondary schools. b. Health and hospitals—Current expenditures for the provision of services for the conservation and improvement of public health, other than hospital care, and financial support of other governments’ health programs; for a government’s own hospitals as well as expenditures for the provision of care in other hospitals; for the provision of care in other hospitals and support of other public and private hospitals. c. Higher education—Current expenditures for higher education activities and facilities that provide supplementary services to students, faculty or staff, and which are self-supported (wholly or largely through charges for services) and operated on a commerci basis (higher education auxiliary enterprises) and for degree-grant institutions operated by state or local governments that provide academic training beyond the high school level, other than for auxiliary enterprises of the state or local institution (other higher education). d. Highways—Current expenditures for the maintenance, operation, repair, and construction of highways, streets, roads, alleys, sidewal bridges, tunnels, ferry boats, viaducts, and related non-toll structures (regular highways) and for highways, roads, bridges, ferries, and tunnels operated on a fee or toll basis (toll highways). e. Police and corrections—Current expenditures for residential institutions or facilities for the confinement, correction, and rehabilitation of convicted adults, or juveniles adjudicated, delinqu or in need of supervision, and for the detention of adults and charged with a crime and awaiting trial (correctional institutions); fo correctional activities other than federal, state and local residential institutions or facilities (other corrections); and for general police, sheriff, state police, and other governmental departments that preserve law and order, protect persons and property from illegal acts, and work to prevent, control, investigate, and reduce crime (police protection). f. Public welfare—Current expenditures associated with Supplemental Security Income (SSI), Temporary Assistance for Need Families (TANF), Medical Assistance Program (Medicaid) (public welfare—federal categorical assistance programs); cash payments made directly to individuals contingent upon their need, other than those under federal categorical assistance programs (public welfare— other cash assistance programs); public welfare payments made directly to private vendors for medical assistance and hospital or health care, including Medicaid (Title XIX), plus mandatory state payments to the federal government to offset costs of prescription drugs under Medicare Part D and payments to vendors or the federal government must be made on behalf of low-income or means-tested y beneficiaries, or other medically qualified persons (public welfare— vendor payments for medical care); payments under public welfare programs made directly to private vendors (i.e., individuals or nongovernmental organizations furnishing goods and services) for services and commodities, other than medical, hospital, and health care, on behalf of low-income or other means-tested beneficiaries (public welfare—vendor payments for other purposes); provision, construction, and maintenance of nursing homes and welfare institutions owned and operated by a government for the benefit of needy persons (contingent upon their financial or medical need veterans (public welfare—institutions); and all expenditures for welfare activities not classified elsewhere (public welfare—other). g. Other—Current expenditures for all other functions. eral revenue—General revenue is all revenue except that classified as r store, utility, or insurance trust revenue. 1. Intergovernmental revenue from the federal government—Amounts received directly from the federal government. For states, this includ fedety, reimral grants and aid, payments-in-lieu-of-taxes on federal proper tranbursements for state activities, and revenue received but later govesmitted through the state to local governments. For local rnments, this category includes only direct aid from the federal government. 2. Ow by a emp insu improvements (taxes), charges imposed for providing current services or for t t activities (cur own n-source revenue—Revenue from compulsory contributions e government for public purposes, other than for employee and loyer assessments and contributions to finance retirement and soc rance trust systems and for special assessments to pay capital he sale of products in connection with general governmen rent charges), and all other general revenue of governments from their sources (miscellaneous general revenue). CETA—Provided job training and employment for economically disadvantaged, unemployed, and underemployed persons through a system of federal, sta and local programs. grams (Added by Title 1 ub. L. No. 93-567) Titles II and VI—Provided transitional state and local government public service jobs in areas with high unemployment rates. Provided emergency financial assistance to create, maintain or expand jobs in areas suffering from unusually high levels of unemployment. Title Capital Development and Investment Act of 1976 I—Local Public Works Authorized funds to establish an antirecess and increased federal funding to states and localities to improve the nation’s public infrastructure—roads, bridges, sanitation systems, and other public facilities. Title II—Antirecession Fiscal Assistance (ARFA) ARFA intended to offset certain fiscal actio ns taken by state governments during recessions, including raising taxes and layoffs. It was designed to achieve three objectives: to maintain public employment, maintain public services, an counter the November 1973—March 1975 recession. Under the ARFA program, state governments receive third of the allocation, while local governments received two-thirds. The State and Local Fiscal Assistance Act of 1972 in to help assure the financial soundness of state and local governments through general revenue sharing. The Amendments of 1976 extended and modified this Act. For payments to the State and Local Government Fiscal Assistance Trust Fund, as authorized by The State and Local Fiscal Assistance Act of 1972, which was intended to help assure the financial soundness of state and local governments through general revenue sharing. See Antirecession Fiscal Assistance (ARFA) above. An additional amount for ARFA was to remain available until September 30, 1978. Employment And Training Made economic stimulus a Assistance and training. Made economic stimulus appropriations for CETA. Made economic stimulus appropriations for the fiscal year ending September 30, 1977, as well as for other purposes. Increased the authorization for the Local Public Works Capital Development and Investment Act of 1976 (see above) and provided funding for the im works projects which were to be performed by cont awarded by competitive bidding. Did not include federal counte governments. Federal countercyclical legislation enacted provided som assisting state and local governments. Provided (1) fiscal relief through a temporary increase in federal Medicaid funding for all states, as well as (2) general assistance divided among the states for essen government services. The funds were allocated to the states on a per capita basis, adjusted to provide for minimum payment amounts to smaller states. Division B, Title V: State Fiscal Relief Fund (FMAP) Education Jobs and Recovery Act FMAP Extension, Pub. L. No. 111- 226 (federal legislation enacted on August 10, 2010, to amend the Recovery Act.) Funds awarded to local educational agencies under this law may be used only to retain existing employees, to recall or rehire former employees, and to hire new employees, in order to provide educational and related services. These funds may not be used to supplement a rainy-day fund or reduce debt obligations incurred by the state. Provided for an extension of increased FMAP funding through June 30, 2011, but at a lower level. Stanley J. Czerwinski, Director, Strategic Issues, (202) 512-6806 or [email protected]. homas J. McCool, Direc tor, Center for Economics, (202) 512- . Michelle Sager (Assistant Director), Shannon Finnegan (Analyst-in- Charge), Benjamin Bolitzer, Anthony Bova, Amy Bowser, Andrew Ching, Robert Dinkelmeyer, Gregory Dybalski, Robert Gebhart, Courtney LaFountain, Alicia Loucks, Donna Miller, Max Sawicky, and Michael Springer also made key contributions to this report. Medicaid: Improving Responsiveness of Federal Assistance to Sta During Economic Dow 2011. nturns. GAO-11-395. Washington, D.C.: March 31, Recovery Act: Oppo Accountability over States’ and Localities’ Uses of Funds. GAO-10-999. Washington, D.C.: September 20, 2010. rtunities to Improve Management and Strengthen State and Local Governments: Fiscal Pressures Could Have Implication for Future Delivery of Intergovernmental Programs. GAO-10-899. Washington, D.C.: July 30, 2010. Recovery Act: States’ and Localities’ Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster Accountability. GAO-10-604. Washington, D.C.: May 26, 2010. Recovery Act: One Year Later, States’ and Localities’ Uses of Funds and Opportunities to Strengthen Accountability. GAO-10-437. Washington, D.C.: March 3, 2010. State and Local Governments’ Fiscal Outlook: March 2010 Update. GAO-10-358. Washington, D.C.: March 2, 2010. Recovery Act: Status of States’ and Localities’ Use of Funds and Efforts to Ensure Accountability. GAO-10-231. Washington, D.C.: December 10, 2009. Recovery Act: Recipient Reported Jobs Data Provide Some Insight into Use of Recovery Act Funding, but Data Quality and Reporting Issues Need Attention. GAO-10-223. Washington, D.C.: November 19, 2009. Recovery Act: Funds Continue to Provide Fiscal Relief to States and Localities, While Accountability and Reporting Challenges Need to Be Fully Addressed. GAO-09-1016. Washington, D.C.: September 23, 2009. Recovery Act: States’ and Localities’ Current and Planned Uses of Funds While Facing Fiscal Stresses. GAO-09-829. Washington, D.C.: July 8, 2009. Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential. GAO-09-580. Washington, D.C.: April 23, 2009. American Recovery and Reinvestment Act: GAO’s Role in Helping to Ensure Accountability and Transparency. GAO-09-453T. Washington, D.C.: March 5, 2009. Update of State and Local Government Fiscal Pressures. GAO-09-320R.Washington, D.C.: January 26, 2009. State and Local Fiscal Challenges: Rising Health Care Costs Drive Long- term and Immediate Pressure. GAO-09-210T. Washington, D.C.: November 19, 2008. Medicaid: Strategies to Help States Address Increased Expenditures during Economic Downturns. GAO-07-97. Washington, D.C.: October 18, 2006. Federal Assistance: Temporary State Fiscal Relief. GAO-04-736R. Washington, D.C.: May 7, 2004.
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The most recent recession, which started in December 2007, is generally believed to be the worst economic downturn the country has experienced since the Great Depression. In response to this recession, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act), which provided state and local governments with about $282 billion in fiscal assistance. The Recovery Act requires GAO to evaluate how national economic downturns have affected states since 1974. In this report, GAO (1) analyzes how state and local government budgets are affected during national recessions and (2) identifies strategies to provide fiscal assistance to state and local governments and indicators policymakers could use to time and target such assistance. This report is being released in conjunction with a companion report on Medicaid and economic downturns to respond to a related statutory requirement in the Recovery Act. GAO analyzed economic data and states' general fund budget data; reviewed past federal fiscal assistance and related evaluations; and interviewed analysts at key associations and think tanks. GAO shared relevant findings with policy research organizations and associations representing state and local officials, who generally agreed with our conclusions. We incorporated technical comments from the Bureau of Labor Statistics. GAO identifies strategies for Congress to consider but does not make recommendations in this report. Understanding state and local government revenue and expenditure patterns can help policymakers determine whether, when, where, and how they provide federal fiscal assistance to state and local governments in response to future national recessions. In general, state and local governments' revenues increase during economic expansions and decline during national recessions (relative to long-run trends). State and local revenue declines have varied during each recession, and the declines have been more severe during recent recessions. Additionally, revenue fluctuations vary substantially across states, due in part to states' differing tax structures, economic conditions, and industrial bases. State and local government spending also tends to increase during economic expansions, but spending on safety net programs, such as health and hospitals and public welfare, appears to decrease during economic expansions and increase during national recessions, relative to long-run trends. These trends can exacerbate the fiscal conditions of state and local governments given that demand for health and other safety net programs increases during recessions, and these programs now consume larger shares of state budgets relative to prior decades. This implies that, during recessions, state and local governments may have difficulties providing services. To mitigate the effect on services from declining revenues, state and local governments take actions including raising taxes and fees, tapping reserves, and using other budget measures to maintain balanced budgets. Although every recession reflects varied economic circumstances at the national level and among the states, knowledge of prior federal responses to national recessions provides guideposts for policymakers to consider as they design strategies to respond to future recessions. Considerations include (1) Timing assistance so that the aid begins to flow as the economy is contracting, although assistance that continues for some period beyond the recession's end may help these governments avoid actions that slow economic recovery; (2) Targeting assistance based on the magnitude of the recession's effects on individual states' economic distress; and (3) Temporarily increasing federal funding (by specifying the conditions for ending or halting the state and local assistance when states' economic conditions sufficiently improve). Policymakers also balance their decision to provide state and local assistance with other federal policy considerations such as competing demands for federal resources. Policymakers can select indicators to identify when the federal government should start and stop providing aid, as well as how much aid should be allocated. Timely indicators are capable of distinguishing states' economic downturns from economic expansions. Indicators selected for targeting assistance are capable of identifying states' individual circumstances in a recession. In general, timely indicators capable of targeting assistance to states can be found primarily in labor market data. Indicators such as employment, unemployment, hourly earnings, and wages and salaries also offer the advantage of providing information on economic conditions rather than reflecting states' policy choices (a limitation of data on state revenue trends). In some cases, it may be appropriate for policymakers to select multiple indicators or select indicators to reflect their policy goals specific to a particular recession. States have been affected differently during each of these recessions. For example, unemployment rates, entry into, and exit out of economic downturns have varied across states during past recessions. Federal responses to prior recessions have included various forms of federal fiscal assistance to these governments as well as decisions not to provide direct fiscal assistance to these governments.
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As we reported in December 2015, offshore oil and gas infrastructure in the Gulf varies in size and complexity, and lessees have installed and plugged or removed thousands of wells and structures over the past half century. The simplest structures are found in shallow water and include caissons and well protectors. A caisson is a cylindrical or tapered large diameter steel pipe enclosing a well conductor and is the minimum structure for offshore development. A well protector provides support to one or more wells with no production equipment and facilities. Lessees drill wells to access and extract oil and gas from geologic formations. According to an Interior publication, “exploratory” wells are drilled in an area with potential oil and gas reserves, while “development” wells are drilled to produce oil and gas from a known reserve. An exploratory well may not actually produce any oil or gas, while a successful development well produces oil or gas. Some wellheads are located on a fixed platform (typically in shallow water), while other wellheads are located on the seafloor (typically in deep water). A more complex structure in shallow water is a fixed platform, which uses a jacket and pilings to support the superstructure, or deck. The deck is the surface where work is performed and provides space for crew quarters, a drilling rig, and production facilities. Most of the large fixed platforms have living quarters for the crew, a helicopter pad, and room for drilling and production equipment. A typical platform is designed so that multiple wells may be drilled from it. Wells from a single platform may have bottom-hole locations many thousands of feet (laterally displaced) from the surface location. Structures in deep water rely on other methods to anchor to the ocean floor. For example, a “compliant tower” structure supports the deck using a narrow, flexible tower and a piled foundation. According to an industry publication, the flexible nature of the compliant tower allows it to withstand large wind and wave forces associated with hurricanes. Other common deep-water structures include the tension leg platform, floating production system, and spar platform. Illustrations of these structures are shown in figure 1. In our December 2015 report, we also discussed the oil and gas infrastructure installed and removed in the Gulf over time. Figure 2 shows the annual number of wells drilled and plugged in the Gulf from 1947 through 2014. During this period, lessees drilled a total of 52,223 wells in the Gulf (including 18,447 exploratory wells and 33,776 development wells) and plugged a total of 29,879 wells (including 4,017 temporarily abandoned wells and 25,862 permanently abandoned wells). Figure 3 shows the annual number of structures installed and removed in the Gulf from 1947 through 2014. During this period, lessees installed a total of 7,038 structures in the Gulf. In addition, starting in the 1970s, lessees began removing structures from the Gulf. Specifically, lessees removed a total of 4,611 structures from 1973 through 2014. Most of the structures installed and removed were fixed platforms and caissons installed in shallow water. From the late 1940s through the early 1960s, lessees only drilled wells in shallow water. However, starting in the mid-1960s, lessees began drilling wells in deep water. Figure 4 shows the annual number of wells drilled and plugged in deep water in the Gulf from 1966 through 2014. During this period, lessees drilled a total of 6,468 wells (including exploratory and development wells) and plugged a total of 2,489 wells (including temporary and permanently abandoned wells) in deep water. Lessees also installed 112 structures—mostly fixed platforms, spar, tension leg platforms, and floating production systems—and removed 19 structures in deep water during this period. From 1985 through 2014, oil production from deepwater wells has increased significantly, as shown in figure 5. While the number of wells drilled decreased in recent years, offshore production increased as lessees drilled wells in deep water that are more productive than wells in shallower water. In 2014, over 80 percent of Gulf oil production occurred in deep water, up from 6 percent in 1985. According to BSEE officials we interviewed for our December 2015 report, activities in deep water, including drilling and decommissioning, are significantly more expensive than those in shallow water because of the technology required and challenges associated with deep water, such as very high pressures at significant water and well depths. As we reported in December 2015, Interior requires lessees to decommission offshore oil and gas infrastructure, and Interior’s BSEE developed procedures to oversee the decommissioning process for offshore oil and gas infrastructure and to estimate costs associated with decommissioning liabilities. According to Interior regulations, lessees must permanently plug all wells, remove all platforms and other structures, decommission all pipelines, and clear the seafloor of all obstructions created by the lease and pipeline right-of-way operations when the lessee’s facility is no longer useful for operations. Generally, lessees must permanently plug wells and remove platforms within 1 year after a lease terminates. As we reported in December 2015, BSEE referred to infrastructure that was no longer useful for operations on active leases as idle infrastructure (or “idle iron”) and infrastructure on expired leases as terminated lease infrastructure. In general, BSEE’s guidance defined idle infrastructure as follows: A well is considered idle if it has not been used in the past 5 years for operations associated with exploration or development and production of oil or gas, and if the lessee has no plans for such operations. A platform is considered idle if it has been toppled or otherwise destroyed, or it has not been used in the past 5 years for operations associated with exploration or development and production of oil or gas. According to BSEE officials we spoke with as part of our December 2015 report, companies may postpone decommissioning idle wells and platforms to defer the cost of removal, increase the opportunity for resale, or reduce decommissioning costs through economies of scale and scheduling, among other reasons. However, they said that postponing decommissioning can be costly because the longer a structure is present in the Gulf the greater the likelihood it will be damaged by a storm. According to Interior documentation, decommissioning a storm-damaged structure may cost 15 times or more the cost of decommissioning an undamaged structure. In 2005, Hurricanes Katrina and Rita destroyed 116 structures and significantly damaged another 163 structures and 542 pipelines in the Gulf, according to Interior documentation. According to BSEE officials, as of April 2015, the Gulf contained 13 destroyed structures with 16 associated wells. Storm-damaged or toppled structures present a greater risk to safety and require difficult and time-consuming salvage work. After preliminary salvage work that can take weeks, divers cut and remove structural components while crane assemblies remove the components and place them on a barge for transport and disposal. Additionally, when working in areas with strong currents and unconsolidated material, coffer dams are often constructed on the seabed to prevent material from slumping back in on the dive crews and equipment. In December 2015, we reported that BSEE had developed procedures for overseeing the decommissioning of offshore oil and gas infrastructure and estimating costs associated with decommissioning liabilities. Under BSEE’s regulations, lessees must apply for approval before plugging wells, removing platforms or other facilities, and decommissioning pipelines. According to BSEE regional officials, they reviewed applications to ensure that they contained the required information (see table 1 below). Once this process was complete, BSEE officials approved a lessee’s application, which authorized the lessee to begin decommissioning activities. After lessees completed all planned decommissioning, they were required to report to BSEE on the outcome of these activities so that BSEE could verify that all their decommissioning obligations had been met, including clearing the seafloor around wells, platforms, and other facilities. According to BSEE regional officials we spoke with as part of our December 2015 report, they reviewed lessee reports on decommissioning activities to ensure that the results were consistent with the information presented as part of the application process. Table 2 summarizes BSEE’s reporting requirements related to the results of decommissioning activities, as of December 2015. In addition to reviewing lessee applications and reports, the BSEE Gulf region identified and tracked idle and terminated lease infrastructure. According to BSEE regional officials we spoke with as part of our December 2015 report, the BSEE Gulf region began identifying and tracking idle lease infrastructure in 2010 and updated a list of this infrastructure on an annual basis. BSEE began identifying and tracking terminated lease infrastructure prior to 2010, according to BSEE regional officials. At the beginning of each calendar year, BSEE regional officials obtained data from Interior’s main data system—the Technical Information Management System—on wells and structures on leases that meet the criteria for idle and terminated lease infrastructure. Based on these data, BSEE sent a list of idle and terminated lease infrastructure to each lessee, requesting a decommissioning plan and schedule for decommissioning the lessee’s inventory. According to BSEE regional officials, BSEE worked with lessees to verify the accuracy of their inventory of idle and terminated lease infrastructure, and BSEE tracked lessees’ progress in meeting their schedules. According to BSEE regional officials we spoke with for our December 2015 report, BSEE estimated the costs associated with decommissioning liabilities by counting the number and types of wells, pipeline segments, and structures on a lease and using data on the water depth associated with this infrastructure. Using these data, BSEE then calculated the costs associated with (1) plugging and abandoning wells, (2) removing platforms and other structures, (3) decommissioning pipelines, and (4) clearing debris from the site. In general, the cost to plug wells and remove structures increases as the water depth increases. For example, according to BSEE’s methodology at the time of our December 2015 report, its estimate of the cost to plug a dry tree well attached to a fixed structure in shallow water was $150,000, while its estimate of the cost to plug a subsea well in deep water was a minimum of about $21 million. Likewise, BSEE’s estimates of the costs to remove fixed platforms in shallow water ranged from approximately $85,000 to $4.6 million, while its estimate of the cost to remove a floating structure (and associated equipment) in deep water was a minimum of $30 million. In our December 2015 report, we found that BSEE generally did not have access to current data on decommissioning costs but had taken steps to address this issue. Prior to December 2015, under BSEE’s regulations, lessees were not required to report costs associated with decommissioning activities to BSEE. According to BSEE regional officials, data on decommissioning costs were considered proprietary, and companies generally did not share this information with BSEE. Instead, BSEE regional officials told us that they relied on other sources of data— some of which were decades old and, as a result, likely inaccurate—to estimate costs associated with decommissioning liabilities. For example, according to BSEE regional officials, their estimates for decommissioning liabilities in shallow water were based on data provided by the oil and gas industry in 1995. However, in December 2015, BSEE issued a final rule requiring establishing new requirements for lessees to submit expense information on costs associated with plugging and abandonment, platform removal, and site clearance. As we reported in December 2015, Interior’s BOEM requires financial assurances from lessees to cover decommissioning liabilities, but we found that Interior’s financial assurance procedures in place at that time posed risks to the federal government. Under The Outer Continental Shelf Lands Act, Interior has issued regulations and developed financial assurance procedures to protect the government from incurring costs if a lessee fails to meet its lease obligations, including its obligation to decommission offshore infrastructure. Under the regulations and procedures in place at the time of our December 2015 report, BOEM regional directors could require a lessee to provide a bond —referred to as a “supplemental bond”—that covers the estimated costs of decommissioning for a lease. BSEE is responsible for estimating costs associated with decommissioning liabilities. If a lessee was unable to accomplish decommissioning obligations as required, the federal government could use the bond to cover decommissioning costs. However, where there are co-lessees or prior lessees, if BOEM determined that at least one lessee had sufficient financial strength to accomplish decommissioning obligations on the lease, BOEM might waive the requirement for a supplemental bond. Under BOEM and BSEE regulations, lessee liability is “joint and several”—that is, each lessee is liable for all decommissioning obligations that accrue on the lease during its ownership, including those that accrued prior to its ownership but had not been performed. In addition, a lessee that transfers its ownership rights to another party will continue to be liable for the decommissioning obligations it accrued. According to BOEM officials we spoke with as part of our December 2015 report, BOEM ensured that all decommissioning obligations on offshore leases were required to be covered by either a supplemental bond or a current lessee that had the financial ability to conduct decommissioning. Under BOEM’s financial assurance procedures in place at the time of our December 2015 report, each offshore lease with a decommissioning liability had to be covered by a supplemental bond unless BOEM determined that a lessee had the financial ability to fulfill its decommissioning obligations. BOEM staff evaluated the financial ability of a lessee to fulfill its decommissioning obligations by means of a financial strength test. BOEM’s financial strength test required a lessee to meet the following criteria: provide an independently audited financial statement indicating a net worth greater than $65 million; possess a total decommissioning liability (as determined by BSEE) of less than or equal to 50 percent of its audited net worth; possess total company liabilities of no more than 2 to 3 times the value of the adjusted net worth;, and demonstrate reliability, as shown by a record of compliance with laws, regulations and lease terms, among other factors. According to our December 2015 report, if a lessee passed the financial strength test by demonstrating its financial ability to pay for decommissioning on its leases, BOEM waived its requirement for the lessee to provide supplemental bonds. Other responsible parties on the lease would also be waived from the requirement to provide supplemental bonds. According to BOEM officials, BOEM waived these parties as well because the waived lessee could be held responsible if another party on a lease did not fulfill its decommissioning obligations. In addition, a waived lessee might provide financial assurance in the form of a corporate guarantee of the lease obligations of a lessee on another lease. According to our December 2015 report, after BOEM waived a lessee from the requirement to provide supplemental bonding, it monitored the financial strength of the lessee to ensure it continued to pass BOEM’s financial strength test. BOEM conducted quarterly financial reviews for the first 2 years after a lessee received a waiver and then an annual review thereafter. In addition, on a weekly basis, BOEM compared the decommissioning obligations (as determined by BSEE) of all waived lessees with the financial information provided by lessee audited financial statements. If BOEM found that a lessee no longer passed its financial strength test, BOEM conducted a more in-depth review of a lessee’s financial status by reviewing financial statements, credit ratings, and other financial information. BOEM might also conduct an unscheduled financial review if: (1) BSEE revised its estimate of a lessee’s decommissioning liability, (2) a lessee’s financial status changed as reported by credit rating agencies, or (3) a lessee did not pay the required royalties to the federal government. According to BOEM officials, these reviews could have caused BOEM to revoke a lessee’s waiver from the requirement to provide supplemental bonding. For example, in May 2015, BOEM revoked the waiver of one lessee and, according to BOEM officials, the waived lessee and related parties could have been required to provide as much as $1 billion in supplemental bonds. However, in our December 2015 report, we found that BOEM’s financial assurance procedures posed financial risks to the federal government in several ways. In particular, under BOEM’s procedures in place at the time, less than 8 percent of estimated decommissioning liabilities in the Gulf were covered by financial assurance mechanisms such as bonds. Specifically, as of October 2015, according to BOEM officials, for an estimated $38.2 billion in decommissioning liabilities in the Gulf, BOEM held or required about $2.9 billion in bonds and other financial assurances. For $33.0 billion in decommissioning liabilities, BOEM had waived 47 lessees from the requirement to provide supplemental bonds based on BOEM’s reviews of the lessees’ financial strength, according to BOEM officials., As we have found in prior GAO reports, the use of financial strength tests and corporate guarantees in lieu of bonds pose financial risks to the federal government. Specifically, we found, in August 2005, that the financial assurance mechanisms that impose the lowest costs on the companies using them—such as financial strength tests and corporate guarantees—also typically pose the highest financial risks to the government entity accepting them. In that report, we found that, if a company passes a financial strength test but subsequently files for bankruptcy or becomes insolvent, the company in essence is no longer providing financial assurance because it may no longer have the financial capacity to meet its obligations. Such financial deterioration can occur quickly. While companies no longer meeting the financial test are to obtain other financial assurance, they may not be able to obtain or afford to purchase it. In addition, in May 2012, we found that, according to the Bureau of Land Management and the Environmental Protection Agency, corporate guarantees are potentially risky because they are not covered by a specific financial asset such as a bond. Therefore, in our December 2015 report, we concluded that BOEM’s use of the financial strength test and corporate guarantees in lieu of bonds raised the risk that the federal government would have to pay for offshore decommissioning if lessees did not. According to BOEM officials we spoke with for our December 2015 report, BOEM recognized the financial risks associated with its financial assurance procedures and planned to revise its procedures to reduce risk. Specifically, BOEM officials told us that BOEM’s planned revisions would eliminate the use of financial strength tests to completely waive lessees from the requirement to provide supplemental bonding. Instead, BOEM planned to conduct financial reviews of lessees’ financial status and, based on those reviews, assign lessees an amount of credit that may be used to reduce required bonding associated with decommissioning liabilities on leases. Lessees would be able to apportion this credit to leases, in coordination with other responsible parties on those leases, to ensure that lease decommissioning liabilities are fully covered by apportioned credit or supplemental bonds. However, because it was unclear whether BOEM’s planned revisions would improve its procedures and the extent to which these revisions would increase the amount of bonding that lessees provide, we recommended in our December 2015 report, that BOEM complete its plans to revise its financial assurance procedures, and Interior concurred. Since the issuance of our December 2015 report, BOEM revised its financial assurance procedures. Specifically, on July 12, 2016, BOEM issued revised procedures, effective on September 12, 2016, containing several changes to BOEM’s policy concerning additional financial security requirements for leases, pipeline rights-of-way, and rights-of-use and easement, including the use of alternative measures of financial strength. In December 2016, BOEM issued orders to sole liability lessees requiring them to provide additional security. In January 2017, BOEM delayed implementation of its revised financial assurance procedures for 6 months. The following month, BOEM withdrew its December 2016 orders to sole liability lessees, stating that these orders will be discussed as part of the six-month review process related to the financial assurance procedures. We have not evaluated the extent to which these financial assurance procedures and orders, if fully implemented, would address the concerns we have identified about the financial risks to the federal government. We will continue to monitor Interior’s actions to address our recommendations. Chairman Gosar, Ranking Member Lowenthal, and Members of the Subcommittee, 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 Frank Rusco, Director, Natural Resources and Environment, 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. GAO staff who made key contributions to this testimony are Jason Holliday, Christine Kehr, and David Messman. 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.
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Oil and gas produced on federal leases in the Gulf are important to the U.S. energy supply. When oil and gas infrastructure is no longer in use, Interior requires lessees to decommission it so that it does not pose safety and environmental hazards. Decommissioning can include plugging wells and removing platforms, which can cost millions of dollars. Interior requires lessees to provide bonds or other financial assurances to demonstrate that they can pay these costs; however, if lessees do not fulfill their decommissioning obligations, the federal government may be liable for these costs. This statement describes offshore oil and gas infrastructure in the Gulf and Interior's requirements and procedures for overseeing decommissioning, and the risks posed by its financial assurances procedures. This statement is based on GAO-16-40 from December 2015. For that report, GAO reviewed agency regulations and procedures and interviewed officials from Interior, credit rating agencies, academia, and trade associations. GAO also followed up on the implementation status of the report's recommendations. As GAO reported in December 2015, offshore oil and gas infrastructure in the Gulf of Mexico (Gulf) varies in size and complexity, and lessees have installed and removed thousands of structures over the past half century. The simplest structures are found in shallow water and include a caisson, which is a cylindrical, large diameter steel pipe enclosing a well. A more complex structure in shallow water is a fixed platform, which uses a jacket and pilings to support the superstructure, or deck. A typical platform is designed so that multiple wells may be drilled from it. Structures in deep water rely on other methods to anchor to the ocean floor, such as using a narrow, flexible tower and a piled foundation. From 1947 through 2014, lessees drilled over 50,000 wells and installed over 7,000 structures in the Gulf. Over the same time period, lessees plugged almost 30,000 of these wells and removed about 5,000 of these structures. Oil production from deepwater wells increased significantly in recent decades, and in 2014, over 80 percent of Gulf oil production occurred in deep water. The Department of the Interior (Interior) requires lessees to decommission offshore oil and gas infrastructure, and according to GAO's December 2015 report, Interior developed procedures for overseeing the decommissioning of offshore oil and gas infrastructure and estimating costs associated with decommissioning liabilities. According to Interior regulations, lessees must permanently plug all wells, remove all platforms and other structures, decommission all pipelines, and clear the seafloor of all obstructions created by the lease and pipeline operations when the lessee's facility is no longer useful for operations. Lessees must also permanently plug wells and remove platforms within 1 year after a lease terminates. According to officials GAO interviewed for its December 2015 report, Interior's procedures for overseeing decommissioning and estimating costs associated with decommissioning liabilities included (1) identifying and tracking unused infrastructure, (2) reviewing lessee plans to decommission infrastructure, and (3) using different cost estimates for decommissioning in shallow and deep water. Interior requires financial assurances from lessees to cover decommissioning liabilities, but GAO's December 2015 report found that Interior's financial assurance procedures in place at that time posed risks to the federal government. Under Interior's financial assurance procedures in place at the time, each offshore lease with a decommissioning liability had to be covered by a bond unless Interior determined that a lessee had the financial ability to fulfill its decommissioning obligations. Interior's procedures allowed it to waive its requirement for a lessee to provide a bond if the lessee passed a financial strength test. However, GAO found that of $38.2 billion in decommissioning liabilities as of October 2015, Interior held or required about $2.9 billion in bonds and other financial assurances, and had foregone requiring about $33.0 billion in bonds for most of the remaining liabilities. Prior GAO work has shown that the use of financial strength tests in lieu of bonds poses risks to the federal government. GAO recommended that Interior address this risk by following through on plans to revise its financial assurance procedures. Interior issued revised financial assurance procedures in July 2016 but, according to Interior, delayed implementing them in 2017 pending a six-month review process. Among other recommendations, GAO recommended in GAO-16-40 that Interior complete plans to revise its financial assurance procedures to address risks posed by these procedures. Interior concurred with GAO's recommendations and has taken or described planned actions to address the recommendations, which GAO will continue to monitor.
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Afghanistan is a mountainous, arid, land-locked Central Asian country with limited natural resources. At 647,500 square kilometers, it is slightly smaller than the state of Texas. Afghanistan is bordered by Pakistan to the east and south; Tajikistan, Turkmenistan, Uzbekistan, and China to the north; and Iran to the west (see fig. 1). Its population, currently estimated at 26 million, is ethnically diverse, largely rural, and mostly uneducated. Life expectancy in Afghanistan is among the lowest in the world, with some of the highest rates of infant and child mortality. Political conflicts have ravaged Afghanistan for years, limiting development within the country. Conflict broke out in 1978 when a communist-backed coup led to a change in government. One year later, the Soviet Union began its occupation of Afghanistan, initiating more than two decades of conflict. Over the course of the 10-year occupation, various countries, including the United States, backed Afghan resistance efforts. The protracted conflict led to the flight of a large number of refugees into Pakistan and Iran. In 1989, the Soviet forces withdrew, and in 1992, the communist regime fell to the Afghan resistance. Unrest continued, however, fueled by factions and warlords fighting for control. The Taliban movement emerged in the mid 1990s, and by 1998 it controlled approximately 90 percent of the country. Although it provided some political stability, the Taliban regime did not make significant improvements to the country’s food security. Furthermore, the Taliban’s continuing war with the Northern Alliance and the Taliban’s destructive policies, highlighted in its treatment of women, further impeded aid and development. Coalition forces removed the regime in late 2001, responding to its protection of al Qaeda terrorists who attacked the United States. In December 2001, an international summit in Bonn, Germany, established a framework for the new Afghan government, known as the Bonn Agreement. Agriculture is essential to Afghanistan. Despite the fact that only 11.5 percent (7.5 million hectares) of Afghanistan’s total area is cultivable, 85 percent of the population depends on agriculture for its livelihood, and 80 percent of export earnings and more than 50 percent of the gross domestic product have historically come from agriculture. However, Afghanistan’s agricultural sector continues to suffer from the effects of prolonged drought, war, and neglect. It lacks high-quality seed, draft animals, and fertilizer, as well as adequate veterinary services, modern technology, advanced farming methods, and a credit system for farmers. Further, Afghanistan’s Ministry of Agriculture and Animal Husbandry and its Ministry of Irrigation and Water Resources lack the infrastructure and resources to assist farmers. Because Afghanistan experiences limited rainfall, its agricultural sector is highly dependent on irrigation—85 percent of its agricultural products derives from irrigated areas. Thus, the conservation and efficient use of water is the foundation of the agricultural sector. The severe drought that has gripped the country since 1998 has resulted in drastic decreases in domestic production of livestock and agricultural supplies including seed, fertilizer, and feed (see fig. 2). Several earthquakes and the worst locust infestation in 30 years exacerbated this crisis in 2002. Without adequate supplies and repairs to irrigation systems, even if the drought breaks, farmers will be unable to produce the food that the country needs to feed itself. Since 1965, the WFP has been the major provider of food assistance to Afghanistan. Partnering with nongovernmental organizations, it delivers assistance through emergency operations that provide short-term relief to populations affected by a specific crisis such as war or drought. It also conducts protracted relief and recovery operations designed to shift assistance toward longer-term reconstruction efforts. Because of its policy to target assistance at specific populations, WFP does not attempt to provide food for all of the vulnerable people within a country or affected area. Instead, it focuses on specific vulnerable populations such as internally displaced people or widows (see fig. 3). Further, it does not try to meet all of the daily requirements of the targeted populations. WFP’s 2002 emergency operation in Afghanistan targeted internally displaced people, people affected by drought, and children, among others. The assistance programs designed to assist these populations provide between 46 and 79 percent, or 970 to 1671 kilocalories, of the recommended minimum daily requirement of 2100 kilocalories. WFP assumes that beneficiaries will obtain the remainder of their food through subsistence farming or the market. FAO has provided much of the agricultural assistance to Afghanistan. FAO has been involved in agricultural development and natural resource management in Afghanistan for more than 50 years. FAO was founded in 1945 with a mandate to raise levels of nutrition and standards of living, to improve agricultural productivity, and to better the condition of rural populations. Today, FAO is one of the largest specialized agencies in the UN system and the lead agency for agriculture, forestry, fisheries, and rural development. An intergovernmental organization, FAO has 183 member countries plus one member organization, the European Community. FAO has traditionally carried out reconstruction efforts in relatively stable environments. Although FAO is increasingly implementing its programs in unstable postconflict situations such as Afghanistan, the agency and its staff are still adjusting to operating in such environments. FAO's regular program budget provides funding for the organization's normative work and, to a limited extent, for advice to member states on policy and planning in the agricultural sector. FAO's regular budget can also fund limited technical assistance projects through its Technical Cooperation Program. Apart from this, extrabudgetary resources, through trust funds provided by donors or other funding arrangements, fund all emergency and development assistance provided by FAO. Thus, extrabudgetary resources fund FAO’s field program, the major part of its assistance to member countries. The emergency food assistance provided to Afghanistan by the United States and the international community from January 1999 through December 2002 benefited millions and was well managed, but donor support was inadequate. WFP delivered food to millions of people in each of the 4 years, helping avert widespread famine. In addition, WFP managed the distribution of U.S. and international food assistance effectively, overcoming significant obstacles and using its logistics system and a variety of monitoring mechanisms to ensure that food reached the intended beneficiaries. However, inadequate and untimely donor support in 2002 disrupted some WFP assistance efforts and could cause further disruptions in 2003. Further, WFP could have provided assistance to an additional 685,000 people and reduced its delivery times if the United States had donated cash or regionally purchased commodities instead of shipping U.S.-produced commodities. Additionally, if the United States had donated the $50.9 million that it spent on approximately 2.5 million daily rations air- dropped by the Department of Defense, WFP could have purchased enough regionally produced commodities to provide food assistance for an estimated 1.0 million people for a year. The emergency food assistance that the United States and other bilateral donors provided in Afghanistan through WFP from 1999 through 2002 met a portion of the food needs of millions of vulnerable Afghans. Over the 4-year period, WFP delivered approximately 1.6 million metric tons of food that helped avert famine and stabilize the Afghan people, both in Afghanistan and in refugee camps in neighboring countries. The food assistance also furthered the country’s reconstruction through projects, among others, that exchanged food for work. WFP delivered the assistance as part of seven protracted relief–recovery and emergency operations (see table 1). The types of operations and their duration and objectives varied in response to changing conditions within Afghanistan. These objectives included, but were not limited to, providing relief to the most severely affected populations in Afghanistan and Afghan refugees in neighboring countries and preventing mass movements of populations. WFP implemented a number of different types of food assistance projects, including free food distribution; institutional feeding programs; bakeries; food-for-work, -seed, -education, -training, and -asset-creation projects; and projects targeted at refugees, internally displaced people, and civil servants. (See app. II for a list and description of WFP’s projects.) Food-for- work and food-for-asset-creation projects provided essential food assistance to the most vulnerable members of Afghanistan’s population while enabling the beneficiaries to help rehabilitate local infrastructure and rebuild productive assets such as roads and schools. Between July and September 2002, these projects employed 1 million laborers per month, paying them in food commodities. U.S. food assistance to Afghanistan, provided by USAID and USDA, accounted for approximately 68 percent of the cash contributions and 67 percent of the commodities delivered by WFP from 1999 through 2002 (see table 1). The U.S. provides cash to WFP to cover transportation and administrative costs associated with its in-kind contributions of commodities. USAID’s authority to donate to WFP operations derives from Title II of the Agricultural Trade Development and Assistance Act of 1954 (P.L. 480). Title II authorizes the agency to donate agricultural commodities to meet international emergency relief requirements and carry out nonemergency feeding programs overseas. USDA also provides surplus commodities to WFP under section 416(b) of the Agricultural Act of 1949. U.S. contributions consisted of in-kind donations of commodities such as white wheat and cash donations to cover the cost of transporting the commodities from the United States to Afghanistan. WFP managed the distribution of U.S. and international food assistance to Afghanistan effectively despite significant obstacles, including harsh weather and a lack of infrastructure to deliver food to beneficiaries. To accomplish this, WFP appointed a special envoy to direct operations and employed a dedicated staff of local nationals. It also used various monitoring and reporting mechanisms to track the delivery of food. In distributing the food assistance, WFP faced significant obstacles related to political and security disturbances in Afghanistan as well as physical and environmental conditions. These obstacles included limited mobility due to continued fighting between the Taliban and the Northern Alliance and coalition forces; religious edicts issued by the Taliban limiting the employment of women by international organizations; difficult transport routes created by geography, climate, and lack of infrastructure (see fig. 4); and attempts by Afghan trucking cartels to dramatically increase trucking fees. To overcome these obstacles, WFP negotiated with the Taliban to allow the movement of food to areas occupied by the Northern Alliance; it also threatened to cancel certain projects unless women were allowed to continue to work for WFP. Further, WFP found ways to deliver food to remote areas, including airlifting food and hiring donkeys (see fig. 5). In addition, it purchased trucks to supplement a fleet of contracted trucks. Using these trucks as leverage against the Afghan trucking cartel, WFP forced the cartel to negotiate when the cartel attempted to dramatically increase transport fees. WFP created the position of Special Envoy of the Executive Director for the Afghan Region to lead and direct all WFP operations in Afghanistan and neighboring countries during the winter of 2001–2002, when it was believed that the combination of winter weather and conflict would increase the need for food assistance. WFP was thus able to consolidate the control of all resources in the region, streamline its operations, and accelerate the movement of assistance. WFP points to the creation of the position as one of the main reasons it was able to move record amounts of food into Afghanistan from November 2001 through January 2002. In December 2001 alone, WFP delivered 116,000 metric tons of food, the single largest monthly food delivery within a complex emergency operation in WFP’s history. WFP also credits its quick response to its national staff and the Afghan truck drivers it contracted. WFP employed approximately 400 full-time national staff during 1999–2002. These staff established and operated an extensive logistics system and continued operations throughout Afghanistan, including areas that international staff could not reach owing to security concerns, and during periods when international staff were evacuated from the country. The truckers who moved the food around the country continued working even during the harshest weather and in areas that were unsafe because of ongoing fighting and banditry. WFP uses a number of real-time monitoring mechanisms to track the distribution of commodities in Afghanistan, and the data we reviewed suggested that food distributions have been effective and losses minimal. (For a description of WFP’s monitoring procedures, see app. III.) During our visits to project and warehouse sites in Afghanistan, we observed orderly and efficient storage, handling, and distribution of food assistance. WFP’s internal auditor reviewed WFP Afghanistan’s monitoring operations in August of 2002 and found no material weaknesses. USAID has also conducted periodic monitoring of WFP activities without finding any major flaws in WFP’s operations. In addition, most of the implementing partners we contacted were familiar with WFP reporting requirements. However, 10 of the 14 implementing partners we contacted commented unfavorably on WFP’s project monitoring efforts, stating that monitoring visits were too infrequent. Finally, WFP’s loss reporting data indicated that only 0.4 percent of the commodities was lost owing to theft, spoilage, mishandling, or other causes. Inadequate and untimely donor support disrupted WFP’s food assistance efforts in 2002 and could disrupt efforts in 2003; in addition, U.S. assistance to Afghanistan, both through WFP and the Department of Defense, was costly. In 2002, interruptions in support forced WFP to delay payments of food, curtail the implementation of new projects, and reduce the level of rations provided to repatriating refugees. WFP expressed concern that donor support in 2003 may be similarly affected, as a growing number of international emergencies and budgetary constraints could reduce the total funding available for food assistance to Afghanistan. In addition, WFP could have delivered more food and reduced delivery times if the United States had provided either cash or regionally purchased commodities instead of shipping U.S.-produced commodities and airdropping humanitarian daily rations. Obtaining donor support for the emergency food assistance operation for the April 2002 through December 2002 period was difficult owing to the donor community’s inadequate response to WFP’s appeal for contributions. WFP made its initial appeal in February 2002 for the operation and it made subsequent appeals for donor support throughout the operation. The operation was designed to benefit 9,885,000 Afghans over a 9-month period, through the provision of 543,837 metric tons of food at a cost of over $295 million. It was also intended to allow WFP to begin to shift from emergency to recovery operations with particular emphasis on education, health, and the agricultural sector. When the operation began in April 2002, WFP’s Kabul office warned that it might have to stop or slow projects if donors did not provide more support. At that time, WFP had received only $63.9 million, or 22 percent of the required resources. The United States provided most of this funding. (See app. IV for a list of donors and their contributions for the operation.) From April through June—the preharvest period when Afghan food supplies are traditionally at their lowest point— WFP was able to meet only 51 percent of the planned requirement for assistance. WFP’s actual deliveries were, on average, 33 percent below actual requirements for the 10-month period April 2002–January 2003. Figure 6 illustrates the gaps in the operation’s resources for the 10-month period. Lack of timely donor contributions and an increase in the number of returning refugees forced WFP and its implementing partner, the UN High Commissioner for Refugees, to reduce from 150 to 50 kilograms the rations provided to help returning refugees and internally displaced persons reestablish themselves in their places of origin. The rations are intended to enable these groups to sustain themselves long enough to reestablish their lives; reducing the rations may have compromised efforts to stabilize population movements within Afghanistan. The lack of donor support also forced WFP and its implementing partners to delay for up to 10 weeks, in some cases, the compensation promised to Afghans who participated in the food-for-work and food-for-asset-creation projects, resulting in a loss of credibility in the eyes of the Afghans and nongovernmental organizations. Similarly, because of resource shortages, WFP had to delay for up to 8 weeks in-kind payments of food in its civil service support program, intended to help the new government establish itself, and it never received enough contributions to provide civil servants with the allocation of tea they were to be given as part of their support package. In addition, WFP was forced to reduce the number of new projects it initiated, thus limiting the level of reconstruction efforts it completed. In January 2003, WFP expressed concern that the problems it encountered with donor support in 2002 could recur in 2003. Despite the expansion of agricultural production in 2002 because of increased rainfall, 6 million Afghans will require food assistance in 2003. Although the United States was the largest donor of food assistance to Afghanistan in 2002, the U.S. contribution may be smaller in 2003 than in previous years owing to reduced surpluses of commodities, higher commodity prices, and competing crises in Africa, North Korea, and Iraq. The UN forecasts Afghan cereal production for July 2002 through June 2003 at 3.59 million metric tons, a cereal import requirement of 1.38 million metric tons, and Afghan commercial food imports at 911,000 metric tons. Thus, an estimated total deficit of 469,000 metric tons remains to be covered in the 12-month period by international food assistance. The U.S.-produced commodities and humanitarian daily rations provided by the United States to Afghanistan resulted in lower volumes of food than if the United States had provided regionally purchased commodities or cash donations. If it had provided WFP with cash or commodities from countries in the Central Asia region, the United States could have eliminated ocean freight costs. We estimated that the savings in freight costs would have enabled WFP to provide food assistance to approximately 685,000 additional people for 1 year. In addition, we estimated that if the United States had donated cash or regionally purchased commodities instead of air-dropping rations, WFP could have provided food assistance for another 1.0 million people for a year. U.S.-Produced Commodities Raised Costs and Slowed Delivery Most of the food assistance that the United States donated to Afghanistan in 1999–2002 was provided through WFP as in-kind donations of U.S. agricultural products as well as cash to cover shipping and freight costs. Since the commodities were purchased in the United States, much of the cost of the assistance represented shipping and freight costs rather than the price of the commodities. Figure 7 provides a breakdown of the costs associated with U.S. food assistance to Afghanistan from 1999 through 2002. (See app. V for additional cost data.) We estimated that if the United States had provided cash or regionally purchased commodities instead of U.S.-produced commodities in 2002, WFP could have purchased approximately 103,000 additional metric tons of commodities and saved 120 days in delivery time. WFP officials in Rome and Cairo stated that cash was greatly preferable to in-kind donations because it allows for flexibility and for local and regional purchases. Other contributors to WFP efforts in Afghanistan have provided cash, allowing WFP to make the purchases it deemed most expedient, including purchases from Central Asian countries that produced large surpluses in 2002. Ninety-three percent of the commodities WFP purchased for the emergency operation that began in April 2002 (157,128 metric tons) were from Kazakhstan and Pakistan. WFP also stated that it could have saved approximately 120 days in delivery time if it had received U.S. contributions in cash that it could have used for regional purchases. Although the commodity costs and some of the freight costs for regional purchases are lower, the largest portion of the savings from regional purchases comes from eliminating ocean freight costs. In 2002, USDA spent $5.6 million on ocean freight, or 31 percent of the value of the aid it provided to Afghanistan. USAID spent $29.4 million on ocean freight, or 18.3 percent of the value of the aid it provided to Afghanistan. Overall, USDA and USAID spent approximately $35.0 million on ocean freight and commissions, or 19.6 percent of the total value ($178,068,786) of the food aid they provided through WFP to Afghanistan. Had this money been spent on regional purchases instead of on ocean freight, it could have paid for 103,000 additional metric tons of commodities, or enough to provide food assistance for approximately 685,000 people for 1 year. However, the laws governing the main food assistance programs under which most of the U.S. assistance was provided to Afghanistan through WFP do not provide for USAID and USDA to purchase food assistance commodities regionally or provide cash to WFP to make regional purchases. All of the assistance must be provided in the form of U.S. commodities, and 75 percent of the commodities by weight must be shipped on U.S.-flag vessels. According to USDA, this requirement referred to as “cargo preference” accounts for 9 percent of the cost of U.S. food assistance shipments worldwide. In this case, it accounted for approximately $16 million of the $35 million in ocean freight. In prior reports we reported that the most significant impact of the cargo preference requirement on U.S. food assistance programs is the additional costs incurred. Using U.S.-flag vessels reduces funds available for purchasing commodities, thus the amount of food delivered to vulnerable populations is decreased. In its 2002 annual assessment of management performance, the Office of Management and Budget concluded that U.S. food assistance programs would be more cost effective and flexible if the requirement to ship U.S. food assistance on U.S.-flag vessels was eliminated. In commenting on a draft of this report, USDA stated that consideration should be given to waiving cargo preference requirements in specific food aid situations. In February 2003, the President announced a new humanitarian $200 million Famine Fund. Use of the fund will be subject to presidential decision and will draw upon the broad disaster assistance authorities in the Foreign Assistance Act. According to USAID, these authorities allow the U.S. government to purchase commodities overseas to meet emergency food assistance needs. However, this authority does not extend to the United States’ fiscal year 2003 $2.6 billion food assistance programs under existing food assistance legislation. Humanitarian Daily Rations Were Expensive and Inefficient The U.S. Department of Defense’s humanitarian daily ration program was a largely ineffective and expensive component of the U.S. food assistance effort. The program was initiated to alleviate suffering and convey that the United States was waging war against the Taliban, not the Afghan people. However, the program’s public relations and military impact have not been formally evaluated. Airdrops of the humanitarian daily rations were intended to disperse the packets over a wide area, avoiding the dangers of heavy pallet drops or having concentrations of food fall into the hands of a few. On October 8, 2001, U.S. Air Force C-17s began dropping rations on various areas within Afghanistan. Drops averaged 35,000 packets per night (two planeloads) and ended on December 21, 2001. In 198 missions over 74 days, the Air Force dropped 2,489,880 rations (see fig. 8). According to WFP, one of the major problems with the ration program was the lack of any assessment to identify the needs of the target populations or their locations. WFP representatives were part of the coordination team located at Central Command in late 2001 when the airdrops were made. These representatives provided the Defense Department with general information on drought-affected areas but were not asked to provide information on specific areas to target. According to Department of Defense officials, the drop areas were selected based on consultations with USAID staff familiar with the situation in Afghanistan. Defense officials told us that the rations are an expensive and inefficient means of delivering food assistance and were designed to relieve temporary food shortages resulting from manmade or natural disasters— not, as in Afghanistan, to feed a large number of people affected by a long- term food shortage. Defense officials responsible for the ration program stated that the humanitarian, public relations, and military impact of the effort in Afghanistan had not been evaluated. According to these officials, anecdotal reports from Special Forces soldiers indicated that vulnerable populations did receive the food and that the rations helped to generate goodwill among the Afghan people. However, reports from nongovernmental organizations in Afghanistan indicated that often the rations went to the healthiest, since they were able to access the drop zone most quickly, and were hoarded by a few rather than distributed among the population. The cost of the rations was $4.25 per unit, or $10,581,990 for the approximately 2.5 million dropped. The total cost of the program was $50,897,769, or $20.44 per daily ration. Delivery cost is estimated at $16.19 per unit, based on the difference in the ration cost and the department’s total expenditure. The rations accounted for only 2,835 metric tons out of the total of 365,170 metric tons, or .78 percent of the total weight of food aid delivered in fiscal year 2002. However, the cost of the rations equals 28.6 percent of the $178,068,786 that USAID and USDA spent on emergency assistance to Afghanistan from October 2001 through September 2002. If the United States had bought traditional food assistance commodities regionally instead of dropping the 2,835 metric tons of rations, it could have purchased approximately 118,000 metric tons of food, enough to provide food assistance to 1.0 million people for 1 year. The U.S. and international community’s agricultural reconstruction efforts in Afghanistan have had limited impact, coordination of the assistance has been fragmented, and significant obstacles jeopardize Afghanistan’s long- term food security and political stability. Because of drought and adverse political conditions, agricultural assistance provided by the international community has not measurably improved Afghanistan’s long-term food security. In 2002, collective efforts to coordinate reconstruction assistance, especially with the Afghan government, were ineffectual and, as a result, no single operational strategy has been developed to manage and integrate international agricultural assistance projects. Finally, the inadequacy of proposed agricultural assistance, and the increase in domestic terrorism, warlords’ control of much of the country, and opium production all present obstacles to the international community’s goal of achieving food security and political stability in Afghanistan. For most of the period 1999–2002, because of war and drought, FAO, bilateral donors, and more than 50 nongovernmental organizations in Afghanistan focused resources primarily on short-term, humanitarian relief; consequently, the impact of this effort on the agricultural sector’s long-term rehabilitation was limited. The assistance was provided in an effort to increase short-term food security and decrease Afghanistan’s dependence on emergency food assistance. During most of the 4-year period, FAO provided $28 million in assistance to Afghanistan partly under the UN Development Program’s (UNDP) Poverty Eradication and Community Empowerment program and partly as donor-funded response to the drought. The poverty eradication program ended in 2002, but FAO continues its projects in Afghanistan. FAO’s short-term activities focus on efforts to enable war- and drought-affected populations to resume food production activities. These activities include providing agricultural inputs such as tools, seed, and fertilizer; controlling locusts; and making repairs to small-scale irrigation systems (see fig. 9). Its longer-term activities include, among other things, the establishment of veterinary clinics, assistance in the production of high-quality seed through 5,000 contracted Afghan farmers, and horticulture development. From 1999 to 2002, bilateral efforts focused on the distribution of agricultural inputs and the repair of irrigation systems. USAID activities currently include developing a market-based distribution system for agricultural inputs as well as distributing high- quality seed. As of March 2002, at least 50 of the approximately 400 national and international nongovernmental organizations working in Afghanistan were involved in agriculture-related assistance, including providing agricultural inputs, farmer training, microcredit, and the construction of wells. For most of the 4-year period, the rise of the Taliban, the continuing conflict with the Northern Alliance, and the ongoing drought prevented the international community from shifting from short-term relief projects to longer-term agricultural rehabilitation projects and reversed earlier advancements in agricultural production. For example, by 1997, agriculture in some areas had returned to prewar levels, and Afghanistan as a whole had reached 70 percent self-sufficiency in the production of cereals. At the time, assistance agencies were planning to implement longer-term assistance activities but were unable to do so owing to drought and conflict. These same factors resulted in decreases in cereal production and livestock herds of 48 percent and 60 percent, respectively, from 1998 through 2001. In 2002, a number of longer-term agricultural rehabilitation efforts were started, including efforts by USAID to reestablish agricultural input and product markets. However, these efforts have not been evaluated, and it is too early to determine their sustainability after donor assistance ends or their long-term impact. International assistance, including agricultural assistance, was not well coordinated in 2002, and, as a result, the Afghan government was not substantively integrated into the agricultural recovery effort and lacks an effective operational strategy. In December 2002, the Afghan government and the international community instituted a new mechanism, the Consultative Group, to improve coordination. However, the Consultative Group is similar in purpose and structure to a mechanism used earlier in 2002, the Implementation Group, and does not surmount the obstacles that prevented the Implementation Group’s success. Because of the lack of coordination, the Afghan government and the international community have not developed a single operational strategy to direct the agricultural rehabilitation effort; instead, all of the major assistance organizations have independent strategies. Although documents prepared by the Afghan government and others to manage assistance efforts contain some of the components of an effective operational strategy, these components have not been combined in a coherent strategy. The lack of an operational strategy hinders efforts to integrate projects, focus resources, empower Afghan government ministries, and make the international community more accountable. Despite efforts to synchronize multiple donors’ initiatives in a complex and changing environment, coordination of international assistance in general, and agricultural assistance in particular, was weak in 2002. According to the UN, assistance coordination refers to a recipient government’s integration of donor assistance into national development goals and strategies. From the beginning of the assistance effort in 2002, donors were urged to defer responsibility for assistance coordination to the Afghan government as stipulated in the Bonn Agreement. According to the UN, coordination rests with the Afghan government, efforts by the aid community should reinforce national authorities, and the international community should operate, and relate to the Afghan government, in a coherent manner rather than through a series of disparate relationships. The Security Council resolution that established the UN Assistance Mission in Afghanistan goes further; it states that reconstruction assistance should be provided through the Afghan government and urges the international community to coordinate closely with the government. In April 2002, the Afghan government attempted to exert leadership over the highly fragmented reconstruction process. To accomplish this task, the government published its National Development Framework. The framework provides a vision for a reconstructed Afghanistan and broadly establishes national goals and policy directions. The framework is not intended to serve as a detailed operational plan with specific objectives and tasks that must be pursued to accomplish national goals. Also, in 2002, the Afghan government established a government-led coordination mechanism, the Implementation Group (see app. VI for detailed descriptions and a comparison of the coordinating mechanisms). The intent of the Implementation Group was to bring coherence to the international community’s independent efforts and broad political objectives, such as ensuring Afghanistan does not become a harbor for terrorists. The mechanism’s structure was based on the National Development Framework. Individual coordination groups, led by Afghan ministers and composed of assistance organizations, were established for each of the 12 programs contained in the framework. The Implementation Group mechanism proved to be largely ineffective. Officials from the Afghan government, the UN, the Department of State, and USAID, as well as a number of nongovernmental bodies, expressed concern over the lack of meaningful and effective coordination of assistance in Afghanistan in 2002. For example, a high-ranking WFP official in Afghanistan said that coordination efforts since September 11, 2002, paid only “lip-service” to collaboration, integration, and consensus. In August 2002, the Ministers of Foreign Affairs, Rural Reconstruction and Development, Irrigation, and Agriculture stated that the donor community’s effort to coordinate with the government was poor to nonexistent. A USAID official characterized the coordination of reconstruction in 2002 as an “ugly evolution” and “the most complex post-conflict management system” he had ever seen. The ineffectiveness of the Implementation Group mechanism resulted from its inability to overcome several impediments. First, each bilateral, multilateral, and nongovernmental assistance agency has its own mandate, established by implementing legislation or charter, and sources of funding, and each agency pursues development efforts in Afghanistan independently. Second, the international community asserts that the Afghan government lacks the capacity and resources to effectively assume the role of coordinator and, hence, these responsibilities cannot be delegated to the government. Third, no single entity within the international community has the authority and mandate to direct the efforts of the myriad bilateral, multilateral, and nongovernmental organizations providing agricultural assistance to Afghanistan. Finally, efforts to coordinate agricultural assistance were further complicated because the Ministries of Agriculture, Irrigation, and Rehabilitation and Rural Development share responsibility for agriculture development. In December 2002, the Afghan government instituted a new coordination system, the Consultative Group mechanism. The overall objective of the Consultative Group in Afghanistan is to increase the effectiveness and efficiency of assistance coordination in support of goals and objectives contained in the National Development Framework. According to the Afghan government, the program-level consultative groups established under this mechanism provide a means by which the government can engage donors, UN agencies, and nongovernmental organizations to promote specific national programs and objectives presented in the government’s National Development Framework and the projects articulated in the Afghan National Development Budget. According to advisors to the Afghan government, the Consultative Group mechanism provides a real opportunity for donors to provide focused support for policy development, project preparation, implementation, monitoring, and evaluation. The Consultative Group mechanism in Afghanistan evolved out of the Implementation Group and is similar in its National Development Framework–based hierarchal structure, the role of the Afghan government, the membership and leadership of sector specific groups, and stated goals (see app. VI). One difference between the Implementation and Consultative Group mechanisms is that, since the establishment of the latter, the Afghan government has asked donor government and assistance organizations to categorize their assistance projects under the subprograms in the National Development Framework and to direct funding toward the projects in the Afghan National Development Budget. Despite the effort to develop a more effective coordination mechanism, the Consultative Group mechanism has not surmounted the conditions that prevented the Implementation Group from effectively coordinating assistance. For example, in 2003, donor governments and assistance agencies have continued to develop their own strategies, as well as fund and implement projects outside the Afghan government’s national budget. In addition, agricultural assistance is divided up among several consultative groups including the groups for natural resources management and livelihoods. Further, unlike food assistance where donors primarily use one agency, WFP, for channeling resources, donors continue to use a variety of channels for their agriculture assistance. Although the Afghan government asserts that it is assuming a greater level of leadership over the coordination effort, as of May 2003, we could not determine whether the new coordination mechanism would be more successful than earlier efforts. Because of the inadequate coordination of agricultural assistance, the Afghan government and the international community have not developed an operational agricultural sector strategy. Each assistance agency has published its own development strategy that addresses agriculture and numerous other sectors. The Consultative Group mechanism and the National Development Framework, as well as other documents prepared by the Afghan government and others to manage assistance efforts, contain some of the components of an effective operational strategy, such as measurable goals and impediments to their achievement. However, these components have not been incorporated in a single strategy. Without an integrated operational strategy, jointly developed by the Afghan government and the international community, the Afghan government lacks a mechanism to manage the agricultural rehabilitation effort, focus limited resources, assert its leadership, and hold the international donor community accountable. Assistance Agencies Have Developed Separate Strategies No donor has taken the lead in the agricultural sector; consequently, multilateral, bilateral, and nongovernmental organizations, including the UN, FAO, the Asian Development Bank, the World Bank, USAID, and others, have prepared individual strategies that address, to varying degrees, agricultural reconstruction and food security. However, these strategies lack measurable national goals for the sector and have not been developed jointly with the Afghan government. For example, in August 2002, the Minister of Agriculture stated, “The ministry does not know the priorities of the international community for the agricultural sector, how much money will be spent, and where the projects will be implemented.” FAO claimed that the Ministry of Agriculture had endorsed FAO’s agricultural rehabilitation strategy. However, no letter of agreement or memorandum of understanding between the FAO and the ministry documents the acceptance of the strategy. The Minister of Agriculture told us, in December 2002, that the ministry had not endorsed FAO’s latest strategy. Further, the Ministry of Agriculture presented a list of more than 100 prioritized rehabilitation projects to the international community. As of late December 2002, the international community had not responded regarding the ministry’s proposed projects. Components of an Operational Strategy Have Not Been Integrated into a Single Document Although Consultative Group mechanism–related documents, the Afghan National Development Framework, and other documents prepared by the Afghan government and others to manage assistance efforts contain some of the components of an effective operational strategy, these components have not been incorporated in a single strategy. For an operational agricultural strategy to be effective, all relevant stakeholders must participate in its formulation. In this case, stakeholders include the Afghan Ministries of Agriculture and Irrigation and key nongovernmental, multilateral, and bilateral development organizations. Further, such strategies must establish measurable goals, set specific time frames, determine resource levels, and delineate responsibilities. For example, in Afghanistan, one such goal might be to increase the percentage of irrigated land by 25 percent by 2004 through the implementation of $100 million in FAO-led irrigation projects in specific provinces. In addition, an operational strategy should identify external factors that could significantly affect the achievement of goals and include a schedule for future program evaluations. Stakeholders should implement the strategy through projects that support the measurable goals of the strategy and broader policy objectives, such as those contained in the Afghan Government’s National Development Framework (see fig. 10). The Implementation Group and its successor, the Consultative Group, as well as the National Development Framework and other documents, contain some of the essential elements of an operational strategy. These elements include the involvement of key stakeholders, the development of some measurable objectives, and the identification of external factors that could affect the achievement of goals. However, since the National Development Framework is a general national strategy and not a detailed operational strategy, it is sufficiently broad that any assistance to the agricultural sector could be considered supportive of the framework, even if the assistance were not well targeted or made no significant impact. In addition, the various elements of an effective operational strategy that are contained in the National Development Framework and other documents have not been effectively applied, nor has a single agricultural sector strategy incorporating all of these elements been developed. The UN Assistance Mission for Afghanistan’s management plan endorses the formulation of joint strategies for reconstruction. In late December 2002, Afghanistan’s Minister of Agriculture told us that he would welcome the development of a joint Afghan–international agricultural sector strategy containing clear objectives, measurable goals, concrete funding levels, and clearly delineated responsibilities. In January 2003, FAO’s Assistant Director-General of Technical Cooperation stated that FAO would welcome the opportunity to assist the Ministry of Agriculture in preparing a strategy. The Consultative Group mechanism could serve as a vehicle to support the development of such a strategy. In March 2003, Afghan government advisors told us that consultative groups could develop strategies based on the subprograms contained in the National Development Framework and National Development Budget. Proposals for the development of strategies pertaining to natural resources management, including agriculture, have been drafted, and support for these proposals is being sought from the international community. Lack of Operational Agricultural Sector Strategy Limits Integration and Oversight The lack of an operational agricultural sector strategy hinders efforts to integrate disparate projects, focus limited assistance resources, place Afghan government ministries in a leadership role, and make the international community more accountable to the Afghan government. In its October 2002 National Development Budget, the Afghan government cited the lack of a strategic framework for the natural resources management sector, including agriculture, as an impediment to rehabilitation. Absent an operational strategy, the Afghan government lacks a mechanism to integrate disparate projects into an effective agricultural rehabilitation manage finite resources so as to ensure the greatest return on guide the efforts of the international community and assert the Afghan government’s leadership in agricultural reconstruction. Finally, an operational agricultural sector strategy that includes measurable goals and the means to assess progress against those goals could increase accountability. Because no comprehensive integrated strategy exists, the Afghan government lacks the means to hold the international assistance community accountable for implementing the agricultural sector reconstruction effort and achieving measurable results. Major obstacles to the goal of a food-secure and politically stable Afghan state include inadequate assistance funding, as well as a volatile security situation, long-standing power struggles among warlords, and the rapid increase in opium production. Donor support has not met Afghanistan’s recovery and reconstruction needs, and future funding levels for agricultural assistance may be inadequate to achieve the goal of food security and political stability, primarily because assistance levels are based on what the international community is willing to provide rather than on Afghanistan’s needs. Meanwhile, the continued deterioration of the security situation, exacerbated by a rising incidence of terrorism, the resurgence of warlords, and near-record levels of opium production, are impeding reconstruction and threaten to destabilize the nascent Afghan government. Total assistance levels, including those for agricultural reconstruction, proposed at the Tokyo donors’ conference in January 2002 do not provide Afghanistan with enough assistance to meet its estimated needs. The preliminary needs assessment prepared for the January 2002 donor’s conference in Tokyo estimated that, in addition to humanitarian assistance such as food and shelter assistance, between $11.4 and $18.1 billion over 10 years would be needed to reconstruct Afghanistan (see table 2). Others have estimated that much more is required. For example, the Afghan government estimated that it would need $15 billion for reconstruction from 2003 through 2007. In January 2002, donors pledged $5.2 billion for the reconstruction of Afghanistan for 2002–2006, or slightly more than half of the base-case estimate for 5 years. For the period January 2002–March 2003, the donors pledged $2.1 billion (see app. VII for donor pledges and donations). As of March 2003, approximately 88 percent of the 2002 grant funding had been disbursed. However, only 27 percent, or $499 million, was spent on major reconstruction projects such as roads and bridges, which are essential for the export of Afghan agricultural commodities and the import of foreign agricultural supplies. Despite the importance that the United States and the international community attach to the Afghan reconstruction effort, Afghanistan is receiving less assistance than was provided for other recent postconflict, complex emergencies. For example, per capita assistance levels have ranged from $193 in Rwanda to $326 in Bosnia, compared with $57 for Afghanistan. Given that the livelihood of 22 million Afghans depends on agriculture, we estimated that if all of the assistance had been provided only to people engaged in agriculture, each person would have received $67 annually or about 18 cents per day for their daily subsistence and agriculture production efforts in 2002. If Afghanistan were to receive per capita aid consistent with the average amounts provided for other recent postconflict reconstruction efforts, in 2002 it would have received $6 billion in international assistance, and from 2002 to 2006 it would receive $30 billion, or nearly three times the base-case estimate. The funding proposed by donors for food security–related issues is limited and may be insufficient to achieve the long-term goals of the Afghan government and the international community. Despite the Afghan government’s estimated annual need of $500 million for agricultural rehabilitation, agricultural assistance for Afghanistan in 2003 may total approximately $230 million. Afghanistan’s President has emphasized that the goal of food security and political stability is the Afghan government’s overarching priority, and the United States and other donor governments recognize the strong link between stability and food security. According to the U.S. Department of State, reconstruction is an integral part of the campaign against terrorism: the U.S. policy goal in Afghanistan is to create a stable Afghan society that is not a threat to itself or others and is not a base for terrorism. Because the agricultural sector forms the core of the Afghan economy, the pace of the sector’s recovery will largely determine the rate of overall economic recovery. Sustained investment in the agricultural sector, particularly the rehabilitation, upgrading, and maintenance of the nation’s irrigation infrastructure, is essential for the recovery of the Afghan economy and the country’s long-term food security. Despite improvements in agricultural production in 2002, owing primarily to increased precipitation, the fundamental weakness of Afghanistan’s agricultural infrastructure continues to threaten overall recovery efforts. The Ministry of Agriculture estimates that it needs $5 billion over 10 years to complete 117 key projects and other efforts important for the recovery of the sector. Despite these costs, the 2003 Afghan development budget for natural resource management, including agriculture, is only $155 million. Since the budget is funded almost entirely by the donor community, the budget reflects what the government expects to receive from the international community, not the Afghan government’s actual need. Afghan government budget estimates indicate that the natural resources management budget will increase to $298 million in 2004 and $432 million in 2005. International donors have budgeted approximately $230 million for agriculture-related assistance in 2003. USAID considers adequate funding a prerequisite for the success of the assistance effort and plans to spend approximately $50 million on agriculture in 2003 and similar amounts in 2004 and 2005. USAID funding covers 32 percent of the Afghan government’s 2003 natural resources management program budget of $155 million but only 10 percent of the Afghan Ministry of Agriculture’s estimated annual needs of $500 million. The goal of a stable Afghan state is threatened by the rise in domestic terrorism, long-standing rivalries among warlords, and the rapid increase in opium production. In March 2002, in a report to the UN Security Council, the UN Secretary General stated that security will remain the essential requirement for the protection of the peace process in Afghanistan. One year later, in a report to the council, he stated that “security remains the most serious challenge facing the peace process in Afghanistan.” Others in the international community, including USAID, consider security as a prerequisite for the implementation of reconstruction efforts. In 2002 and early 2003, the deteriorating security situation was marked by terrorist attacks against the Afghan government, the Afghan people, and the international community. These incidents have forced the international community to periodically suspend agricultural assistance activities, disrupting the agricultural recovery effort. Meanwhile, clashes between the warlords’ private armies continue to destabilize the country and reduce the Afghan government’s ability to fund agricultural reconstruction. The warlords foster an illegitimate economy fueled by smuggling of arms, drugs, and other goods. They also illegally withhold hundreds of millions of dollars in customs duties collected at border points in the regions they control, depriving the central government of revenues needed to fund the country’s agricultural reconstruction. The warlords control private armies of tens of thousands of armed men. Across Afghanistan, approximately 700,000 Afghan men are armed, and half of these are combat trained. USAID considers the demobilization and integration of these armed men a prerequisite for the success of the international recovery effort. Currently, the unemployment rate in Afghanistan is estimated at 50 percent. Without a revitalization of the agricultural sector—the engine of the Afghan economy and the main source of employment—it is likely that these men will remain in the employ of the warlords. Another destabilizing force that affects agriculture is the illicit international trade in Afghan opiates. The drug trade was the primary income source of the Taliban and continues to provide income for terrorists and warlords. On January 17, 2002, the President of Afghanistan issued a decree stating that the existence of an opium-based economy was a matter of national security and should be fought by all means. During the 1990s, Afghanistan became the world’s leading opium producer accounting for approximately 70 percent of opium production worldwide. Despite being a central focus of a number of international donors engaged in Afghanistan, opium poppy eradication efforts implemented by the Afghan government and the international community in 2002 failed. In July 2002, one of Afghanistan’s vice presidents and leader of the Afghan government’s poppy eradication campaign, Haji Qadir, was assassinated. In October 2002, the UN Office for Drug Control and Crime Prevention estimated that, in 2002, Afghan farmers produced 3,400 metric tons of opium. This level of production equals or exceeds levels achieved in 9 of the last 10 years. Total 2002 revenue from opium production totaled $1.2 billion, an amount equivalent to 70 percent of total assistance to Afghanistan pledged for 2002, or nearly 220 percent more than the Afghan government’s 2003 operating budget. The UN Drug Control Program also estimated that the average poppy farmer earned $4,000 dollars from growing poppies in 2002. Owing to continuing drought, a poor agricultural marketing structure, and widespread poverty, farmers have turned to poppy cultivation to avoid destitution. Since the fall of the Taliban, irrigated acreage dedicated to wheat production has fallen by 10 percent, supplanted by opium poppies. In addition, it is estimated that 30 to 50 percent of Afghans are involved in opium cultivation. Many of the farmers continue to grow opium poppies because they lack the seed and fertilizer needed to grow alternative crops that generate revenues comparable to those from opium. The establishment of a new government in Afghanistan has provided the Afghan people, the international community, and the United States an opportunity to rebuild Afghanistan and create a stable country that is neither a threat to itself or its neighbors nor a harbor for terrorists. In 2002, U.S. and international food assistance averted famine, assisted the return of refugees, and helped to implement reconstruction efforts. However, U.S. food assistance and cargo shipping legislation limited the United States’ flexibility in responding quickly to the emergency and providing support to WFP; the legislation does not provide for purchasing commodities regionally or donating cash to the UN for procuring commodities and requires that U.S. commodities be shipped on U.S. flag vessels. Consequently, the costs of food assistance were higher and delivery times were greater, fewer commodities were purchased, and a smaller number of people received food assistance. In addition, a lack of timely and adequate overall donor support disrupted WFP’s food assistance efforts. Meanwhile, in 2003, six million people will require food assistance in Afghanistan. Because the economy remains overwhelmingly agricultural, the pace of recovery in the agricultural sector will largely determine the rate of Afghanistan’s overall recovery. Food assistance alone cannot provide food security; Afghanistan’s agricultural sector must be rehabilitated. Environmental and political problems have limited the impact of the international community’s agricultural assistance efforts. In addition, in 2002, the assistance efforts were not coordinated with each other or with the Afghan government. A new coordination mechanism established in December 2002 is largely similar to earlier mechanisms, and it is too recent for us to determine its effectiveness. Further, whereas U.S. and UN agencies, bilateral donors, and nongovernmental organizations have drafted numerous overlapping recovery strategies, no single Afghan government–supported strategy is directed toward the effort to rehabilitate the sector. Meanwhile, funding for the agricultural assistance effort is insufficient and the nascent Afghan government is plagued with problems stemming from domestic terrorism, the resurgence of warlords, and near- record levels of opium production. These obstacles threaten the recovery of the agricultural sector and the U.S. goals of achieving food security and political stability in Afghanistan. To increase the United States’ ability to respond quickly to complex emergencies involving U.S. national security interests, such as that in Afghanistan, Congress may wish to consider amending the Agricultural Trade Development and Assistance Act of 1954 (P.L. 83-480), as amended, to provide the flexibility, in such emergencies, to purchase commodities outside the United States when necessary and provide cash to assistance agencies for the procurement of non-U.S.-produced commodities. In addition, Congress may wish to amend the Merchant Marine Act of 1936, as amended, to allow waiver of cargo preference requirements in emergencies involving national security. These amendments would enable the United States to reduce assistance costs and speed the delivery of assistance, thus better supporting U.S. foreign policy and national security objectives. To increase the effectiveness of the agricultural assistance effort in Afghanistan, we recommend that the Secretary of State and the Administrator of the U.S. Agency for International Development work through the Consultative Group mechanism to develop a comprehensive international–Afghan operational strategy for the rehabilitation of the agricultural sector. The strategy should (1) contain measurable goals and specific time frames and resource levels, (2) delineate responsibilities, (3) identify external factors that could significantly affect the achievement of goals, and (4) include a schedule for program evaluations that assess progress against the strategy’s goals. We provided a draft of this report to WFP, Department of State, USDA, USAID, and Department of Defense and received written comments from each agency (see app. VIII, IX, X, XI, and XII respectively). We also received technical comments from USDA, the Departments of Defense and State, USAID, FAO, and the World Bank, and incorporated information as appropriate. Department of State, USDA, and USAID all commented on our matter for congressional consideration related to amending food assistance legislation. WFP supported our suggestion that Congress consider amending the Agricultural Trade Development and Assistance Act of 1954 to allow the provision of non-U.S. commodities when such action supports U.S. national security. However, State, USDA, and USAID did not support the recommendation. Specifically, although State accepted our evidence that purchasing commodities from the United States is not the most cost- effective method of providing assistance, it believes that further study of potential variables, such as regional customs fees, taxes, and trucking costs, that may negate cost-benefit savings is needed before the act is amended. USAID stated that an amendment is not necessary because other authorities under the Foreign Assistance Act allow the provision of cash, and the proposed $200 million Famine Fund announced by the President in February 2003 would also increase the flexibility of U.S. assistance programs. USDA stated that the flexibility to quickly respond to humanitarian crises can be achieved through means, such as amending cargo shipping legislation, that would not adversely affect the provision of U.S. commodities. Specifically, USDA suggested adding a national security waiver to the U.S. regulations that govern how U.S. assistance is transported to eliminate the requirement to use U.S. flag vessels in certain circumstances. We do not disagree that under broad disaster assistance legislation U.S. agencies may provide cash or purchase food aid commodities outside the United States. However, we maintain that amending the Agricultural Trade Development and Assistance Act of 1954 to allow the provision of cash or food commodities outside the United States will greatly improve U.S. flexibility in responding to crises that affect U.S. national security and foreign policy interests. The act is the principal authority for providing food assistance in emergency situations. In both 2002 and 2003 over $2 billion in food assistance, the preponderant amount of this type of assistance, was dispersed under this authority. Amending the act will provide the United States with more flexibility to respond rapidly and at lower cost to events that affect U.S. national security; this is particularly important given the number and magnitude of crises requiring food assistance and decreasing surpluses of U.S. commodities. We also agree with USDA that the cargo preference requirement adds additional cost to food assistance and should be waived in specific situations, and we have adjusted the matter for congressional consideration contained in the report on this issue. In its comments, USDA stated that the report did not provide enough evidence about the existence of surpluses in 2002 in the Central Asia region. It also stated that if the U.S. had procured greater levels of commodities with the savings accrued by purchasing regional versus U.S. - origin commodities, the additional commodities would have over burdened WFP’s logistics system while generating only “marginal savings in time and money.” We have added additional information on the 7.6 million metric ton 2002 grain surplus in Kazakhstan and Pakistan. We disagree with USDA’s assertions that additional regionally procured commodities would have taxed WFP’s logistics system and brought only marginal gains. In December 2002, while fighting between coalition forces, the Northern Alliance, and the Taliban was still occurring, and winter weather was complicating food deliveries, WFP delivered 116,000 metric tons of food to Afghan beneficiaries, in the single largest movement of food by WFP in a 1- month period. According to WFP, its Afghanistan logistics system was capable of routinely moving more than 50,000 metric tons of food per month. Further, we disagree with USDA’s statement that the potential savings in cost and time by purchasing commodities regionally are marginal. Savings from the elimination of ocean freight costs could have fed 685,000 people for 1 year, and commodities purchased regionally are delivered to beneficiaries within weeks of being purchased, compared with the 4 months that it can take for commodities purchased in the United States. WFP, the Department of State, USDA, and USAID all agreed with the report’s conclusion and recommendation pertaining to assistance coordination and the need to develop a joint international-Afghan agricultural rehabilitation strategy. WFP pointed out that although the international assistance effort may have been aided by better coordination in 2002, the overall level of assistance might have been too small in 2002 to have any long-term impact on the agricultural sector. Although USAID agreed with our recommendation, it stated it did not want to lead the strategy development effort. We believe that USAID should take an active and aggressive role in the development of a joint international–Afghan government strategy, because the United States is the largest donor to Afghanistan, agriculture rehabilitation is the focus of USAID’s assistance effort in Afghanistan, and the achievement of U.S. goals in Afghanistan is tightly linked to the rehabilitation of the country’s agricultural sector. According to USAID’s assistance strategy for Afghanistan, restoring food security is USAID’s highest priority. Finally, the Department of Defense focused its comments on the report’s discussion of the humanitarian daily ration program. Specifically, the Department of Defense stated that (1) the report incorrectly characterized the ration program as a food assistance program, (2) informal evaluations of the program indicated that the program alleviated hunger and generated goodwill from the Afghan people toward U.S. soldiers, and (3) although the funds used to purchase rations could have been used to purchase bulk food, the bulk food could not have been delivered to remote areas. The report discusses both the food assistance and nonfood assistance aspects of the rations program, and we have added information on page 30 about the goodwill generated by the rations to the report. Finally, as discussed on page 20 of the report, bulk food could have been delivered to remote areas during the period of time (October-December 2001) when the ration program was implemented. During the month of December 2001, WFP delivered 116,000 metric tons of food to Afghanistan, a level of food assistance that exceeds any 1-month total for any emergency operation in WFP’s history. We are sending copies of this report to the Honorable Richard J. Durbin, Ranking Minority Member, Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, Committee on Governmental Affairs, and to the Honorable Frank R. Wolf, Chairman, Subcommittee on Commerce, Justice, State, and the Judiciary, Committee on Appropriations, House of Representatives. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4347. Other GAO contacts and staff acknowledgments are listed in appendix XIII. To examine the management, cost, and sufficiency of U.S. and international food assistance since 1999, we reviewed documents obtained from the World Food Program (WFP) and the U.S. Agency for International Development (USAID). Specifically, we reviewed program documentation for recent emergency and special operations; WFP Afghanistan Country Office quarterly and annual reports; WFP’s Emergency Field Operations Manual and Food Aid in Emergencies Redbook; country office monitoring guidelines; Afghanistan area office strategies; memorandums of understanding and letters of agreement signed by WFP and United Nations (UN) agencies, nongovernmental organizations, and the Afghan government; and monitoring reports prepared by USAID staff. In addition, we analyzed project monitoring and loss data to determine the frequency of monitoring visits, the experience and education level of monitors, and the level of commodities lost versus those delivered. We did not verify the statistical data provided by WFP. We also reviewed donor resource contribution data for recent emergency and special operations. We contacted by e-mail, or spoke with, 14 Afghan and international nongovernmental organizations to obtain their views on the delivery of assistance, WFP monitoring and reporting, and overall assistance coordination issues. We interviewed WFP management and staff at WFP headquarters in Rome, Italy; at the Regional Bureau for the Mediterranean, Middle East, and Central Asia, in Cairo, Egypt; at the Country Office in Kabul, Afghanistan; and at the Area Office in Hirat, Afghanistan. We also interviewed USAID, U.S. Department of Agriculture (USDA) and U.S. Department of State staff in Washington, D.C., and Kabul; U.S. Department of Defense Staff in Washington; the International Security Afghanistan Force, UN Development Program (UNDP), and UN Assistance Mission in Afghanistan (UNAMA) staff in Kabul; and UN High Commissioner for Refugees staff in Kabul and Hirat. Finally, we visited WFP project sites and warehouses in Kabul and Hirat. The number of sites visited was limited because of constraints placed on our movement within Afghanistan by the U.S. Embassy because of security considerations. We also examined cost data provided by USDA and USAID. The data included commodity costs; total ocean freight charges; inland freight; internal transport, storage, and handling charges; and administrative support costs. We used the data to calculate two additional expenses, per USDA statements about the composition of costs and additional costs that are not stated on the data sheets. First, the "freight forwarder" fees represent 2.5 percent of the total cost of ocean freight. Thus, ocean freight charges were divided between freight forwarder fees (total freight minus total freight divided by 1.025) and actual freight costs (total freight minus freight forwarder fees). This was true for both USDA and USAID assistance. In the final analysis, the freight forwarder fee was included in the ocean freight cost because it is an expense that would not have been incurred if ocean shipping had not been used. Second, with each donation to WFP, USDA provides an administrative support grant at the rate of 7.5 percent of the total value of the donated commodities. We calculated these data accordingly. We checked all USAID and USDA data for validity, where possible to the level of individual shipment. We cross-checked USAID data with USDA data. (USAID typically provided only estimated costs for commodities for the period 1999–2002. Because USDA conducts almost all commodity purchases for USAID, USAID estimates the commodity costs at the time it places its order with USDA, based on the current market cost. However, because USDA provided actual costs for USAID purchases in 1999, 2000, and 2001, the USAID commodity costs we cited for 2002 are based on USAID's estimate.) We then compared the cost of the U.S.-purchased commodities with the cost of commodities purchased in the Central Asia region to determine whether any savings could have been realized by purchasing commodities regionally versus buying U.S. commodities. Finally, using the level of rations that WFP provides to returning refugees, 12.5 kilograms per month, we calculated the amount of food assistance that the United States could have purchased and the number of people that could have received food assistance if it had purchased commodities in the Central Asia region. Further, we examined the costs associated with the Department of Defense’s Afghan humanitarian daily ration program, implemented from October 2001 through December 2001. Using the level of rations that WFP provides to returning refugees, 12.5 kilograms per month, we calculated the amount of food assistance that the United States could have purchased and the number of people that could have received food assistance if it had purchased commodities in the Central Asia region. In addition, we reviewed relevant food assistance legislation including the Agricultural Trade Development and Assistance Act of 1954 (P.L. 83-480) to determine whether provisions in the law allowed the U.S. government to purchase commodities outside the United States or provide cash transfers to assistance agencies for the provision of commodities from sources other than U.S. suppliers. To assess U.S. and international agricultural assistance, coordination, strategies, and funding intended to help Afghanistan maintain stability and achieve long-term food security, we reviewed documentation provided by FAO, UNDP, and UNAMA; the World Bank; the Asian Development Bank; USAID; and the Afghan Ministries of Agriculture and Animal Husbandry, and Irrigation and Water Resources. We reviewed information pertaining to past and current coordination mechanisms in the Afghan government’s National Development Framework and National Development Budget. We examined the structure and content of the assistance strategies published by FAO, UNDP, UNAMA, the European Commission, the World Bank, Asian Development Bank, and USAID, and we examined the proposed funding levels contained in each strategy. Using the criteria contained in the U.S. Government Performance and Results Act, we examined the strategies to determine whether each contained the basic elements of an operational strategy articulated in the act. Further, we examined the overall assistance funding requirements contained in the January 2002 UNDP, World Bank, and Asian Development Bank Comprehensive Needs Assessment, which served as a guideline for international donor contributions for Afghanistan. We interpolated the funding projection data to construct annual aid flows, so that the cumulative totals were equal to those contained in the assessment. Assuming that the first year of data referred to 2002, we applied the U.S. gross domestic product deflator to convert the assumed current dollar figures into constant 2003 dollars. Further, we examined security reports produced by the Department of Defense and the UN, as well as the UN Office on Drugs and Crime report on opium production in Afghanistan, to determine the impact of warlords and opium production on food security and political stability. In addition, we discussed U.S. and international agricultural assistance efforts and food security issues with officials from USAID in Washington and Kabul; FAO in Rome and Kabul; UNDP and the Afghan Ministries of Communication, Foreign Affairs, Interior, Rural Rehabilitation and Development, and Irrigation and Water Resources in Kabul; and the Afghan Ministry of Agriculture in Kabul and Washington. We conducted our review from April 2002 through May 2003 in accordance with generally accepted government auditing standards. Free food is delivered to the most vulnerable populations. Malnourished children, pregnant and nursing mothers, and people undergoing treatment for tuberculosis and leprosy are provided with a blended mix of either milled corn and soy or wheat and soy, in addition to sugar and oil, through feeding centers, hospitals, clinics, and orphanages. Returning refugees, internally displaced persons, and people involved in the poppy industry, among others, reconstruct and rehabilitate irrigation canals, roads, and other infrastructure. The program provides wages in the form of food and tools. Men and women of the community decide which families should receive food. Able- bodied households contribute their labor to construct or rehabilitate an asset, such as an irrigation canal, that benefits the entire community. Those who cannot contribute labor also receive food, and they benefit from the community asset. Food is distributed to students in school to encourage families to send their children to school. To encourage families to support the education of females, additional food is provided to female students. Food is also provided to teachers to supplement their low salaries. Food is provided to women who participate in informal education activities including technical skills and literacy training. Food is exchanged for improved seed grown by contract farmers. The seed is then sold to other farmers. Daily rations of bread are provided to more than 250,000 people. Women operate 41 of the 100 bakeries. Approximately 270,000 civil servants were provided with pulses and oil to supplement their salaries and help the Afghan government reestablish itself. Food assistance is provided as part of a resettlement package to help people reestablish themselves in their home areas or chosen community. The World Food Program uses a number of mechanisms to minimize losses and ensure that its commodities are well managed. The mechanisms include real-time automated tracking, periodic monitoring visits to project sites, required periodic reports from implementing partners, and end-of- project evaluations. The program’s global automated tracking system, the Commodity Movement and Progress Analysis System, is intended to record and report all commodity movement, loss, and damage. Each WFP suboffice in Afghanistan has access to the system and employs a clerk dedicated to managing it. The system produces a number of reports, including stock, damage, and loss reports. WFP guidelines state that monitoring and reporting are essential parts of effective project management in the field, and it is WFP’s policy not to support any project that cannot be monitored. Monitoring activities are intended to assess the status of projects by comparing the actual implementation of activities to the project’s work plan. The responsibility for monitoring projects rests with the program’s country office in Kabul and five Afghan suboffices located in other cities. Each office employs between 6 and 24 local Afghan project monitors, and WFP has 22 program staff in Afghanistan who also monitor projects, in addition to their other duties. WFP’s Afghan country office has developed monitoring guidelines for its monitors and monitoring checklists for each type of activity (e.g., food-for-work, food-for-seed, food-for-asset-creation, food-for-education). According to WFP, monitoring visits include an examination of project inputs, current operations, outputs, and immediate effects. Specific monitoring activities include an examination of food stocks held by implementing partners. The monitors spot-check the weight of randomly selected bags in storage and compare the total stock held with WFP stock balance reports. The monitors also survey local markets to determine whether any WFP food is being resold rather than used by beneficiaries. Projects are monitored on a periodic basis. WFP tries to visit each project when it starts, during its implementation, and when it is completed. The WFP data that we examined indicated that, on average, 2.4 monitoring visits were conducted on all projects implemented between April 2002 and November 2002 in Afghanistan. In addition to requiring the project monitoring visits, WFP requires its implementing partners to report on the status of projects on a monthly basis. WFP project proposals and the letters of agreement signed by WFP and its implementing partners stipulate that monthly and end-of-project reports must be submitted to WFP. The end-of-project reports include an assessment of the achievement of project objectives and a breakdown of budget expenditures. Between 1998 and 2003, as circumstances in Afghanistan changed, the coordination processes utilized by the international community and the Afghan government evolved (see table 3 and figure 11). Beginning in 1998, the international community employed a strategy of Principled Common Programming among United Nations agency, nongovernmental, and bilateral donor programs. The international community’s aim was to establish priorities and projects based on agreed upon goals and principles that would form the UN’s annual consolidated appeal for assistance. To implement Principled Common Programming, a number of coordination mechanisms were established, including the Afghan Programming Body. The programming body consisted of the Afghan Support Group, 15 UN Representatives, and 15 nongovernmental organizations and was responsible for making policy recommendations on issues of common concern, supporting the UN’s annual consolidated appeal for donor assistance, and promoting coordination of assistance efforts. The Taliban government had no role in the programming body. The programming body was supported by a secretariat; working level operations were conducted by a standing committee and thematic groups responsible for analyzing needs, developing strategies and policies, and setting assistance priorities within their thematic areas (e.g., the provision of basic social services). The Afghan Programming Body and its standing committee were incorporated into the Implementation Group/Program Group process established in 2002. Table 3 describes the Afghan assistance coordination mechanisms in place in 2002. In December 2002, the Afghan government instituted the Consultative Group coordination process in Afghanistan. The process evolved out of the previous Implementation/Program group processes. (Table 4 compares the two processes.) The Consultative Group process retains the same basic hierarchical structure that was established under the Implementation Group process. For example, the new process includes 12 groups, each lead by an Afghan government minister, organized around the 12 programs contained in the Afghan government’s National Development Framework. In addition to the 12 groups, 2 consultative groups covering national security programs (i.e., the national army and police); and 3 national working groups on disarmament, demobilization, and reintegration; counternarcotics; and demining were established. Further, 5 advisory groups were also established to ensure that cross-cutting issues, such as human rights, are mainstreamed effectively in the work of the 12 consultative groups and reflected in the policy framework and budget. Each consultative group will assist in policy management, as well as monitoring the implementation of activities envisaged under the Afghan government’s national budget. The groups will assist in preparing the budget, provide a forum for general policy dialogue, monitor the implementation of the budget, report on indicators of progress for each development program, and elaborate detailed national programs. The groups, with assistance from the standing committee, will also focus on monitoring performance against benchmarks established by each group. Each lead ministry will select a focal point, or secretariat, organization from among donors and UN agencies. Each year, in March, the Afghanistan Development Forum, or national consultative group meeting, will be held to discuss the budget for the next fiscal year, review national priorities, and assess progress. At that time, the consultative groups will report to the Consultative Group Standing Committee. 3 years Russia did not pledge at Tokyo – Russian assistance has been primarily in-kind donations. The following are GAO’s comments on the letter from the United Nations World Food Program dated June 2, 2003. 1. Although changes in the coordination mechanism utilized in Afghanistan were introduced in 2003, the Afghan government and the international community still lack a common, jointly developed strategy for rehabilitating the agricultural sector. We believe that such a strategy, including measurable goals and a means to evaluate progress toward achieving the goals, is needed to focus limited resources and hold the international community accountable for the assistance it delivers. The following are GAO’s comments on the letter from the Department of State dated June 3, 2003. 1. The U.S. Agency for International Development (USAID) currently purchases limited amounts of regional food commodities in an effort to respond quickly to humanitarian emergencies. Commodities purchased in the United States by U.S. agencies must travel the same logistics networks as commodities purchased regionally. For example, U.S. commodities destined for Afghanistan in 2002 were shipped from the United States to the Pakistani port at Karachi and moved to their final destination via roads in Pakistan and Afghanistan. Commodities purchased in Pakistan followed the same transit routes. Hence, the overland shipping costs, such as for trucking, were the same for U.S. origin commodities and Pakistani commodities. Further, regional cash purchases of food would be made by U.S. government officials or World Food Program (WFP) officials, the same officials that currently handle hundreds of millions of dollars in assistance funds and millions of metric tons of commodities; we are not suggesting that cash be provided to local governments. Any purchases would be subject to U.S. and UN accountability procedures, as such purchases are currently; increasing the amount of commodities purchased locally would not by itself create an opportunity for corruption. The following are GAO’s comments on the letter from the United States Agency for International Development dated June 6, 2003. strategy recognizes the importance of agriculture sector rehabilitation to the achievement of the U.S. policy goals in Afghanistan, including a politically stable state that is not a harbor for terrorists. 4. We agree that other authorities allow USAID to provide cash or purchase assistance commodities outside the United States. However, we believe that amending the Agricultural Trade Development and Assistance Act of 1954 to allow the provision of cash or food commodities outside the United States will greatly improve U.S. flexibility in responding to crises affecting U.S. national security and foreign policy interests. The act is the principal authority for providing food assistance in emergency and nonemergency situations. Amending the act will provide a permanent provision in this authority allowing the United States to respond rapidly and in a cost-effective manner to events that affect U.S. national security. USAID cites the recently proposed $200 million Famine Fund as providing the flexibility that the United States needs to address humanitarian crises. However, the fund proposal indicates that the fund will target dire unforeseen circumstances related to famine; thus, the fund does not appear to be designed to respond to nonfamine crises involving large amounts of food aid or national security. The fund amounts to less than 10 percent of the $2.2 billion and $2.6 billion appropriated for U.S. food aid in 2002 and 2003, respectively, a period marked by an increasing number of humanitarian food crises—for example, in Afghanistan, southern Africa, and North Korea—that did not entail famine but that did, in some cases, affect U.S. national security. The Famine Fund is inadequate to respond to the increasing number and size of such crises. Meanwhile, the availability of commodities in the United States for food assistance has declined in 2003. Therefore, the need to procure commodities overseas in close proximity to affected countries has become more critical while also being more cost effective. The following are GAO’s comments on the letter from the Department of Agriculture dated June 10, 2003. 1. Although other legislation allows for the provision of cash or assistance commodities from non-U.S. sources, we believe that amending the Agricultural Trade Development and Assistance Act of 1954 to allow the provision of cash or food commodities outside the United States will greatly improve U.S. flexibility in responding to crises that affect U.S. national security interests. The act is the principal authority for providing food assistance in emergency and nonemergency situations. Amending the act will provide a permanent provision in this authority allowing the United States to respond rapidly and in a cost effective manner to events that affect U.S. national security. In addition, although the proposed $200 million Famine Fund may provide some additional flexibility for responding to humanitarian crises, the fund proposal indicates that the fund will target dire unforeseen circumstances related to famine. Thus, the fund does not appear to be designed to respond to nonfamine crises involving large amounts of food aid or national security. The fund amounts to less than 10 percent of the $2.2 billion and $2.6 billion appropriated for U.S. food aid in 2002 and 2003, respectively, a period marked by an increasing number of humanitarian food crises—for example, in Afghanistan, southern Africa, and North Korea—that did not entail famine but that did, in some cases, affect U.S. national security. 2. We agree with the U.S. Department of Agriculture (USDA) that the cargo preference requirement adds additional cost to food assistance and should be waived in specific situations, and we have adjusted the matter for congressional consideration to reflect this. As stated in the report, 19.6 percent of total food assistance costs in fiscal year 2002 were for ocean freight. These costs were incurred because of the requirement that assistance commodities must be purchased in the United States, and 75 percent of the purchased commodities by weight must be shipped on U.S.-flagged carriers. In previous reports, we analyzed the costs of cargo preference requirements on food assistance and demonstrated the negative impact of these costs on U.S. food aid programs. it had used the savings realized through the purchase of regional commodities versus U.S. commodities to procure additional commodities. Further, WFP has commodity quality control standards and would not purchase commodities with donor funds that were objectionable to the donor providing the funds. Finally, much of the wheat that was purchased in the United States was shipped in bulk to ports in Pakistan where it was bagged for final distribution in bags clearly marked “USA.” Wheat purchased regionally with U.S. funds was packaged in Pakistan in the same type of bags. Thus, any regional purchases could be packaged in appropriately marked bags in the country of origin or at a bagging facility in a transit country. WFP uses this practice in other regions, such as southern Africa. 6. WFP made regional purchases during late 2001, but it also made regional purchases during 2002. As stated in the report, the amount of food available for food assistance in 2003 is less than in 2002, while the need for food aid continues to grow around the world, most notably in southern Africa. In addition, even if the U.S. grain infrastructure system is able to respond to ongoing demands for food aid, purchasing U.S. origin commodities and shipping the commodities via expensive ocean freight is not the most cost effective or quickest means either of supplying food to hungry people or of achieving U.S. national security and foreign policy objectives, such as stability in Afghanistan. 7. We agree that the donor community faced challenges in engaging the Afghan government in 2002. We believe that the mechanisms currently in place, including the Consultative Group coordination mechanism, provide an environment where the international community and the Afghan government can engage in a joint strategy development effort. 8. The report’s description of Afghanistan’s agriculture sector is based on discussions with and documents obtained from FAO, Asian Development Bank, USAID, and Afghan government officials. We have adjusted the language in the report in response to USDA’s comments. The following are GAO’s comments on the letter from the Department of Defense dated June 10, 2003. 1. The report discusses both food assistance and nonfood assistance aspects of the Humanitarian Daily Ration program. On page 30 of the report, we state that the HDR program was initiated to alleviate suffering and convey that the United States waged war against the Taliban, not the Afghan people. Also, the HDR program is included with the U.S. Agency for International Development’s humanitarian programs in U.S. government tallies of total humanitarian assistance provided to Afghanistan. 2. Department of Defense officials responsible for the administration of the HDR program stated that no formal evaluation of the HDR program in Afghanistan has been conducted. In the report, we cite the informal reporting that provided the Department of Defense with some information about how the program was received by the Afghan people. We have added information about the goodwill that the HDRs generated according to the informal reports cited by the Department of Defense in its comments on the draft report. 3. The report describes how HDRs are designed to be used—to relieve temporary food shortages resulting from manmade or natural disasters—not, as in Afghanistan, to feed a large number of people affected by a long-term food shortage. Further, as discussed in the report, the World Food Program (WFP) has worked in Afghanistan for many years, and during that period it developed an extensive logistics system for delivering food throughout the country. Even during the rule of the Taliban, WFP was able to deliver food to remote areas including those controlled by the Northern Alliance. During the month of December 2001, while Department of Defense was delivering HDRs, WFP delivered 116,000 metric tons of food to Afghanistan, a level of food assistance that exceeds any 1-month total for any emergency operation in WFP’s history. As stated in the report, WFP’s logistics system was capable of delivering commodities to remote populations both by air or by donkey if necessary. In addition to the individuals named above, Jeffery T. Goebel, Paul Hodges, and Reid L. Lowe made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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After the events of September 11, 2001 led to the defeat of the Taliban, the United States and the international community developed an assistance program to support Afghanistan's new government and its people. Key components of this effort include food and agricultural assistance. GAO was asked to assess (1) the impact, management, and support of food assistance to Afghanistan and (2) the impact and management of agricultural assistance to Afghanistan, as well as obstacles to achieving food security and political stability. The emergency food assistance that the United States and the international community provided from January 1999 through December 2002 helped avert famine by supplying millions of beneficiaries with about 1.6 million tons of food. However, the inadequacy of the international community's financial and in-kind support of the World Food Program's (WFP) appeal for assistance disrupted the provision of food assistance throughout 2002. Because of a lack of resources, WFP reduced the amount of food rations provided to returning refugees from 150 kilograms to 50 kilograms. Meanwhile, as a result of the statutory requirement that U.S. agencies providing food assistance purchase U.S.-origin commodities and ship them on U.S.-flag vessels, assistance costs and delivery times were higher by $35 million and 120 days, respectively, than if the United States had provided WFP with cash or regionally produced commodities. Had the U.S. assistance been purchased regionally, an additional 685,000 people could have been fed for 1 year. The livelihood of 85 percent of Afghanistan's approximately 26 million people depends on agriculture. Over 50 percent of the gross domestic product and 80 percent of export earnings have historically come from agriculture. Over the 4-year period, because of continued conflict and drought, the international community provided primarily short-term agricultural assistance such as tools and seed. As a result, the assistance did not significantly contribute to the reconstruction of the agricultural sector. In 2002, agricultural assistance was not adequately coordinated with the Afghan government; a new coordination mechanism was established in December 2002, but it is too early to determine its effectiveness. As a result of the weak coordination, the Afghan government and the international community have not developed a joint strategy to direct the overall agricultural rehabilitation effort. Meanwhile, inadequate assistance funding, continuing terrorist attacks, warlords' control of much of the country, and the growth of opium production threaten the recovery of the agricultural sector and the U.S. goals of food security and political stability in Afghanistan.
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Since 1973, IRS Policy Statement P-1-20 has prohibited using records of tax enforcement results to evaluate enforcement officers or to impose or suggest production goals or quotas. An enforcement officer is an employee who exercises judgment with regard to determining tax liability or the ability to pay. Enforcement officers include employees directly involved in collection, examination, or criminal investigation functions as well as appeals officers and reviewers. Each function has its own set of tax enforcement results. For example, for the examination function, tax enforcement results include data such as the number of hours spent per return, amount of dollars proposed per return, and number of cases closed. For the collection function, tax enforcement results include the number of liens, levies, and seizures; amount of dollars collected; and number of cases closed. As a general rule, the policy prohibited managers from using any statistic that measures quantity, time per case, type of disposition, or dollar value. Instead, employees are to be evaluated on the basis of the quality of the work, including the use of enforcement tools, timeliness of action, and application of tax law. However, the policy statement permitted IRS officials to use statistics on tax enforcement results when carrying out certain management activities, such as preparing long-range and financial plans, allocating resources, and evaluating program effectiveness. In addition, managers were permitted to use tax enforcement results when evaluating employee performance during a case review, for example by noting whether a revenue officer appropriately levied a bank account given the facts of the specific case. Managers were also permitted to discuss with employees the number of cases processed, the amount of time spent on cases, and the kind of results obtained, as long as the discussion was based on a review of the results that were appropriate for specific cases processed by the employees and goals and quotas were not involved. In 1988, along with other changes, the Taxpayer Bill of Rights also prohibited the use of records of tax enforcement results to evaluate employees, but the prohibition only applied to employees directly involved in collection activities and their immediate supervisors. The law specified that IRS would be in compliance with the legislative requirements as long as IRS followed its policy statement. To help ensure compliance, the law also required each district director to certify each quarter whether violations had occurred and the corrective action taken, if needed. Because IRS service centers also have collection responsibilities, IRS imposed the same certification requirement on its service center directors. Generally, the self-certification process requires managers to submit certifications to the next higher level for review. Quarterly, group managers are to submit certifications to their branch chiefs, branch chiefs are to submit certifications to their division chiefs, and division chiefs are to submit certifications to their directors. Directors, relying on lower-level managers’ certifications, are to submit their certifications to the Commissioner of Internal Revenue through the Assistant Commissioner (Collection). During hearings held by the Senate Committee on Finance in September 1997, witnesses alleged that IRS’ focus on enforcement statistics was encouraging enforcement officers to take unnecessary and illegal enforcement actions against taxpayers. Prompted by these hearings, IRS’ Internal Audit reviewed the use of enforcement statistics by collection personnel in 12 districts, as well as at national and regional offices, and found an atmosphere largely driven by statistical measures. Internal Audit also found similar conditions in its July 1998 report on the use of enforcement results by the examination functions in 12 district offices. The IRS Restructuring and Reform Act of 1998 (Public Law 105-206, July 22, 1998) repealed the Taxpayer Bill of Rights prohibitions, which only covered collection employees, and instead expanded the prohibitions to cover all employees. The act also expanded the quarterly certifications to cover each appropriate supervisor. To determine the extent to which IRS’ current certification process identified violations, we reviewed fiscal year 1996 and 1997 quarterly certifications filed by district and service center directors—a total of 288 for the district offices and 80 for the service centers. We also obtained summary information on the potential violations for the first quarter of fiscal year 1998. To obtain information on IRS’ quarterly certification policy and procedures, we interviewed officials from IRS’ National Office; the Western Regional Office; the Georgia, Kansas/Missouri, and Northern California District Offices; and the Atlanta and Fresno Service Centers. We visited these offices because of their close proximity to our offices. We also surveyed officials in all districts and service centers on the quarterly certification process they had in place as of the last quarter of calendar year 1997. Appendix I contains a summary of the violations reported in the quarterly certifications we reviewed. To determine IRS employees’ perceptions of the use of tax enforcement results, we surveyed a statistically representative sample of 1,104 of 20,974 IRS front-line employees and group managers in the collection and examination functions. The survey included questions on whether employees perceived that tax enforcement results influenced their evaluations, the basis for those perceptions, and the use of tax enforcement results to establish group goals. We also analyzed the comments provided voluntarily by IRS employees on the survey. Appendixes II through VI contain our sampling methodology and survey results. All results are reported at the 95-percent confidence level. Sampling errors for all of our estimates are less than plus or minus 10 percentage points unless otherwise reported. To determine how tax enforcement results were used in written employee evaluations, we reviewed the 2 most recent evaluations for a statistically representative sample of 300 of 18,292 examination and collection front-line employees. We reviewed the evaluations to determine whether tax enforcement results were used to rate the employee in violation of IRS guidance. We discussed potential violations with IRS officials and considered their opinions on whether they were violations. We also reviewed the evaluations to determine whether the narratives used tax enforcement results to generally characterize employee performance or to discuss specific case examples. Appendix II contains our sampling methodology and appendix VII contains the results of our review of employee evaluations. All results are reported at the 95-percent confidence level and, unless noted otherwise, the data have sampling errors of no more than 8 percent. To evaluate IRS’ efforts to revise the certification process, we discussed IRS proposals with senior-level officials who were involved in developing the new process. We reviewed the existing and proposed guidance provided to managers and identified the differences between the existing and proposed certification processes. We also met with National Treasury Employees Union (NTEU) officials to obtain their perspective on the existing and proposed processes. We compared the proposed changes with the results of our review of the current process to determine if the limitations we noted were being addressed. There were some limitations to our analysis. We did not verify employees’ responses to our survey. However, we discussed these responses with senior IRS officials. We also did not verify IRS’ personnel database from which we drew our sample. We did our work between December 1997 and August 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue. The comments we received are in appendix VIII and are evaluated at the end of this letter. Our review of quarterly certifications for fiscal years 1996 and 1997 found that directors reported 11 potential violations in 368 quarterly certifications (see app. I). IRS determined that four of the incidents were actual violations, two were unfounded allegations, and five were reported because the directors believed the actions could be misconstrued as violations. However, there are some indications that the certification process may not have identified all violations. For example, for the first quarter of fiscal year 1998, directors reported 28 potential enforcement results violations, more than double the total reported for the prior 8 quarters. According to IRS officials, the increase in reported potential violations occurred as a result of the September 1997 Senate hearings on IRS abuses, which made managers more aware of their responsibilities for reporting potential violations. IRS had not completed its investigation of these potential violations at the time we completed our audit work. Also, we identified several systemic weaknesses that affected the reliability of the certification process. First, our analysis of the potential violations that were reported indicated that there was confusion among IRS officials about what constituted a violation. For example, one certification noted that a district director had asked the National Office official, who was responsible for providing guidance on the use of tax enforcement results, whether a group could establish a team goal to increase dollars collected by 10 percent as part of an organizational pilot project. Although the National Office official agreed that this was acceptable because neither awards nor individual evaluations would be based on achieving the goal, IRS’ Chief Counsel subsequently determined that the group goal was a production quota or goal and, as such, a violation. Second, IRS guidance did not specify how the certifications were to be supported. For example, IRS policy did not mandate what action directors should take to support their certifications, such as reviewing a sample of evaluations or indicating on the certification the number and type of documents reviewed. As a result, National Office officials may not have been in a position to determine whether directors performed enough oversight to validate their certifications. We found that officials at all levels with certification responsibility said that they reviewed some documents to determine whether managers complied with the tax enforcement results policy. However, the nature and scope of their review varied widely. For example, some officials reviewed all performance evaluations and supporting documents for violations while other officials reviewed a random sample or reviewed a small, judgmental sample. Third, IRS did not integrate the employee performance evaluation and certification processes. For example, although IRS procedures require managers to submit an evaluation to a higher level of management for review and approval before the evaluation is given to the employee, they do not require the reviewer to assess the evaluation for potential tax enforcement results violations. Although the preparers’ and reviewers’ signatures on the evaluation form signified that the evaluation complied with procedures for conducting evaluations, the procedures did not specifically refer to the tax enforcement results policy or the certification process. Such a requirement could heighten managerial awareness of policy and legal prohibitions at the time the evaluation is prepared. Fourth, IRS guidance did not clearly inform managers that they could be subject to sanctions or the kinds of sanctions that could be imposed if they either misused tax enforcement results or signed a false or misleading certification. Neither the policy guidance nor the certification included an acknowledgement that managers could be subject to disciplinary action for the improper use of tax enforcement records, so managers might not have known the importance or potential consequences of their actions. Furthermore, the lack of clear guidance could lead to inconsistent disciplinary actions. The Guide for Penalty Determinations listed in IRS’ Interim Handbook of Employee Conduct and Ethical Behavior did not specify the types of disciplinary actions that could be imposed on managers who violate tax enforcement results policy. According to an IRS official, the guide is not intended to be an exhaustive listing of all offenses, and one general category can be used for penalty determinations in matters not otherwise covered. The penalties for this general category ranged from a reprimand, to a 14-day suspension, to a removal. Disciplinary action for the four violations IRS identified in the fiscal year 1996 and 1997 certifications ranged from counseling to removing the manager from his/her position. Our employee survey showed a widespread perception on the part of collection and examination front-line employees that tax enforcement results are considered by managers when preparing performance evaluations. We estimated that, overall, about 75 percent of front-line employees (i.e., revenue agents and tax auditors in the examination function and revenue officers in the collection function) and 81 percent of examination and collection group managers believe that one or more enforcement measures were considered to some extent by their managers when preparing their most recent performance evaluation. For those revenue officers who indicated that tax enforcement results affected their evaluation, an estimated 58 percent of them cited “number of cases closed”—a measure of productivity—as a tax enforcement result influencing their evaluations. Revenue agents and tax auditors who indicated that tax enforcement results affected their evaluations cited measures of revenue production more frequently as factors that influenced their evaluations than did revenue officers. At least an estimated 61 percent of revenue agents and tax auditors said that “additional dollars proposed per return” influenced their evaluations, while an estimated 29 percent of revenue officers said that “average dollars collected per return” influenced their evaluations. Appendix III shows the point-estimates intervals for each type of enforcement result by type of employee and manager. An estimated 77 percent of collection group managers who indicated that tax enforcement results affected their evaluations believed that the number of cases closed affected their evaluations, compared with an estimated 39 percent who believed that the average dollars collected per return affected their evaluations. Examination group managers who indicated that tax enforcement results affected their evaluations cited workload measures about as frequently as revenue production measures. About 74 percent of examination group managers identified tax enforcement results dealing with the average hours per return and about 76 percent identified additional dollars proposed per return as affecting their evaluations. IRS’ quarterly certification process focused on the use of enforcement results in formal written performance evaluations. However, our survey results indicated that although many employees had multiple bases for their perceptions on the use of tax enforcement statistics, most based their perception on verbal information received from their managers. We estimated that about 70 percent of front-line employees, who believed that tax enforcement results affected their evaluations, based their perceptions on verbal communication with their managers during group meetings and performance feedback sessions. An estimated 36 percent based their perception on written information contained in their evaluations. Likewise, managers who believed that tax enforcement results affected their evaluations had multiple bases for their perceptions. An estimated 83 percent based their perception on verbal communication with their branch and division chiefs, while an estimated 51 percent based their perception on written communications. Appendix IV contains detailed information on the basis for front-line employee and group manager perceptions. IRS’ managers are prohibited from using tax enforcement results to establish group production quotas or goals because of the possibility that group goals will be interpreted as individual goals or expectations. About one-half of front-line employees and group managers indicated that performance goals were established for their groups. Where group goals were established, at least two-thirds of the front-line employees and managers indicated that the goals included one or more enforcement results. Appendix V provides more detailed information on which enforcement results were included in group goals. In voluntary written comments to our questionnaires, front-line employees and managers included additional reasons why they believe enforcement results influenced their performance evaluations. The comments generally centered on the following scenarios: (1) supervisors or managers implied that an employee’s performance evaluation was influenced by tax enforcement results; (2) the general culture or atmosphere of IRS implied that enforcement results affected performance evaluations; (3) higher-level managers pressured group managers to increase production or revenue yield; and (4) IRS’ business plan, reports, and other documents emphasized enforcement results as goals. Front-line employees and managers also made positive and negative comments about using enforcement and workload measures to establish group goals or in performance evaluations. Generally, the number of negative comments made by front-line employees and managers exceeded the number of positive comments. Appendix VI contains examples of voluntary comments received from front-line employees and managers. Using IRS guidance for determining whether an evaluation contained a violation, we estimated that 9 percent of front-line employees received at least one written performance evaluation containing a violation in the two most recent annual evaluations. The potential effect of the violations on future employee performance could vary, however, depending on how the enforcement results were used in evaluations. Some violations could influence employees to be more aggressive in their dealings with taxpayers. For example, the following two comments taken from evaluations could create an incentive for employees to more aggressively pursue fraud cases, liens, and levies. “You had one possible fraud case during this period. Keep trying for more fraud cases.” “You do not hesitate to lien or levy and have demonstrated innovative ideas in your efforts to comply with group goals. . . Your workload management produces a closure rate that demonstrates your commitment to group goals.” Both evaluations violations link a positive evaluation to achieving a higher number of enforcement results, rather than focusing on the appropriateness of the employees’ action. In other cases, however, the potential impact of the violations on employee performance was less clear. For example, many of the violations mentioned closing cases when summarizing employees’ accomplishments, as shown in the following two examples. “The effectiveness of your planning and time utilization is demonstrated by the fact that you closed 38 key cases during the year.” “You have selected the proper technique to detect unreported income and applied your technique to detect and recognize indications of fraud. For example, , during this fiscal year you have submitted and had accepted six civil fraud referrals.” For most of the violations we identified, IRS officials said that the comments would not have been considered violations under the guidance in effect at the time the evaluations were prepared. However, the officials agreed that the comments would be considered inappropriate under IRS’ revised guidance, which is discussed in the following section. The incidence of violations was relatively low, given that 36 percent of front-line employees who believed that tax enforcement results affected their evaluations based their perception on their written evaluations. Our analysis of employee evaluations found that an estimated 69 percent of the evaluations contained two types of narrative that employees could have interpreted as inappropriate references to tax enforcement results but which did not violate IRS guidance. The first type of narrative involved the use of general or case-specific references to enforcement-related activities, such as the amounts of revenue collected or use of collection tools. These references, which are not based on statistics such as group goals, are not violations. We estimated that 50 percent of employees received evaluations that contained this type of narrative. For example, one evaluation included the statement “You had one case that the property was in foreclosure and you were looking at seizing or redeeming the property but would only get around $23,000. Through your working with a third-party lending institution, you were able to secure $30,000. . . .” Another included “ . . . have done a very good job in locating assets even in unusual situations. An example of this would be the research you completed on a large dollar tax protestor assigned to your inventory.” Since the comments were based on specific cases reviewed, they are not considered tax enforcement results violations under IRS’ guidelines. However, IRS guidance cautions managers that discussing a tax deficiency or referencing a dollar amount collected may give the employee an improper perception that only the size of the deficiency or the amount collected was the basis for the employee’s evaluation. The second type of narrative that could create misperceptions about the use of tax enforcement results was the use of the terms “overage” (the age of the cases in the employee’s workload inventory) and “cycle time” (the number of cases worked within the established guidelines for closing cases). IRS views these statistics as measures of process time and responsiveness to taxpayers because they are indications of timely attention to taxpayer issues rather than measures of tax enforcement results. We estimate that 41 percent of employees received evaluations that included either general or case-specific references to overage cases and cycle time. For example, one evaluation included the statement “You are making excellent progress in closing out cases and specifically targeting overage and high cycle time to minimize these problems.” Another included the statement “You appear to be doing a better job of meeting the time frames for initial contact and follow-up action on your cases, but your high overage and potential overage rates still indicate a need to improve in this area.” Although neither cycle time nor overage cases are defined by IRS as enforcement results, IRS guidance cautions managers in their use of such terms because of the potential for either of the terms being interpreted as a prohibited statistic such as “hours per case.” Also, during our discussions with NTEU officials, they raised concerns about whether front-line employees and group managers clearly understood the distinction between the inappropriate use of productivity-related enforcement measures, such as hours per case, and the appropriate use of overage and cycle-time data. Appendix VII provides the detailed results for our review of employee evaluations. Because of Internal Audit reports, IRS has undertaken several steps to strengthen the certification process, including expanding the number of employees covered, instituting an independent review process of the certifications, revising guidance, and training managers. According to IRS officials, IRS has expanded the certification process to include all appropriate enforcement supervisors, not just those working in the collection function. Employees who are to be covered by the certification include revenue agents, tax auditors, appeals officers, and criminal investigators. The IRS Restructuring and Reform Act of 1998 also mandates quarterly certification of all appropriate enforcement supervisors. IRS is also instituting an annual independent review to verify the accuracy of the certifications. The reviews are to be performed annually by cross-functional management teams and must include a review of Employee Performance Folders and employee evaluations, which may include documentation related to the evaluation process—such as award narratives and case reviews. The review team may also consider other sources, such as local memos, minutes of meetings, and grievances submitted by employees. IRS has also implemented a new employee evaluation process effective September 1998 that includes a revised form to document a performance evaluation. The guidance on the new form sent to IRS managers in August 1998 states that by signing the form the rater and reviewer certify that enforcement statistics were not used in preparing the appraisal. In addition, IRS has revised the handbook that provides guidance on the appropriate and inappropriate use of tax enforcement results. The handbook provides guidance on which employees are considered enforcement officers and examples of common scenarios involving the proper and improper use of tax enforcement results for each job classification. The handbook also includes a decision table that leads managers through a series of four questions to help them determine whether they are using tax enforcement results appropriately. This new guidance may help clarify some of the confusion managers had on what constitutes a tax enforcement result violation. Furthermore, IRS trained managers on the new certification process and handbook. After providing background on the prohibitions, the training discussed the appropriate use of tax enforcement results and how the prohibitions affect supervisory activities, such as setting expectations as well as explaining the self-certification and independent review processes. To signal its commitment to addressing issues involving the use of enforcement statistics, IRS involved senior executives in the training. For example, IRS directed that district and service center directors would teach the section on self-certification and the independent review. IRS completed the training before the new certification process became effective in the last quarter of 1998. These initiatives address existing weaknesses that we have identified by clarifying which employees are covered and the steps directors should take to independently validate certifications. However, managers may be confused about how to apply the decision table contained in the revised guidance to the preparation of written evaluations. The scenarios included in the revised guidance focus primarily on the prohibited use of statistical reports to imply group goals with relatively few examples relating to the appropriate and inappropriate uses of tax enforcement results in written evaluations. Providing such examples is particularly important because, as noted earlier, IRS officials said that most of the violations we identified would be considered violations under the revised guidance but not under the guidance in effect before 1998. IRS officials agreed that expanding the guidance to include additional examples could be beneficial, especially since managers raised many questions about the appropriate use of tax enforcement results in written evaluations during the training on the revised guidance. Furthermore, IRS has revised its certification form to reflect that more employees are covered by the certification process, but the form contains only a vague statement of conformance. As shown in appendix IX, the certification does not specifically state that first-level managers have not personally misused records of tax enforcement results in written performance evaluations they prepared or to set individual production goals or quotas during their verbal communications with employees. In the case of second-level managers, the certifications do not specifically require that managers certify that tax enforcement results were not used in written performance evaluations they prepared or reviewed or during their verbal communications with employees. As a result, the form does not clearly explain to managers what they are certifying to. IRS has not informed managers about what specific sanctions can be imposed for misusing tax enforcement results or submitting misleading certifications. Neither the revised guidance nor the certification form refers to potential sanctions. In addition to these possible sources of confusion, IRS’ independent review process is to focus on reviewing documents and records to identify written violations. As a result, IRS does not have a mechanism, such as our employee survey, for monitoring employee perceptions of how often tax enforcement results are verbally communicated or whether their written evaluations are influenced by records of tax enforcement results. Consequently, without an employee survey, IRS cannot determine whether further clarifications of the guidance or additional training is needed. IRS directors reported few violations through the quarterly certification process in fiscal years 1996 and 1997, and we found an estimated 9 percent of employees received evaluations that were in violation of IRS’ revised guidance during our review of employee evaluation files. Nonetheless, our survey of IRS employees indicated a widespread perception that managers consider tax enforcement results when preparing performance evaluations. Most of the employees indicated that the violations occurred during verbal communications with their supervisors, such as staff meetings or performance feedback sessions, rather than in their written performance evaluations. Perceptions based on such verbal communications could encourage employees to focus on achieving statistical benchmarks rather than acting solely on the merits of the case. Furthermore, the use of overage and cycle-time data in evaluations may further employee perceptions that tax enforcement results affect their evaluations, because they may be misconstrued as an enforcement statistic, such as hours per case. Although IRS is taking steps to strengthen its reporting of violations, weaknesses remain. IRS’ revised guidance has few examples of the appropriate and inappropriate use of tax enforcement results in written evaluations. Furthermore, the certification form does not specifically require managers to certify that tax enforcement results were not used in written evaluations or used inappropriately during verbal communications with employees. IRS has not provided clear guidance on the sanctions for misusing tax enforcement results or submitting misleading certifications. Additionally, IRS does not have a mechanism for monitoring how often violations result from verbal communications or employee perceptions of whether records of tax enforcement results are influencing their evaluations. To better ensure managerial accountability for the proper use of tax enforcement results, we recommend that the Commissioner expand the guidance to include additional examples of the appropriate and inappropriate use of records of tax enforcement results in written evaluations, revise the quarterly certification form to specifically state that tax enforcement results were not used in any written employee evaluation prepared or reviewed, including appraisals, awards, or promotion justifications, and that the manager did not verbally communicate to employees that tax enforcement results affected their evaluations or were used to set individual production goals or quotas, revise the penalty guide to specifically list the disciplinary actions that can be taken for violations, and survey employees periodically to determine whether they perceive that tax enforcement results were used in written evaluations or verbally communicated by their supervisors and use the results to assess whether IRS needs to further clarify the guidance, provide additional training, or take any other appropriate action. Also, to avoid the potential inappropriate use of overage and cycle-time data, the IRS Commissioner should either designate overage and cycle-time data as prohibited tax enforcement results or emphasize in official policies or procedures to front-line employees and managers how overage and cycle-time data may be used appropriately. We obtained written comments on a draft of this report from the Commissioner of Internal Revenue. The Commissioner agreed with all of our recommendations and described the actions IRS plans to take in response to our recommendations. Regarding our recommendation that IRS should either designate overage and cycle-time data as prohibited tax enforcement results or emphasize in official policies or procedures to front-line employees and managers how overage and cycle-time data may be used appropriately, the Commissioner said that IRS would revise the Internal Revenue Manual to include examples of the appropriate use of these data. If effectively implemented, the actions described should help to resolve the problems we identified. In addition, the Commissioner pointed out that IRS has undertaken a number of initiatives to address the use of tax enforcement results in employee performance evaluations. These initiatives included (1) revising the Internal Revenue Manual provisions concerning the use of enforcement statistics; (2) providing training to all managers on the use of enforcement statistics, which included numerous examples of appropriate and inappropriate language for discussing tax enforcement results in evaluations; (3) providing an orientation course on the proper use of statistics for all IRS employees; (4) establishing a Support Panel to answer questions from managers or employees on the proper use of enforcement statistics; (5) establishing independent review teams that are obliged to review documentation in Employee Performance Files and Employee Evaluations and may, at the director’s discretion, look to other sources of information to ensure potential violations are uncovered, including group discussions, union comments or reports, grievances, and minutes of managers’ meetings; and (6) developing a balanced performance measure system to include measures of customer satisfaction, employee satisfaction, and business results. The business results measure is to focus on the quality and quantity of work done. The quantity measures are to consist exclusively of outcome-neutral production data, such as cases closed and time per closing. We are sending copies of this report to the Ranking Minority Member of the House Ways and Means Committee; the Ranking Minority Member of the Subcommittee on Oversight, Committee on Ways and Means; various other congressional committees; the Secretary of the Treasury; the Commissioner of Internal Revenue; and other interested parties. We will also make copies available to others on request. Please contact me at (202) 512-9110 if you or your staff have any questions. Major contributors to this report are listed in appendix X. This appendix is a summary list of all potential violations that were reported on quarterly certifications for fiscal years 1996 and 1997. No violations were reported in the quarters ending June 30, 1996, September 30, 1996, and December 31, 1996. The Internal Revenue Service (IRS) determined that the reported incidents numbered 1, 2, 5, and 11 were actual violations. 1. Quarter Ending 12/31/95. A branch chief discussed enforcement statistics in a group manager’s evaluation. According to a district office official, the violation, discovered during the next level review, was a statement to the effect that “Your group led the branch in the number of seizures.” Corrective action included assigning the individual to another position outside the Collection Division, assigning an acting branch chief until a permanent replacement could be brought in, and reviewing guidelines. 2. Quarter Ending 03/31/96. A proposal to redesign the revenue officer position under an IRS test project recommended that individual groups negotiate their own production goals. One group established a goal to increase the amount of dollars collected by 10 percent in the next year. The National Office Coordinator certified that this goal was not a policy violation because (1) it was established as a part of a test, and (2) awards or individual evaluations would not be based on the achievement of the goal. District officials were still uncertain about whether this goal was in conflict with policy and requested an opinion from the Office of Assistant Commissioner (Collection), who in turn requested legal advice from IRS’ Chief Counsel. The Chief Counsel ruled that the group’s goal was a violation because it was a production quota or goal and corrective action needed to be taken to be in compliance with policy. The Chief Counsel also cautioned that IRS managers must have the authority to void goals negotiated under the test project if the goals violated law or policy. 3. Quarter Ending 03/31/97. A local chapter of the National Treasury Employees Union (NTEU) raised a concern about a branch chief who discussed the number of seizures reflected on a monthly activity report with his group managers. Although this instance was reported on the quarterly certification, the incident was not considered a violation because, under the policy, managers can discuss recorded statistics with employees as long as they do not imply that goals or quotas are being established. Because the comments were open to misinterpretation, district management said they reinforced the policy guidelines. 4. Quarter Ending 03/31/97. An Automated Call Site manager discussed the low number of calls made during 1 week with his employees and requested them to quadruple the number of calls. The manager also commended the group on the number of closures they made and identified the number of closures he was “going for.” Although this instance was reported, it was not considered a violation because (1) Automated Call Site calls were not considered an enforcement statistic and (2) individual goals were not established. Nonetheless, the manager was counseled and requested to immediately meet with his team again to emphasize that it was the quality of the case work that resulted in the closures. 5. Quarter Ending 06/30/97. A group manager prepared a positive employee evaluation that was based on the amount of dollars collected. According to a district office official, this violation was discovered during a branch manager’s quarterly policy review. The group manager was counseled and the evaluation was revised. 6. Quarter Ending 09/30/97. A district reported a pending allegation in which an employee claimed he was forced to make seizures. According to a district official, based on subsequent district and regional offices’ investigations, the allegation was found to be unwarranted. 7. Quarter Ending 09/30/97. A district identified, during a division and branch chiefs’ sample review of employees’ performance binders, a few instances in which performance evaluations and documents contained enforcement results that could easily be misconstrued as violations (e.g., “His collection actions resulted in both the generation of substantial revenue and in the proper disposition of numerous cases”; “You have processed a number of Offer In Compromise recommendations”; etc.). Corrective actions included emphasizing the policy guidelines on the use of tax enforcement results and requiring more thorough reviews to assess adherence with policy and the law. 8. Quarter Ending 09/30/97. An acting branch manager distributed a memorandum to group managers indicating dollars collected were low and needed to be improved. Although not a violation, the acting branch manager was advised by the division chief that his memorandum was inappropriate and could be misconstrued. He was also instructed to schedule a meeting with the group managers on the real intent of his message to ensure they understood the focus was to identify reasons for the current level of performance and find ways to improve it. 9. Quarter Ending 09/30/97. According to the NTEU, a group manager shared with his group a report containing revenue officers’ statistical accomplishments, including a recap of the dollars collected over a 3-year period. As a corrective action, managers were given instructions that this information should not be shared at the group level and that branch statistics, comparing groups within a branch, should not be shared below the branch level. While this was not classified as a violation at that time, district management officials said they would consider it a violation under the new draft certification procedures. 10. Quarter Ending 09/30/97. The NTEU reported an allegation that, in the presentation of a manager’s award, a group manager mentioned that the revenue officer being honored had made the most seizures in the group. The manager denied making that statement, and the incident was not considered a violation. District officials said that, although not directly related to this incident, several actions were taken, including holding meetings and briefings to discuss the policy and the discontinuation of the distribution of statistics. 11. Quarter Ending 09/30/97. The NTEU and an outside party reported that a group manager placed a routing slip on employees’ desks indicating the amount of dollars that needed to be collected by each revenue officer each day, week, and month. The group manager was temporarily reassigned until an investigation and administrative determination was completed. Instructions were given to branch chiefs not to provide statistical information below their branch level. As a general corrective action applicable to these three incidents, a meeting was held to discuss the importance of adhering to the policy and law, and guidance was distributed to managers. This appendix discusses the sampling methodology we used to determine IRS employees’ perceptions of the use of tax enforcement results and how tax enforcement results were used in employee evaluations. To determine IRS employees’ perceptions of the use of tax enforcement results, we conducted statistically representative surveys of five groups of IRS employees: (1) revenue agents assigned to district office Examination Divisions and Employee Plans and Exempt Organizations Divisions, (2) tax auditors assigned to Examination Divisions, (3) revenue officers assigned to Collection Divisions, (4) group managers assigned to Examination Divisions and Employee Plans and Exempt Organizations Divisions, and (5) group managers assigned to Collection Divisions. To determine how tax enforcement results were used in employee evaluations, we reviewed performance evaluations for a separately drawn sample of revenue agents assigned to district office Examination Divisions and Employee Plans and Exempt Organizations Divisions, tax auditors assigned to Examination Divisions, and revenue officers assigned to Collection Divisions. Both samples were drawn from IRS’ personnel database as of January 3, 1998. Because the questionnaires for the employee surveys were not mailed until March 1998, the results do not include the opinions of any IRS employees who were in the groups of interest as of January 3, 1998, but were not in these groups at the time the questionnaire was sent. We assumed that the opinions of these employees, if they would have been included, would have been the same in the aggregate as those of employees who were included in the surveys. We sampled a total of 1,104 IRS employees from the 5 employee groups of interest from the population of 20,974 employees in the January 3, 1998, IRS personnel database. We allocated proportionately more of our sample to Collection Division revenue officers and managers, since they are directly engaged in collection activities. For the objective of determining how tax enforcement results were used in employee evaluations, we reviewed the evaluations of a sample of 300 IRS employees from the 3 employee groups of interest. By design, none of the 300 employees selected were the same as the 1,104 employees sampled for the first objective. IRS managers are not required to write performance narratives for every rating dimension for every employee each year. To review more narratives, the two most recent ratings were requested from IRS for each employee in the sample. The results presented in the report only reflect employees for whom two performance evaluations were received. For our survey of employees’ perceptions of the use of tax enforcement results, we received usable responses (those that indicated the employee was a member of one of the five target groups at the time the questionnaire was received and responded to at least some of the questions) from 814 employees, for a response rate of approximately 74 percent. The disposition of the sampled cases for our employee survey and review of performance evaluations is shown in table II.1 and table II.2, respectively. After weighting the responses to the employee survey to account for selection probabilities and nonresponse, we were able to estimate the percentage of IRS employees who perceived that certain tax enforcement results were or were not used in their evaluations. We also were able to estimate the percentage of IRS employees for whom tax enforcement results were used in at least one of their two most recent employee evaluations. Because we reviewed a statistical sample of employees, each estimate developed from the samples had a measurable precision or sampling error. The sampling error is the maximum amount by which the estimate obtained from a statistical sample can be expected to differ from the true population value being estimated. Sampling errors are stated at a certain confidence level—in this case, 95 percent. This means that the chances are 19 out of 20 that, if we surveyed all IRS employees in the groups of interest, the true value obtained for a question on these surveys would differ from the estimate obtained from our sample by less than the sampling error for that question. The sampling errors for our survey of the extent to which employees perceived that their ratings were based on enforcement results are less than plus or minus 10 percentage points, unless otherwise reported. The sampling errors for our sample of the extent to which enforcement results were discussed on employee evaluations are no more than plus or minus 8 percentage points. In addition to the reported sampling errors, the practical difficulties of conducting any survey may introduce other types of “nonsampling” errors. For example, differences in how a particular question is interpreted or the types of individuals that do not respond can introduce unwanted variability into the survey results. Our survey asked a representative sample of IRS employees the question “To what extent, if at all, do you perceive that each of the following factors was considered by your supervisor or managers in preparing your most recent performance evaluation?” The “factors” shown for this question were the tax enforcement results associated with each employee category. The responses are shown in tables III.1 through III.6. To compare the perceptions of front-line employees and managers, we consolidated the responses of front-line employees (revenue agents, tax auditors, and revenue officers) and managers (Examination Division and Collection Division group managers) as shown in table III.1. Average dollars collected per return Number of installment agreements obtained Number of installment agreements defaulted Number of cases closed as “currently not collectable” Average dollars collected per return Number of installment agreements obtained Number of installment agreements defaulted Number of cases closed as “currently not collectable” For survey respondents who perceived that their supervisor or manager considered one or more tax enforcement results in preparing their most recent performance evaluation, we asked “Why do you believe that one or more of the factors for which you checked box 2 through 5 [To some extent, To a moderate extent, To a great extent, To a very great extent] in influenced your rating?” They were asked to check all the reasons that applied. The responses are shown in tables IV.1 through IV.8. To compare the perceptions of front-line employees and managers, we consolidated the responses of front-line employees (revenue agents, tax auditors, and revenue officers) and managers (Examination Division and Collection Division group managers) as shown in table IV.1. To compare the importance of verbal and written communications, we also consolidated the responses indicating verbal communications (feedback and meetings) and written communications (performance expectations, performance evaluations, and award justifications). Two other categories—promotion patterns and a general “other” category—are reported separately. The responses of front-line employees and managers on the specific basis for their perception that tax enforcement results affected their ratings are given in tables IV.2 through IV.4. Front-line employees (percent) Managers (percent) Revenue agents (percent) Tax auditor (percent) Revenue officer (percent) Examination managers (percent) Collection managers (percent) One or more factors were mentioned in my performance plan (Form 9688) Our survey asked a representative sample of IRS employees “To your knowledge, were performance goals established for your group in calendar year 1997?” To compare the perceptions of front-line employees and managers, we consolidated the responses of front-line employees (revenue agents, tax auditors, and revenue officers) and managers (Examination Division and Collection Division group managers) as shown in table V.1. For those employees who had group performance goals, we asked “Did the performance goals established for your group in calendar year 1997 include any reference to any of the following factors?” The point estimates and confidence intervals for each employee group are shown in tables V.2 and V.3. Revenue agent (percent) Tax auditor (percent) Examination manager (percent) Revenue officer (percent) Collection manager (percent) Average dollars collected per return Number of installment agreements obtained Number of installment agreements defaulted Number of cases closed as “currently not collectable” This appendix gives some examples of voluntary written comments by front-line employees and group managers to our questionnaires on why they believe enforcement results influenced their performance evaluations. The comments generally involved the following scenarios: (1) supervisors or managers implied that an employee’s performance evaluation was influenced by tax enforcement results; (2) the general culture or atmosphere of IRS implied that enforcement results affected performance evaluations; (3) higher level managers pressured group managers to increase production or revenue yield; and (4) IRS’ business plan, reports, and other documents emphasized enforcement results as goals. Front-line employees and managers also wrote about positive and negative effects of using enforcement and workload measures to establish group goals or in performance evaluations. Generally, the number of negative comments made by front-line employees and managers exceeded the number of positive comments. “The district office provided monthly statistics to each branch, rating branches and groups based on ‘dollars per hour,’ ‘dollars per return,’ ‘no-change rate,’ ‘collections percent by exam division.’ . . . Even though performance goals were not established formally based on ‘dollars per return,’ etc., the statistics were mentioned at each group meeting and pressure was felt by each agent to assess the most tax at the least amount of time spent on the case. It was always felt that our evaluations were based indirectly on the factors mentioned in Item 19 (productivity and enforcement statistics).” “Our emphasis used to be on quality and customer service but when our district went under Boston, the emphasis changed to ‘dollars per hour.’ At each group meeting, we would hear about ‘stats’ and ‘dollars per hour.’ This kind of pressure does tend to carry over into the work product.” “Although numbers never mentioned, group manager discussed closure of cases, fraud referrals, and defaulted installment agreements in meetings and in appraisals so it gave the appearance that what he expected.” “We were told by management in group meetings and in town hall meetings that goals in the form of yield (dollars per hour) would no longer be set. Yet, at group meetings, our manager reads our yield from Table 37 and comments on whether it is good, bad, or fair. Our yield is obviously still very important to management.” “There is one important goal in any revenue agent’s life—dollars per hour. From the day I started with the Service until the present, that has been the only constant in the organization. Quality programs have come and gone, emphasis on taxpayer service ebbs and flows, lip service to auditing standards is periodically given. Through it all, any successful revenue agent knows that low time and high dollars will result in recognition, promotion, and awards.” “It is well known that these factors are considered by upper management to be important, although not all are mentioned in evaluations.” “Management has never been specific relative to the connection between promotion and enforcement. However, the perception is here that the more enforcement minded a revenue officer is, the greater the chance of promotion.” “You are expected (unsaid) to do a seizure every quarter.” “. . . was required to post statistics on most of these items on our library room wall up to just a few months ago. When Congress started seriously making noises about statistics, they were taken down. . . . would make reference to these statistics in a general way as pressure was put on him through his chain of command. The pressure relative to improving these statistics came primarily by passing word down from the chief of audit and his assistant chief that our statistics were not measuring up. . . .” “The manager only works toward faster closures and higher yield because it has been stressed by the district management.” “Time and dollars per hour, although less so within the past few years, has always been a major consideration in ‘informal’ discussions and meetings. Tables 36 and 37 were always utilized and disbursed to the group and discussed with agents, although seldom in writing.” “Statistics on dollars collected, number of returns , number of levies and liens were reported by group on a monthly basis to the division via the branch chief.” “Monthly statistics . . . were distributed regarding levies, dollars collected, liens, seizures, fraud referrals, currently not collectible cases, and cases closed.” “If a revenue agent is doing a good job, these factors (adjustments, etc.) are present. The revenue agent will have good adjustments that are technically correct and will also have no-changes. That is part of the job.” “Both time spent on a return and deficiencies are indicators of effectiveness and efficiency in the audit process. Excessive time may indicate complexity of issues or inefficiency and floundering in the audit. The deficiency amount will indicate effectiveness of audit as compared to similar audits or, potentially, a lack of issue identification. When used as indicators of efficiency or effectiveness, these can help direct employees toward improvement. It’s not all bad.” “Our job is to collect (hence ‘collection’) dollars and returns. It is ludicrous to think that a revenue officer who collected no dollars or returns would get a good performance evaluation. After all—that is our job!” “I definitely feel pressure to be productive in terms of dollars per hour, but realistically, that makes sense to me. We should spend time on issues which will most likely produce revenue and work them as quickly as possible.” “Statistics regarding ‘dollars per hour’ are disseminated at group meetings. Our group is compared to the branch and the district. . . . Ten years ago these kinds of statistics were never discussed at the group level. Due to the constant referring to these numbers, it is obvious that ‘dollars per hour’ is the most important concept to management. Consequently, agents will always strive to get the highest yield per case. This means that you will disregard adjustments in the taxpayers favor so as not to reduce the tax yield. Individual statistics have not been discussed. However, the constant reminder of the yield causes agents to do anything they can to get good yield on their cases.” “Even though it is made very clear in the . . . region that there are no individual or group enforcement goals, statistics are kept and very well known throughout the region. Specifically, our ‘mission’ is very goal oriented and very driven by the goals of the Chief of Collections. Very clearly those groups that have good statistics—specifically the number of seizures, cases closed, fraud referrals, etc.—receive special recognition. In some cases, managers receive performance rewards. The revenue officers who specifically take enforcement action to resolve cases are rewarded with promotion even though the enforcement action is not mentioned in the performance evaluation. Those revenue officers who are most aggressive using enforcement are those rewarded most quickly with promotion.” “National and regional management have used dollar goals and quotas for as long as I can remember. It is common knowledge among employees and first-line managers that ‘increase voluntary compliance’ equals ‘dollars per hour.’ You get what you measure.” “Within the last couple of years, ‘dollars collected’ was being conveyed from the division to the group level. This caused group comparisons and competition. While never conveyed to an individual within my group that dollars needed to be increased, it certainly was implied. While this didn’t change my case decisions, I cannot speak for everyone.” Table VII.1 provides the results of our review of employee evaluations in terms of whether the evaluations contained law or policy violations and case or general discussions of enforcement-related activity. Benjamin Douglas, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) managers' compliance with legislative and policy prohibitions against using enforcement statistics in employee evaluations and the requirement that managers certify each quarter whether violations had occurred, focusing on: (1) the extent to which IRS' certification process identified violations of law and policy; (2) IRS employees' perceptions of the use of tax enforcement results in their annual performance evaluations; (3) supervisors' use of tax enforcement results in written employee performance evaluations; and (4) IRS' efforts to revise the certification process. GAO noted that: (1) for fiscal years 1996 and 1997, district and service center directors submitted 368 quarterly certifications that reported 11 potential violations; (2) GAO identified several systemic weaknesses that affected the reliability of the certifications; (3) specifically, GAO found: (a) some confusion among IRS officials about what constituted a violation; (b) inadequate guidance about specific actions directors should take to identify violations; (c) a failure to integrate performance evaluations and the certification process; and (d) unclear guidance on sanctions that could be applied against managers for misusing tax enforcement results or submitting false certifications; (4) GAO's survey of a statistically representative sample of examination and collection employees showed a widespread perception that managers considered enforcement results when preparing annual performance evaluations; (5) GAO estimated that 75 percent of front-line employees and 81 percent of group managers perceived that tax enforcement results affected their most recent performance evaluation; (6) about 70 percent of front-line employees said they based their perception in part on information communicated to them verbally in staff meetings or performance feedback sessions with their managers; (7) and about 36 percent of front-line employees indicated tax enforcement results were used in their written performance evaluations; (8) 9 percent of employees received a written evaluation that contained a tax enforcement result and an estimated 69 percent contained narrative that employees could have interpreted as inappropriate references to tax enforcement results but which did not violate IRS guidance; (9) about 41 percent of the evaluations in GAO's sample mentioned process measures dealing with the age of the cases in the employee's workload inventory and the number of cases worked within guidelines established for closing cases; (10) IRS has undertaken several steps to strengthen the certification process; (11) although these actions address some of the weaknesses of the current system, IRS' revised guidance has few examples of the appropriate and inappropriate use of tax enforcement results in written evaluations; (12) the revised guidance does not clearly inform managers about potential sanctions for inappropriate use of tax enforcement results; and (13) IRS' new independent review process is geared toward identifying written violations and not violations communicated verbally.
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Each year, IRS screens all individual tax returns and selects a small percentage in which to contact taxpayers about potential noncompliance. Prior to doing automated checks of tax returns, IRS had relied on its audit program to contact taxpayers about apparent inaccuracies in reporting income, deductions, and other issues on their tax returns. For example, to verify interest income or dependent exemptions claimed by taxpayers, IRS auditors had to contact taxpayers, request and review documentation. Thus, if IRS audited the returns of 5 percent of all taxpayers, it could at most check on the accuracy of interest income for 5 percent of taxpayers. Since the 1970s, IRS’s ability to verify some items on individual returns expanded as IRS’s capacity to use automated processes grew and as Congress enacted laws requiring third parties (like banks, mortgage finance firms, etc.) to provide information returns to taxpayers and IRS on income paid. These steps enabled IRS to more universally and efficiently check taxpayer compliance for those tax issues covered by information returns. For example, with the initiation of information returns for interest income and the development of IRS’s automated capacity, IRS began to check whether every taxpayer for whom it had received an applicable information return had accurately reported that interest on their tax return. As a result, for some wage earners who claim no deductions, IRS can review the accuracy of all, or nearly all, items reported on their tax return to the extent that third parties correctly filed all information returns. In these cases, IRS effectively receives information that should be in taxpayers “books and records” and no longer needs to use auditors to obtain such information from taxpayers’ records for these selected issues. Concurrent with these expansions in IRS’s ability to check the accuracy of certain issues on taxpayers’ returns, the number of taxpayer returns that IRS audited began to decline. For example, between fiscal years 1981 and 1992, the number of document matching contacts rose from 1.2 million to 3.8 million and the number of audits dropped from 2.5 million to 1.1 million. Several GAO reports have discussed IRS audits, other enforcement contacts, and taxpayer burden as follows: In 1996, we reported that audit rates fell from 1988 to 1993 and then rose to a high of 1.67 percent in 1995. In 2001, we reported that audit rates had steadily dropped from 1996 to 2000, declining to 0.49 percent. During 2000, we reported that IRS made almost 10 million nonaudit contacts of taxpayers in 1998 through about 6 million math error notices, 2 million document matching notices, and 2 million soft notices. We recommended that IRS analyze the data collected for each of the three major nonaudit contact programs to improve taxpayer compliance and taxpayer service. During 2000, we reported on IRS’s efforts to estimate taxpayer compliance burden for prefiling, filing, and postfiling activities. We found that IRS was developing two models that, when combined, should provide more reliable estimates of compliance burden for wage earners. To compare audit and other enforcement programs, we obtained information on their legal and operational characteristics. For legal authority, we reviewed the Internal Revenue Code (IRC) and IRS documents. For program operations, we reviewed IRS documents and interviewed responsible IRS officials to understand how each program works. For the average time spent on each type of contact, we analyzed available IRS data for fiscal years 1993 through 2002. For how taxpayers perceive IRS’s enforcement programs, we interviewed IRS officials; reviewed tax research studies and press articles; and contacted four large national organizations representing attorneys, certified public accountants, enrolled agents, and tax preparers, as well as the largest tax return preparation firm, and IRS’s national taxpayer advocate. To summarize trends in the number and rate of individual taxpayer audits and other enforcement contacts in total and by taxpayer income, we analyzed available IRS data from fiscal year 1993 to fiscal year 2002 on each type of contact. To compute the audit contact rate, we used IRS’s method, which equals the proportion of IRS audits closed in a fiscal year compared with returns filed in the previous calendar year. IRS has not stated a method for computing math error, document matching, and nonfiler rates. For the document matching and nonfiler programs, we compared the proportion of notices sent in a fiscal year to return filings in the previous year because these contacts generally occur in the year after a return is filed. For the math error program, we based the contact rate on the proportion of math error notices to the returns filed in that year because the notices are sent to taxpayers as IRS processes tax returns. For the math error, document matching, and nonfiler programs, we based the contact rate on the number of initial notices sent to taxpayers rather than closures because (1) it is the broadest measure of IRS’s enforcement efforts with taxpayers and (2) the math error and document matching programs usually conclude the contact with the taxpayer within a few months after the initial notice is sent. Nonfiler contacts can take considerably longer to close, making it difficult to know which tax year to use in computing a contact rate. We used the number of initial notices so that the nonfiler program could be measured on a consistent basis with the document matching and math error programs. To understand the reasons for the trends, we analyzed our previously issued reports and IRS reports and interviewed IRS staff for each enforcement program. To determine how audit and other enforcement programs affect individual taxpayer compliance and burden, we obtained and reviewed available data such as IRS studies and reports, our previous reports, and other research. We also interviewed responsible IRS officials. To assess whether IRS should expand reporting on its enforcement efforts, we analyzed the types of enforcement data already publicly reported on an annual basis by IRS. We also analyzed the tradeoffs for two options we identified—expanding the definition of audit to include the other enforcement programs and reporting more data on each program. We used much of the information from the previous objectives and interviews with IRS officials. For all objectives, our work focused on the four major enforcement programs identified by IRS—math error, document matching, nonfiler, and audit. We attempted to verify the completeness and accuracy of IRS’s data but could not reconcile all differences given time constraints. As a result, we either did not report some data or disclosed limitations in the data being reported. Further, in analyzing audit and document matching rates by income level, we did not adjust the income levels for the effects of inflation over the 1993 to 2002 period because detailed data on taxpayer income was not available during the timeframes for the assignment. All data used in the report are final except for the number of tax returns filed in 2002. Because this number is preliminary, the final math error contact rate for fiscal year 2002 may differ somewhat from what we report. In addition, you asked us to analyze two newer IRS efforts—voluntary compliance agreements and soft notices. Appendix IV describes the two newer efforts. We did our work at IRS’s national office in Washington, D.C., and offices in New Carrolton, Maryland, and Atlanta, Georgia, between August 2002 and December 2002 in accordance with generally accepted government accounting standards. We requested comments on a draft of this report from IRS (see app. V). Whether audits and other enforcement programs vary from each other depends on a number of factors. With regard to legal characteristics, audits and other enforcement programs are all authorized to contact taxpayers about apparent noncompliance and to determine and adjust taxpayers’ tax liability. However, audits have the broadest authority to detect possible noncompliance, significant powers to obtain information, and the most restrictions on how IRS is to interact with taxpayers. With regard to operational characteristics, the extent to which audits are operationally similar to or different from other enforcement programs varies depending on the type of audit. Audits done in taxpayer locations and IRS offices are not similar operationally to other enforcement programs and audits done through correspondence with the taxpayer, while still different, are more operationally similar to some of the other programs. IRS officials were unaware of any research on whether taxpayers perceive differences among IRS’s enforcement programs. However, looking at audits and other enforcement programs from the taxpayers’ perspective, IRS officials and officials we interviewed who represent taxpayers believe that taxpayers may not perceive distinctions among many of the enforcement programs. In a general sense, the IRC provisions for enforcement are similar in that they authorize IRS to contact taxpayers about apparent noncompliance and to determine and adjust taxpayers’ tax liability. However, the IRC provisions grant IRS the authority to review all matters that may affect a taxpayer’s tax liabilities under audits but only certain specified tax issues under other enforcement programs. The IRC also establishes more rules— including significant powers to obtain information as well as restrictions on those powers—that govern the nature of audit contacts with taxpayers than for the other programs. The IRC does not explicitly limit the tax issues to be covered by an audit, unlike for the other enforcement programs. Under the authority of section 7602, audits can cover any issue on a tax return, including those that the other programs cover. In contrast, the IRC specifies the scope of legal authority for the three other enforcement programs. For example, after five statutory expansions since 1976, math error authority now covers 11 tax issues (see app. I). Document matching—which grew primarily through the 1980s as Congress authorized more information reporting— now covers over 20 types of individual income as well as certain tax credits and deductions (see app. II). The IRC also specifically authorizes the nonfiler program to pursue unfiled tax returns that should have been filed. The IRC also establishes more rules governing IRS’s contacts with individual taxpayers under the audit program than it does for the math error, document matching, and nonfiler programs. These rules give IRS significant powers to obtain information needed to determine an individual’s tax liabilities when doing an audit and, in turn, places restrictions on the use of those powers. If resolving issues raised under the other enforcement programs requires that IRS auditors become involved, the contacts with taxpayers become audits subject to these greater powers and restrictions. For example, if a taxpayer who receives a math error notice files a claim for IRS to abate the tax assessment, IRS could audit that claim. Similarly, if a taxpayer responds to a document matching notice with materials that cannot be readily and immediately used to settle the discrepancy, the case could be referred to audit staff. The greater powers that IRS has under audit compared with the other programs include the authority to examine books and records and take testimony for purposes of determining the tax liability of a tax return. IRS also has the power to use a summons to compel taxpayers and third parties to provide books and records, and to enter premises to examine objects subject to taxation. Given these greater powers, the law also places more restrictions on audits to protect taxpayer rights. For example, the law restricts IRS from doing unnecessary audits or generally doing more than one inspection of taxpayers’ books for each tax year. The law also governs the time and place of an audit and burden of proof on IRS. In addition, the Internal Revenue Service Restructuring and Reform Act (RRA) of 1998 (P.L. 105- 206) added several requirements, such as informing taxpayers of their rights during audits. On the other hand, RRA also added a provision that creates a legal similarity for all four enforcement programs because it affects any IRS employee, including those making audit or nonaudit contacts. Section 1203 of RRA lays out the conditions under which any IRS employee is to be fired for any of 10 specific acts or omissions. Many of these conditions involve contacts with taxpayers—such as harassing taxpayers or taxpayer representatives, violating their civil rights, or threatening to audit a taxpayer for personal gain. These restrictions were intended to protect taxpayers in their interactions with IRS. Another legal provision creates a similarity between audits and two of the three other programs. Except for the math error program, when IRS proposes a change in taxpayers’ liabilities, it is required to send a notice informing taxpayers of their rights, such as the right to appeal additional taxes that IRS proposes. The IRC does not provide taxpayers a right to appeal assessments created under math error authority because that authority generally applies to obvious errors made by taxpayers on their returns. However, IRS informs taxpayers receiving a math error notice that they may file a claim to ask IRS to abate (reduce) the tax assessment if they believe IRS erred. The extent to which audits are operationally similar to or different from other enforcement programs varies depending on the type of audit. Compared with other enforcement programs, audits done in taxpayers’ locations or IRS offices are more likely to deal with multiple and complex issues, require more skill and judgment by IRS employees, require a greater number of interactions with taxpayers, and take more IRS staff time. Correspondence audits also tend to differ from other enforcement programs in these operational characteristics but to a lesser degree, and in some cases correspondence audits and document matching contacts with taxpayers can be very similar in these characteristics. Table 1 provides an overview of key operational dimensions across the enforcement programs. Reviewing these operational dimensions helps highlight similarities and differences across the four types of enforcement. Contact triggers: All enforcement contacts use computers to identify a potential compliance issue. However, audits are more likely to be triggered by other means such as a special compliance project or referrals from inside or outside of IRS. Number of contacts: Once any potential compliance issues are found, the fewest contacts with taxpayers to resolve the issues are likely under the math error and document matching programs because they have relatively simple issues. Correspondence audits might need more than one contact, depending on the complexity of the issue(s) being audited and taxpayers’ responses. The number of contacts in the nonfiler program can vary depending on whether taxpayers respond to an IRS notice by filing a return, or explaining why a return was not required. Some may not respond, possibly leading IRS to send a second notice or create a substitute return and send it to that taxpayer. Audits at IRS offices or taxpayer locations are likely to have the most contacts with taxpayers through meetings, notices, or the telephone because they tend to cover several, more complex issues. IRS staff skill and judgment: Audit contacts—especially those done in IRS offices or in taxpayer locations—require the most staff skill and judgment to analyze taxpayers’ testimony and books and records. Being more automated and usually dealing with simpler issues, other enforcement programs rely on less staff skill and judgment. Document matching staff might have to analyze taxpayers’ explanations for why they do not owe more tax but are to refer the case to the audit program if an explanation requires detailed analysis or includes books and records. The nonfiler program requires limited skill and judgment when automated processes send the notices or generate substitute returns. More skill and judgment is required when IRS staff manually create substitute returns or when taxpayers respond to a notice by saying that they do not have to file a return. Timing of initial contact: Math error contacts are made as the return is being processed and identify errors that must be corrected to finish processing the return. Document matching and nonfiler contacts usually occur within 1 year after the return is filed or is to be filed. Audits usually start within 1 year after a return is filed but can start later as long as IRS finishes the audit within 3 years after the return is filed. Another operational characteristic is the average time spent by IRS staff. Figure 1 shows that audits use more staff time per case than document matching contacts. For fiscal years 1993 through 2002, the staff time ranged from roughly an hour per document matching case to up to 30 hours per field audit. (see Table 9 in app. III for details.) IRS does not separately track the time spent on math errors from the rest of the returns filing process or on nonfilers from other work done by collection staff. Looking across all of these operational dimensions in general, audits that take place in IRS offices or in taxpayer locations differ the most from other enforcement programs. They differ primarily because they are more likely to deal with multiple complex tax issues, require more skill and judgment by IRS employees, require a greater number of interactions with taxpayers, and take more IRS staff time. Although correspondence audits do differ from other enforcement programs on these characteristics, they do not differ as much from other enforcement programs as do the audits in IRS field offices or taxpayer locations. The closest similarity between correspondence audits and the other programs is with the document- matching program. In comparison to the document matching program, correspondence audits in some cases may deal with about the same number of issues, have the same number of interactions with taxpayers, and require similar skill, judgment, and time on the part of IRS staff. Correspondence audits are less similar to contacts under the math error and nonfiler programs than to document matching. Math error contacts deal with straightforward issues that must be corrected as a return is processed as opposed to contacting the taxpayer up to one year later about issues in the return. Nonfiler contacts deal with taxpayers who have not filed a return at all as opposed to seeking to correct issues related to a filed return. In addition to the four major enforcement programs, starting in the mid- 1990s, IRS created two new programs intended to help individual taxpayers file accurate tax returns. IRS sends so-called “soft notices” on duplicate claims for dependent exemptions and missing self-employment tax reporting. The soft notices do not require taxpayers to take action but are intended to educate them about the potential errors and encourage them to correct their returns, if necessary. The other new program is the voluntary compliance agreements program. These agreements are negotiated with certain employers with the goal of increasing their employees’ compliance in reporting tip income. As discussed in appendix IV, while these programs attempt to improve compliance, they have significant differences from the four major enforcement programs and IRS has little data on their use. However, IRS was able to provide us with data that it sent taxpayers 1.2 million soft notices on duplicate dependent claims in 2002. IRS officials were not aware of any research, and our search of the tax literature and press did not uncover research, on whether taxpayers perceive distinctions between audits and other enforcement programs. Of the four major enforcement program contacts, IRS officials said that they could see how some taxpayers might view two types of contacts— document matching and correspondence audits—as similar in that both tend to cover one or two tax issues that are fairly simple, contact taxpayers through the mail, and give taxpayers the same appeal rights. Otherwise, these officials did not see how taxpayers could view the enforcement contacts as similar, especially the math error contacts. Although they had not surveyed taxpayers, officials we interviewed from six groups that represent taxpayers or help prepare their tax returns believed that many individuals perceive no distinction among the programs. For example, one representative attributed this to the conclusion that taxpayers view all IRS notices as stating the same thing—that the taxpayer owes more taxes. From fiscal years 1993 through 2002, the rates for the four enforcement programs often did not follow consistent patterns from one program to another or from year to year within programs. Comparing just 1993 with 2002, the contact rates for two programs—audits and document matching—were significantly lower, the rate for math errors was significantly higher, and the rate for nonfilers was essentially the same. By taxpayer income level, the audit rate for higher and middle income taxpayers generally declined over the 10-year period—with the sharpest declines for higher income taxpayers. The rate for the lowest income taxpayers increased sharply between 1993 and 1995 and then generally fell, ending virtually the same as in 1993. The document matching contact rate by income class followed very similar patterns with the rates for all income levels dropping over the 10-year period. The enforcement contacts increased or decreased because of several reasons, including statutory changes, staffing declines, and priorities in the use of staff among the programs. As figure 2 shows, the math error program contact rates rose or fell from year to year; however, it’s the only enforcement program that had a significantly higher contact rate in fiscal year 2002 than in 1993. This is true even without counting certain math error contacts for which IRS lacks data over the 10-year period. Using only the math error count, which is consistent throughout the 10 years, the math error contact rate rose 33 percent (from 3.59 percent to 4.79 percent). Document matching contact rates went down and up at various times but ended 45 percent lower (from 2.37 percent to 1.30 percent) in 2002 compared to 1993. The nonfiler rates also went up and down but ended in 2002 about where they were in 1993. Comparing 1993 to 2002, the audit contact rate dropped 38 percent (from 0.92 percent to 0.57 percent), even though it rose significantly between 1993 and 1995. Over the 10 years, the math error rate exceeded the rate for each of the three other programs, and the audit rate was the lowest rate, except in fiscal years 1995, 1996, and 1997. The trends in the number of contacts in all four programs generally follow the trends in the rates. Appendix III provides details about the contact numbers and rates for all four programs. The trend line in Figure 2 shows a revised math error contact rate that includes masterfile notices IRS had been sending throughout this period but had not been reporting as math errors. In data made publicly available on math error contacts, IRS had excluded roughly 2 million masterfile math error contacts annually for fiscal years 1997 through 2002. When included, the math error contact rate increases (e.g., from 4.97 percent to 6.5 percent in 1997). These math error contacts arise from IRS’s match of filed tax returns to its masterfile accounts to identify tax returns that misreport taxes already paid such as in previous years or estimated tax payments. IRS officials said that the masterfile errors were not reported as math errors because they are identified through a different process at a later time compared to other math errors during the processing of tax returns. In our discussions, these officials agreed that both types of errors are identified under the same math error authority, are indistinguishable to taxpayers being contacted, and should be similarly counted and reported. IRS also did not include in its published report about 8 million notices sent in fiscal year 2002 to correct errors in tax returns reporting the rate reduction credit. If these notices had been included, the math error contact rate would have nearly doubled to 12.5 percent. The Economic Growth and Tax Relief Reconciliation Act of 2001 authorized tax rate reductions as well as an advance tax refund, called the rate reduction credit. Because the rate reduction credit applied for only 1 year, this error is unlikely to recur according to IRS officials. As a result, we did not include this information in figure 2. Figure 3 shows that the contact rates generally declined in the audit and document matching programs for all taxpayer income levels between fiscal years 1993 and 2002. For the math error and nonfiler programs, data on contact rates by income level were not available, and IRS officials said that it would take some time and effort to develop math error and nonfiler contact rates by income levels. (See table 7 in app. III for details on contact rates by income levels.) As figure 3 shows, because the audit contact rate declined (from 3.89 percent to 0.86 percent) for higher income (more than $100,000) individuals and remained virtually the same (from 0.77 percent to 0.78 percent) for the lowest income (less than $25,000) individuals between fiscal years 1993 and 2002, the rates for the highest and lowest income individuals essentially converged in 2001 and 2002. Over the same time, the document matching contact rate generally declined for all three income groups with fairly similar year-to-year patterns and with higher income individuals being contacted at the higher rate. The divergent trends between the growing rate of math error contacts and the declining or relatively stable rates for the other enforcement programs can be attributed to how the programs have been affected by statutory changes, fewer enforcement staff, and priorities for using available staff. Math error contacts grew over the fiscal year 1993 through 2002 period in part because Congress expanded the types of tax issues covered by the math error authority. For example, in 1996, Congress gave IRS authority to shift a number of earned income tax credit issues from its audit program to its math error program in that year. As a result, in 1997, IRS shifted over 700,000 cases involving missing or invalid social security numbers (SSN) on tax returns from the audit program to the math error program. Under this and other statutory expansions, IRS was making hundreds of thousands of math error contacts with taxpayers by 2002 that were not made in 1993. A second statutory change played a role in the diverging trends among the enforcement programs. In RRA, Congress took steps to better ensure that taxpayer rights were protected by revising certain audit processes, such as informing taxpayers about their rights and generally how they were selected for audit. According to IRS officials, the changes contributed to the decline in audits because IRS auditors had to spend more time to handle nonaudit duties, to be trained in new procedures and taxpayers’ enhanced rights, and to do new tasks. Those changes contributed to reductions in the number of audits that each auditor completed, meaning they were less productive in closing audit cases. Finally, declines in enforcement staffing and priorities for using staff also contributed to trends in enforcement program contacts. IRS has reported that from 1993 to 2001, enforcement staffing levels declined about 24 percent. These staffing declines affected not only the audit program but also the document matching and nonfiler programs because those programs require that IRS staff screen most notices before they are sent and follow up when taxpayers respond to notices. Given declining staff resources, IRS has restricted the number of notices sent when it finds probable noncompliance under the document matching and nonfiler programs. In contrast, IRS allocated enough resources over this period to the math error program to continue sending these notices. IRS officials said that IRS must resolve math errors to process tax returns and adjust the tax liability so that taxpayers are in compliance. Although widespread agreement exists that enforcement programs help ensure voluntary tax compliance, evidence is limited about the degree to which enforcement overall or by type of program affects taxpayer compliance. No studies are available that measure the burdens that taxpayers experience when contacted under IRS’s enforcement programs. Over the years, many tax practitioners and academics have suggested that enforcement programs are critical for ensuring voluntary compliance. However, measuring the effects of enforcement programs on compliance is a difficult task. IRS officials identified only one study that attempted to estimate the effects of its enforcement programs on compliance; no more recent work is underway or planned to measure these effects. Relying on an econometric analysis of taxpayer behavior—using various assumptions, IRS and non-IRS data for 1982 through 1991, and alternative measures of compliance—this IRS study estimated the effects of various IRS programs across the general taxpayer population. The study suggested that audits had a positive impact on compliance in reporting information on tax returns and that document matching had a positive effect on compliance in filing required returns. We did not have time to analyze the reasonableness of the study’s approach, assumptions, and results. To obtain current information on taxpayers’ compliance in filing tax returns and reporting correctly on them, IRS developed its National Research Program (NRP). This program is designed to yield reliable estimates of the compliance levels of individual taxpayers while addressing concerns about the burden such a measurement program can impose on taxpayers. NRP’s design was completed in fiscal year 2002, and IRS will be auditing taxpayers’ returns under the program during fiscal year 2003. IRS plans to use the NRP results to update tools to select individual tax returns for audit, to allocate resources, to estimate the impacts of legislative and administrative changes on voluntary compliance and tax revenue, and to identify potential ways to improve voluntary compliance. Although NRP should yield useful data, it was not designed to measure the effect that each major enforcement program could have on voluntary compliance. In addition, IRS has been working to produce more comprehensive estimates of burden that individual taxpayers face in meeting their tax obligations. IRS developed a system in 1984 for estimating the burdens taxpayers face in filing IRS forms, and began efforts during the 1990s to create a better model for estimating such compliance burdens. IRS recently announced that the new burden model is ready to be tested and likely will replace the old model during fiscal year 2003. Although the model should provide better estimates of individual taxpayer burdens in completing and filing tax returns, it is not designed to estimate the postfiling burdens related to IRS’s enforcement efforts. IRS expects to model these postfiling burdens but does not yet know when that phase of its burden estimation project will begin. IRS’s public reporting on its enforcement programs for individual taxpayers does not provide a complete perspective on its efforts to enforce tax laws because that reporting heavily focuses on audits. IRS’s audit rate is often cited in the press and is often the focus of congressional and other debates concerning how well IRS is enforcing the tax laws. However, over time the audit rate has become increasingly less complete as a measure of IRS’s efforts to enforce tax laws because IRS’s other enforcement programs have expanded their coverage of issues once covered under audits. At least two options exist for expanding reporting: changing the definition of audits to include other enforcement efforts and reporting more data on each enforcement program separately. The second option would achieve more complete and balanced reporting without incurring some of the disadvantages that could come from expanding the definition of audits. IRS officials plan to expand public reporting for fiscal year 2002 on IRS’s major enforcement programs to the extent that data are available and cost effective to extract. IRS publishes extensive data on audits but only limited data on other enforcement programs in its Data Book. Table 2 summarizes the data annually published on the enforcement programs involving individual taxpayers. As shown, IRS publishes no data on IRS’s math error program—which affects millions of individual taxpayers annually. Compared with audits, public reporting on the document matching and nonfiler programs is much more limited. IRS officials said that IRS publicly reports more data on audits because IRS has had a separate audit case-tracking system for many years that produces such data. Also, they said that requests to publicly report more data on the other programs had not been made. IRS has not changed Data Book reporting on its enforcement programs to keep up with changes in its enforcement programs over the years. With its focus on audits, the reporting may lead others to focus on audits and thereby to have an incomplete understanding of IRS’s enforcement efforts. For example, trends in the audit rate alone are difficult to use to assess IRS’s enforcement presence because that rate does not measure the same phenomenon today as it did earlier. Even within the 10-year period we reviewed, some of the tax issues that formerly had been checked only under the audit program migrated into the other enforcement programs. This type of migration was more pronounced in the 1980s as the document matching program expanded substantially. Although the scope of what IRS does under audits has changed considerably over the past few decades, and even within the past 10 years, the audit rate remains an often-cited statistic when Congress and others consider how well IRS is enforcing the tax laws. For instance, during annual oversight hearings on IRS’s performance, members of Congress often raise questions about changes in the audit rate. Over the past several years, these hearings have included concerns about the declining audit rate and its possible affect on taxpayers’ compliance. The IRS Commissioner also expressed concern about the decline in audits. However, the Commissioner said that he did not believe the audit rate needed to increase to the same level as a number of years ago because IRS has other programs to enforce the tax laws that were not available, or as broad in scope, in past years. To the extent that IRS’s audit rate is the major source of information available to taxpayers on IRS’s enforcement efforts, the public cannot be fully aware of the extent to which IRS enforces tax laws and thus may misjudge the chances that noncompliance is likely to be detected. Taxpayers who are aware only of the audit rate would not be aware that IRS often contacts more taxpayers under each of its other enforcement programs—and IRS always contacts far more taxpayers in these other programs combined—than it does under the audit program. As discussed earlier, although the degree to which enforcement encourages voluntary compliance is difficult to measure, it is widely believed that public knowledge about enforcement efforts helps prompt higher levels of voluntary compliance. Although he did not specifically cite possible increases in voluntary compliance, in a letter issued in March 2001, the IRS Commissioner said that only focusing on audits substantially understates IRS’s capacity to find errors. While greater awareness of the scope of IRS’s efforts to enforce the tax law may encourage compliance, it could also increase taxpayers’ awareness of the trends in these efforts. It is not clear how taxpayers would interpret and react to the differing trends among IRS’s enforcement programs. For the period from 1993 through 2002, trends in IRS’s individual enforcement programs often varied from year to year as well as between the programs. Therefore, the compliance signals to taxpayers from publicizing data on the trends in these other programs probably would be different—and more mixed—than the signal they receive based exclusively on the audit rate. In addition, awareness of the fuller range of IRS’s enforcement efforts may not affect compliance of all groups of taxpayers equally. This could occur, for example, when the contact rates under the enforcement programs differ, as they do under the audit and document matching programs for different income groups. Further, to the extent that taxpayers know that IRS can only understand their tax situation through a traditional audit, their compliance might be less affected by fuller reporting on IRS’s other enforcement efforts. The IRS Commissioner has said that the decline in the traditional audit rate is of concern in part because a growing portion of taxpayers and a growing amount of income is not well identified through such programs as document matching and nonfiler. Of two options we identified for expanding public reporting on IRS’s enforcement efforts, providing data on each major program separately avoids certain disadvantages of aggregating data into one broad audit program. After we discussed the tradeoffs of these options with IRS officials, they said they plan to expand public reporting for each of the nonaudit enforcement programs. One option for expanding reporting on IRS’s enforcement programs would be to define all of IRS’s enforcement programs to be audits for statistical reporting. If the programs were all defined to be audits, IRS might report a consolidated “audit rate” that would represent all of IRS’s contacts with taxpayers. Consolidated reporting might also be done on such things as the additional tax revenues identified through the contacts and the staff time invested by IRS. This option could have several advantages. For instance, it would provide for more complete reporting on IRS’s overall enforcement efforts in a single “rate.” Another advantage to expanding the definition of an audit is that the major enforcement programs have an overall similarity in what they intend to achieve. Moreover, some document matching and math error checks now cover some tax issues that had been covered under audit authority. Thus, because audits do not measure the same thing over time, expanding the definition would create a more consistent measure of the extent to which IRS is enforcing tax laws. However, combining all enforcement programs under one definition poses a number of potential disadvantages. For example, IRS’s legal authority and operational rules, as well as taxpayers’ rights, vary across enforcement programs. If all enforcement programs were called audits, IRS staff and taxpayers could become confused about the rights and restrictions that govern contacts with taxpayers. Labeling all enforcement programs as audits might confuse taxpayers about whether IRS could examine their books and records for a specific tax year (an action taken under IRS’s current audit authority) if they had already been contacted under document matching and/or math error programs. If all enforcement programs were called audits and aggregate reporting was done, IRS would face a challenge in ensuring that taxpayers and others are not misled. For example, a single audit rate would cover the range from intense audits covering multiple tax issues to the correction of simple math errors arising from inadvertent miscalculations by taxpayers. Given the higher number of math errors being detected by IRS over time, if taxpayers interpreted a revised audit rate as representing the former rather than the latter situation, they would be misled about IRS’s true level of tax return scrutiny. Another challenge for IRS would be in reporting audit results like tax dollars assessed and time spent per audit. Considerable variability already exists in these results for audit—e.g., field audits take significantly more staff hours than correspondence audits. These differences would be more extreme under a consolidated audit reporting system that included document matching, nonfiler, and math error contacts. Finally, the IRS would need to account for potential double counting because taxpayers can be contacted through more than one enforcement program for the same return. In addition, labeling all IRS enforcement programs as audits might suggest that the programs are in some sense substitutable in detecting noncompliance and encouraging voluntary compliance. Although the document matching and nonfiler programs do replace part of what had previously been done by auditors, these programs do not completely substitute for audits. Math error program contacts are even less of a substitute for audit. Combining all of these efforts suggests an equivalence—one math error contact with a taxpayer is equivalent to a complex, intense audit of a taxpayer books and records—that is not correct. Therefore, if audits dropped even further than they have in recent years, but math error contacts rose even faster, some might assume that IRS is doing better at enforcing tax laws while others might disagree. Because of such disadvantages, IRS officials said that they do not favor changing the audit definition to include the other enforcement programs at this time. Specifically, they said any changes would create confusion about IRS’s enforcement activities and could distort any comparisons because the programs significantly differ. Instead of expanding the audit definition, IRS has already expressed support for greater reporting on the full range of IRS’s enforcement efforts. For example, in 2001, the IRS Commissioner stated that IRS’s goal is to make public reporting on nonaudit enforcement efforts as informative and meaningful as possible. This approach generally avoids the disadvantages associated with reporting IRS’s enforcement efforts under one consolidated, redefined audit program. At the same time, it would provide more complete reporting to the public. In December 2002, IRS officials told us that they plan to try to report more data on other enforcement programs to the extent that the data are available and cost-effective to extract. Officials expect that this expanded reporting will begin with the fiscal year 2003 Data Book if the necessary statistical tables cannot be produced in time for the 2002 edition that is to be published in early calendar year 2003. The expanded information will also be available on the IRS Web site. These officials said that they would attempt to report the number of cases closed, the staff time expended, and the tax amounts adjusted for document matching and for the automated substitute for return program (ASFR) component of the nonfiler program. For document matching, IRS plans to account for not only the cases in which taxpayers were contacted but also in which IRS staff resolved the apparent income discrepancy without contacting taxpayers. For ASFR, IRS is planning to adjust the data for cases in which IRS abated the additional tax amounts assessed after taxpayers later filed a tax return. For both programs, IRS officials said that reporting the data by the taxpayer’s level of income is doubtful. For math errors, IRS officials said that they could report the number of notices, staff time, and tax amounts assessed but that reporting other data is questionable either because the data are not collected or are difficult or costly to extract. IRS has no plans to analyze whether changes could be made to cost-effectively extract or collect other data to facilitate understanding of and comparisons among these nonaudit enforcement programs. Although research is not conclusive about the extent to which taxpayers comply with the law based on their perception of whether noncompliance will be caught, it is widely believed that those perceptions do contribute to the overall level of compliance by taxpayers. On the basis of this belief, observers in Congress and elsewhere have been concerned as IRS’s oft- cited audit rate has declined in recent years. To an unknown, but real extent, the long-term decline in the audit rate is attributable to the movement of some tax issues from IRS’s audit program into its other enforcement programs. This movement has been facilitated by changes in technology, and has enabled IRS, for some tax issues, to more universally check whether taxpayers have accurately reported their tax liabilities. Although much of the movement of IRS’s audits into other programs occurred during the 1970s and 1980s, this trend continued during the fiscal year 1993 through 2002 period. Given these changes in IRS’s enforcement operations, policymakers in Congress and elsewhere, as well as taxpayers, would be better informed about the scope of IRS’s efforts to enforce tax laws if IRS were to expand its annual public reporting to include the full range of its enforcement programs. Toward this end, some interest has been expressed in having IRS report a new audit rate that would aggregate IRS’s various enforcement programs into a total, revised audit rate. Although such a measure would attempt to provide a more comprehensive picture of IRS’s overall effort to detect compliance problems, the advantages of doing so do not clearly outweigh potential disadvantages. For instance, expanding the definition of an audit would package enforcement activities that are so disparate that the consolidated reporting could be misleading. However, policymakers and taxpayers could be better informed about of the extent of IRS’s efforts to enforce the tax laws without combining data on all of IRS’s enforcement programs into one set of aggregate measures. IRS’s commissioner set fuller reporting of IRS’s enforcement efforts as an IRS goal, and IRS officials plan to move to fuller reporting of enforcement program results, perhaps as early as in the 2002 IRS Data Book, which will be published in early calendar year 2003. IRS officials expect that this expanded reporting will use only readily available data on the enforcement programs. Because the document matching, math error, and nonfiler programs now cover many tax issues formerly covered by audits and they annually contact far more taxpayers than audits, expanded reporting on these programs, using readily available data, is an appropriate first step. However, the readily available data for the nonaudit programs is incomplete compared to data reported on audits. For example, the data do not cover all nonfiler contacts or the results of the programs by taxpayer income. IRS has no plans to determine whether it could cost-effectively extract or collect additional data in order to more completely present program results, and facilitate comparisons across the programs or with any new programs, as they evolve. In the case of the math error program, total data that includes math errors identified during initial processing of tax returns as well as errors found in comparing tax return data to data in IRS’s masterfiles should be reported. Excluding data on math errors found in comparing returns to IRS’s masterfiles materially understates the volume of math error contacts with taxpayers. The Acting Commissioner of Internal Revenue should determine whether additional data on each nonaudit program can be cost effectively extracted or collected to make future annual reporting on enforcement programs more complete and comparable. provide information on all types of math error contacts when publishing data on IRS’s math error program. The Acting Commissioner of Internal Revenue provided written comments on a draft of this report in a January 27, 2003, letter, which is reprinted in appendix V. The Commissioner agreed with our recommendations. We are heartened that IRS has already begun to identify additional data to report on its enforcement programs. Given the differing nature of IRS’s enforcement programs, we encourage IRS to provide information that is as comparable as possible among the programs. As arranged with your office, we plan no further distribution of this report until 30 days from the date of its issue, unless you publicly announce its contents earlier. After that period we will send copies to the Chairman and Ranking Minority Member, House Committee on Ways and Means; and Chairman and Ranking Minority Member, Senate Committee on Finance. We will also send copies to the Acting Secretary of the Treasury; Acting Commissioner of Internal Revenue; the Director, Office of Management and Budget; and other interested parties. Copies of this report will be made available to others on request. In addition, the report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions, please contact me or Tom Short on (202) 512-9110. Key contributors to this report are acknowledged in appendix VI. As early as the first codification of the Internal Revenue law in 1939, Congress granted IRS “math error” authority so that IRS does not have to provide the taxpayer with a statutory notice of deficiency for math errors. In general, these are errors that must be corrected for IRS to process the tax return. A 1976 statutory revision defined the authority to include not only mathematical errors but other obvious errors such as omissions of data needed to substantiate an item on a return. In the 1990s, Congress extended the authority five times to help determine eligibility for certain tax exemptions and credits. Table 3 summarizes the legislative authority on math error provisions for individual tax returns. According to IRS officials, math error authority applies to obvious errors where most taxpayers do not dispute IRS’s decisions. However, if taxpayers do disagree with the changes in taxes assessed, they can request an abatement (reduction) of the additional taxes. The math error process also generates lower administrative and other costs because it is highly automated and requires little contact with taxpayers, according to IRS officials. IRS has endorsed the concept of matching information returns to income tax returns for the purpose of identifying unreported income since the 1960s. Prior to the 1960s, employers had reported on wages paid to employees by the name of the employee. To facilitate matching, Congress required a TIN—generally a social security number for individual taxpayers—that is unique to each taxpayer, unlike a name. IRS and those filing information returns (i.e., payers of income) need accurate TINs for the system to work well. Filing of information returns on magnetic media or other electronic means combined with greater IRS computer capacity also has facilitated the matching process. In 1962, Congress recognized that underreporting of nonwage income, such as interest and dividend income, was a serious problem. To correct it, Congress required information reporting on interest and dividend income. Congress substantially expanded information reporting requirements during the 1980s and added a few requirements during the 1990s. Table 4 lists each major statute expanding information returns authority. IRS did not perform extensive document matching until 1974 when IRS established a program to match information returns against tax return data to identify potential income underreporting. Even so, IRS used labor- intensive, paper-driven methods. For example, clerks had to manually create case files for each potential underreporter, and IRS staff had to review the case files to determine if income was underreported. Clerks entered the results of these file reviews into systems, which generated notices to taxpayers. In 1987, IRS began to automate the document matching process. At that time IRS established the Automated Underreporter Program that allows access to computerized information, reducing the need for hard copy documents and clerks, and enabling a faster response to taxpayer inquiries. By tax year 2000, almost 1.5 billion information returns were filed with IRS. Table 5 lists the major types of information returns filed for 1983 and 2000. In 2002, IRS re-instituted matching of income reported by flow-through entities such as trusts, partnerships, and S-corporations on Schedule K-1 to income reported on tax returns by the related partners and beneficiaries. Schedule K-1 shows the income distributed to partners and beneficiaries, who receive a copy as well as IRS. According to IRS, information provided on Schedule K-1 is important for determining whether recipients of flow-through income have properly reported that income on their tax returns. IRS expects the matching of Schedule K-1 data to increase accurate reporting of trust income on future tax returns by providing information that IRS can use to detect possible unreported income and to induce taxpayers to voluntarily comply. Under K-1 matching, IRS sent 69,097 notices to taxpayers in 2002 for tax year 2000. In most cases, the taxpayers did not owe additional tax for various reasons (e.g., taxpayers reported the income differently than expected). IRS does not yet have complete results from this new matching program. IRS officials told us that K-1 matching has been suspended for one year to analyze the matching criteria and results. IRS did not publish data on revenue officer examiner audits prior to 1998. Data for math error masterfile notices do not exist prior to fiscal year 1997. The number of math error (revised) contacts are the same as the number of math error contacts for fiscal years 1993 through 1996 because data for the number of masterfile notices does not exist for these years. In addition to the four major enforcement programs, IRS started two programs in the mid-1990s to help ensure that taxpayers file timely and accurate returns, and to minimize the need for enforcement. Through the soft notice program, IRS has been sending notices for apparent errors on two tax issues—duplicate claims for one allowable dependent exemption and unfiled self-employment tax returns. IRS uses soft notices when it has information to indicate that some taxpayer made an error but not enough information to know for sure, such as which taxpayer overclaimed a dependent. Soft notices are intended to stimulate taxpayers to correct the error without IRS having to invest audit time. In addition, IRS uses the voluntary compliance agreements program to address known compliance problems in reporting tip income. To improve compliance of employees in industries where tip income is a part of wages, IRS had been auditing the tax returns of tipped employees, which burdened the employees and employers as well as IRS. To minimize these burdens while also addressing the compliance problems, IRS began to explore new methods to achieve voluntary compliance by tipped employees, such as voluntary compliance agreements. IRS has negotiated three types of agreements with certain employers (e.g., restaurants) to improve compliance by their individual employees in reporting tip income. These three types of agreements follow. The Tip Rate Determination Agreement (TRDA) requires that IRS and the business agree upon a tip rate for various occupations in the business and that at least 75 percent of employees in the business agree to report at that rate on their income tax return. The Tip Reporting Alternative Commitment (TRAC) does not require a tip rate to be determined, but does require that the business create written statements to record employee tips and send the statements to IRS. This agreement covers all employees and requires that the business educate employees about their obligation to report their tip income. The Employer-designed Tip Reporting Alternative Commitment Agreement (EmTRAC) requires that businesses establish tip reporting procedures and prepare a statement on a regular basis (no less than monthly) to reflect all tips for each employee. The business must establish an education program to train employees about their obligation to report tip income. In general, these two programs are similar to the four major enforcement programs in that they attempt to correct noncompliance. They differ because, rather than enforcing the tax laws, both attempt to reduce the need for enforcement. In sum, their differences tend to outnumber their similarities, as discussed below. Similar to the four enforcement programs, IRS sends soft notices to inform taxpayers of potential errors. However, the soft notice does not require taxpayers to take any action, and IRS takes no action to verify the error or assess tax. Instead, the notice asks taxpayers to examine the potential error and file an amended return if they confirm the error. Also, the notice informs taxpayers that IRS will monitor these types of errors and might contact them if they do not alter their reporting in the future. The similarity between the voluntary compliance agreements and the other enforcement programs is that they attempt to correct noncompliance. Unlike the other programs, these agreements occur before a return is filed and do not involve sending any notices to taxpayers. IRS believes that these agreements enhance voluntary compliance so that IRS can avoid the need to take enforcement action and assess additional taxes after a return is filed. IRS assures the businesses that IRS will not audit their books and records as long as they abide by the agreement. However, IRS may still audit the books and records of a tipped employee and report any changes to the business. IRS officials said that current procedures require follow-up to check adherence to these agreements, but the officials were not sure about the extent to which this has been occurring. IRS has limited data for the soft notice and voluntary compliance agreement programs, as follows. In 2002, IRS sent 1.2 million soft notices to taxpayers on duplicate dependent claims on 2001 tax returns; in 1998, IRS sent 1.6 million soft notices on these duplicate claims and on self-employment tax for 1996 and 1997 returns. This involved 329,000 notices sent to taxpayers who reported self-employment income but had not filed a schedule SE or paid self-employment tax. IRS did not provide data on these notices for any later years. Through 2001, TRDAs and TRACs covered 48,348 establishments in the casino, beauty, and food and beverage industries. IRS did not have data on the number of individual taxpayers covered by these agreements because the agreements are made with employers rather than directly with the individual taxpayers. In addition to those named above Susan Baker, Grace Coleman, Susan Conlon, Brendan Culley, Michele Fejfar, Leon Green, Marshall Hamlett, Shirley Jones, and Jay Pelkofer made key contributions to this product. U.S. General Accounting Office. Tax Administration: Advance Tax Refund Program Was a Major Accomplishment, but Not Problem Free. GAO-02-827. Washington, D.C.: August 2, 2002. U.S. General Accounting Office. Tax Administration: New Compliance Research Effort Is on Track, but Important Work Remains. GAO-02-769. Washington, D.C.: June 27, 2002. U.S. General Accounting Office. Tax Administration: Impact of Compliance and Collection Program Declines on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002. U.S. General Accounting Office. IRS Audit Rates: Rate for Individual Taxpayers Has Declined But Effect on Compliance Unknown. GAO-01- 484. Washington, D.C.: April 25, 2001. U.S. General Accounting Office. Tax Administration: Information on Selected IRS Tax Enforcement and Collection Efforts. GAO-01-589T. Washington, D.C.: April 5, 2001. U.S. General Accounting Office. Tax Administration: IRS’ Use of Nonaudit Contacts. GAO/GGD-00-7. Washington, D.C.: March 16, 2000. U.S. General Accounting Office. Tax Administration: IRS Is Working to Improve Its Estimates of Compliance Burden. GAO/GGD-00-11. Washington, D.C.: May 22, 2000. U.S. General Accounting Office. IRS Audits: Weaknesses in Selecting and Conducting Correspondence Audits. GGD-99-48. Washington, D.C.: March 31, 1999. U.S. General Accounting Office. Tax Administration: IRS’ Audit and Criminal Enforcement Rates for Individual Taxpayers Across the Country. GAO/GGD-99-19. Washington, D.C.: December 23, 1998. U.S. General Accounting Office. Internal Revenue Service: Results of Nonfiler Strategy and Opportunities to Improve Future Efforts. GAO/GGD-96-72. Washington, D.C.: May 13, 1996. U.S. General Accounting Office. Tax Administration: Audit Trends and Results for Individual Taxpayers. GAO/GGD-96-91. Washington, D.C.: April 26, 1996. Statement of Johnny C. Finch, Senior Associate Director, General Government Division, GAO, Before the Subcommittee on Commerce, Consumer, and Monetary Affairs, Committee on Government Operations, House of Representatives, on IRS’ Information Returns Matching Program, April 29, 1986.
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Reported declines in the rate at which the Internal Revenue Service (IRS) audits (also referred to as "examines") individual income tax returns have raised concerns that taxpayers may have a false perception of the true level of IRS's tax enforcement efforts. In addition, many observers are concerned these reported declines may reduce taxpayers' motivation to voluntarily pay their taxes. Because of these concerns, GAO was asked to review a number of issues surrounding IRS's enforcement efforts. GAO determined the trends in the percent of returns filed that are audited (contact rate) compared with similar data on taxpayer contacts through other enforcement programs for fiscal years 1993 through 2002. In addition, GAO reviewed whether IRS's reporting on its enforcement programs should be expanded. IRS's often-cited audit rate has been declining for several years, as shown below. However, the audit rate portrays only a portion of IRS's efforts to enforce tax laws and not all of those efforts have been declining. For IRS's three nonaudit enforcement programs, the contact rates in 2002 compared to 1993, after year to year variations, declined for one, essentially remained the same for one, and significantly increased for one--math error. A complete math error contact trend is unavailable because IRS did not capture one type of data on a substantial number of contacts prior to 1997. For years where complete data are available, IRS has not included all math errors in external reports. IRS officials agreed that all types of errors are identified under the same math error authority and should be similarly counted and reported. IRS annually reports extensive data on audits but only limited, or no, data on its other enforcement programs. This limited reporting does not provide policymakers or taxpayers information on the full extent of IRS's enforcement efforts. To the extent that taxpayers do, as is widely believed, take the level of enforcement into account when self-reporting their tax obligations, the audit rate alone may mislead them. IRS officials believe that more reporting is desirable and intend to report readily available, but incomplete, information on nonaudit programs in future reports.
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DOE’s responsibility for contractors’ litigation costs has its roots in the early nuclear programs. Since the inception of these programs in the 1940s, the federal government has relied on contractors to operate its nuclear facilities. However, because of the high risk associated with operating these facilities, the agencies responsible for managing nuclear activities—from the Atomic Energy Commission to DOE—included litigation and claims clauses in their management and operating contracts. These clauses generally provide that litigation expenses are allowable costs under the contracts. In addition, judgments against the contractors arising from their performance of the contracts are reimbursable by DOE. Over the past several years, class action lawsuits have been filed against past and present contractors responsible for operating DOE’s facilities. In general, these suits contend that the operation of the facilities released radioactive or toxic emissions and caused personal injury, emotional distress, economic injury, and/or property damage. These suits have been filed against the current and former operators of certain DOE facilities throughout the country, including the Hanford Site near Richland, Washington; the Rocky Flats Site in Golden, Colorado; and, most recently, the Brookhaven National Laboratory in Upton, New York. DOE has the option of undertaking the defense against such class action litigation on its own, but it has generally opted to have the contractors defend these cases. As standard practice, DOE has authorized the contractors to proceed with their defense and has limited its own involvement to approving the hiring of outside counsel, reviewing billings, and agreeing upon settlement amounts. The cognizant DOE field office is responsible for funding each contractor’s litigation and overseeing the litigation effort. DOE’s outside litigation costs exceeded $25 million in fiscal year 1995. On July 13, 1994, we testified before the House Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations on our review of DOE’s management of its outside litigation costs. As we indicated at that hearing, and subsequently reported, we found that DOE had little control over litigation-related expenses. DOE (1) did not know how much it was spending to defend contractors in litigation, (2) had not established cost guidance or criteria for allowable costs, and (3) had not instituted effective procedures for reviewing the legal bills. At that time, DOE’s General Counsel acknowledged that the Department’s management of outside litigation costs had been inadequate and said that DOE was initiating actions to strengthen its controls over these costs. DOE, in August 1994, issued cost control guidance and established detailed procedures for reviewing contractors’ legal bills. Furthermore, DOE has recognized that major savings can be realized by reducing the number of law firms representing its contractors and it has begun efforts to consolidate cases involving multiple contractors and law firms. The General Counsel said that case consolidation was one of his office’s highest priorities because it would allow DOE to improve its case management and greatly reduce costs. Since we first reviewed DOE’s litigation costs, the Department has made considerable efforts to improve its procedures for controlling these costs, saving hundreds of thousands of dollars. However, in certain instances, the guidance is not being consistently applied or not followed. Furthermore, headquarters’ oversight has not been as effective as it could be. Consequently, DOE is still being charged—and is paying—more than it should for litigation expenses. As a result of our July 1994 testimony, DOE issued detailed interim guidance in August 1994 setting forth policies for contracting officers to consider in determining whether particular litigation costs are reasonable. This guidance—which became effective for all ongoing class action suits on October 1, 1994—establishes limits on the costs that DOE will reimburse contractors for outside litigation. For example, the guidance specifies that the cost of duplicating documents should not exceed 10 cents per page; the charges for telephone calls, facsimile transmissions, and computer-assisted research are not to exceed the actual costs of providing these services; airfare is not to exceed the coach fare; and other travel expenses must be moderate, consistent with the rates established in the Federal Travel Regulations. The new guidance also sets forth DOE’s policy for reimbursing attorneys’ fees, profit and overhead, and overtime expenses, and it designates specific nonreimbursable costs. In addition, as part of its efforts to improve controls over litigation expenses, DOE has instituted detailed procedures for reviewing bills. DOE now requires contractors to submit copies of bills and accompanying supporting documentation to the responsible field offices for their review. Copies are also sent to headquarters so that if questions come up in the field, the Office of General Counsel’s staff can review the charges in question. Staff in each field Chief Counsel’s office are required to develop procedures for reviewing the bills each month to ensure compliance with the guidance. At headquarters, the Office of General Counsel hired an attorney with expertise in litigation management to coordinate DOE’s efforts to control costs. As a separate audit function, the Office of General Counsel established a team to audit each Chief Counsel’s office annually to ensure compliance with the guidance for managing litigation. As a result of these initiatives, DOE has questioned and/or disallowed hundreds of thousands of dollars in unnecessary and/or undocumented costs. Such costs have appeared in many of the bills reviewed by DOE. For example, DOE has disallowed time charges for attorneys when the work is clearly for other cases or when the description of work was vague or incomplete. DOE has also questioned charges for work such as “document management,” “filing,” and entertainment expenses. Finally, charges for long-distance telephone calls, overnight delivery, special messenger services, computer database research and other disbursements have been denied for lack of supporting documentation. We reviewed the bills associated with the Cook v. Rockwell/Dow and In re Hanford cases for fiscal year 1995, and found problems in many of them. Specifically, we identified additional expenses—over and above those disallowed by DOE—that should not have been approved according to the guidance. These examples show that the existing guidance is not being consistently applied or not being followed in certain instances. The following examples illustrate some of the most frequently occurring problems: DOE’s guidance directs that the legal fees be reasonable. Following this guidance, the Richland Chief Counsel’s staff—who manage the In re Hanford case—routinely question if an attorney charges more than 8.5 hours per day unless they are in trial, and charges exceeding this limit have been disallowed. However, staff at Rocky Flats—managing the Cook case—made no effort to question these charges even though several attorneys and paralegals from one law firm have frequently billed more than 8.5 hours per day—including one attorney who billed 17 hours for one day. DOE’s guidance says that the costs for meals and lodging for personnel while on travel should be billed at moderate rates using the Federal Travel Regulations as a guide. Nevertheless, the Rocky Flats office allowed lawyers to bill $28 for in-room breakfasts and for lodging that exceeded the government’s per diem rates. For example, one law firm was reimbursed in full for hotel charges of $221 per night in Washington, D.C. (where the federal maximum allowance for hotel rooms was $113), and $177 per night in Denver (where the federal maximum allowance for hotel rooms was $77). DOE’s guidance states that the cost controls are applicable to charges billed by consultants who work on the litigation. However, at Rocky Flats this criterion is not being adhered to. Consultants and expert witnesses are being reimbursed for expenses that are significantly higher than the guidance allows. For example, consultants and expert witnesses are being reimbursed for their administrative expenses at rates higher than their actual costs. They are being reimbursed for overhead at a rate of 140 percent of the administrative and secretarial support costs. Additionally, the mileage charged by some consultants is 133 percent of the federal limits. DOE’s guidance specifies that certain costs are nonreimbursable. However, some nonreimbursable expenses are being paid at both Rocky Flats and Hanford. Staff from these field offices are reimbursing purchases of reference materials, such as books and articles; costs for conference meals in excess of $10 per person; and overtime charges for secretaries—all of which are nonreimbursable under the guidance. DOE’s guidance requires certain costs to be approved in advance. However, we found that expenses requiring advance approval, such as the costs of hiring temporary personnel, were reimbursed even though the advance approval had not been obtained. Finally, we found that headquarters provided inadequate oversight of the field’s review of the bills. Bills are being forwarded to headquarters at the same time as the field office receives them, yet the Office of General Counsel’s staff was not aware of many of the problems we have identified. The Office of General Counsel’s staff said that they had not reviewed the bills to ensure uniformity and consistency with the guidance because they had devoted their limited resources to other efforts. However, they now intend to examine the bills more closely and oversee the field offices’ work. In fact, after learning of our findings, DOE headquarters staff clarified the applicability of the guidance to consultants and expert witnesses. On April 23, 1996, the Office of General Counsel issued a memo to all field office Chief Counsels stating that consultants, experts, and all other outside firms retained by the law firms are subject to the Department’s cost control guidance. These actions should help tighten controls over litigation costs. While DOE has taken a number of actions to institute cost controls over its outside litigation expenses, the dollar savings resulting from these actions are relatively small compared with DOE’s overall costs for outside litigation. Other issues have a far greater impact on the costs associated with the class action suits. These include the number of law firms representing DOE contractors, responding to discovery requests, and database development. DOE’s General Counsel is bringing more management attention to these issues in order to further reduce the costs of the class action litigation. Officials in DOE’s Office of General Counsel believe that consolidating the law firms and contractors in a case gives the department its greatest cost-saving potential. This alleviates potential duplication of work, reduces the number of legal staff billing on the case, and helps the staff in the field streamline their management of the litigation expenses. Since we completed our 1994 work, DOE has consolidated its largest class action case—In re Hanford—which had six codefendants, each represented by at least one law firm and some by as many as three firms. The Office of General Counsel acknowledged in 1994 that duplication of effort was likely occurring and, with it, unnecessary costs. Today, only two law firms are handling the litigation. DOE originally estimated that consolidating the defense for its lawsuits would significantly reduce its annual expenses for outside litigation. In 1995, DOE reduced its legal expenses by $1 million by consolidating the In re Hanford case. DOE explained that the savings at Hanford were less than expected this first year because the law firms experienced difficulties in reviewing and consolidating the voluminous work product of the former law firms. In future years, DOE expects the savings to be higher. To achieve further cost savings, DOE has considered consolidating the Cook case—which has two contractors as defendants. However, DOE has decided not to consolidate in light of the circumstances of this case. To avoid future situations where multiple contractors each hire individual law firms to represent them, DOE instituted a policy requiring contractors to select joint counsel. Staff from the Office of General Counsel cited several recent cases filed against several current and former DOE contractors involved in human radiation experimentation in which the contractors were encouraged to select common counsel to represent them. In addition, the General Counsel has directed that all new management and operating contracts contain a clause that will allow DOE to require that contractors serving as codefendants select common counsel. In both the Cook and the In re Hanford cases, DOE incurred high costs in responding to plaintiffs’ discovery requests—requests to obtain facts from DOE. In the Cook case DOE failed to meet deadlines in a court order and the judge issued a contempt order against DOE in November 1995. Consequently, DOE has rededicated staff and funds to identify, declassify and prepare hundreds of thousands of pages for review by the plaintiffs. After the contempt order was issued, DOE assigned as many as 82 people to the discovery effort. As of March 31, 1996, DOE had spent over $3 million for discovery efforts in Cook in fiscal year 1996. The Rocky Flats Chief Counsel estimates that DOE may spend as much as $11 million before discovery is completed. Discovery matters in the In re Hanford case have also proven costly for DOE. To comply with a court discovery order and avoid a contempt order in that case, DOE temporarily suspended cleanup activities at its Richland facility for a week in February 1996 so that all staff could identify and index documents requested by the plaintiffs. DOE estimates that this effort alone cost over $2.3 million. Ongoing efforts to declassify and catalog discovery documents have cost DOE an additional $4.7 million in this case. DOE recognizes that discovery is costly and that, in the past, it has lacked a coordinated approach for responding to discovery requests. To address this issue, the Office of General Counsel, in March 1996, began circulating draft guidance setting forth procedures for dealing with discovery issues, including procedures for assigning responsibility for contesting discovery requests. DOE’s General Counsel issued this guidance in final form on May 3, 1996. The Office acknowledged that if these procedures had been in place during the initial stages of discovery in the Cook case, they would have helped DOE avoid the contempt citation and the additional discovery costs it entailed. The final area that is driving costs is the development and maintenance of litigation databases. Since 1989, DOE has spent over $27 million to develop a litigation support database—maintained at Los Alamos National Laboratory—to be used to provide assistance to ongoing and future cases involving DOE and its former and current contractors. In addition, DOE contractors have developed their own litigation databases at DOE’s expense—that may be redundant and ineffective. In one instance, DOE allowed a law firm to get a copy of the scanned document tape from Los Alamos to search and organize on its own. The law firm maintained that this would be more cost-effective than its using the Los Alamos database directly. However, the final costs were double the amount estimated and the scanned documents were not as easily searchable as the law firm thought. We identified seven databases used in support of the Cook case. In fiscal year 1995, DOE spent over $600,000 on these databases. When we questioned Rocky Flat’s Chief Counsel about the purpose and need for these databases, she indicated that she was aware of only one database that DOE had developed in support of the Cook case. DOE’s Attorney for Litigation Management acknowledges that the functions of the various Cook databases may overlap and she has begun to identify the databases and their functions in order to minimize or reduce costs. For In re Hanford, we identified over 20 databases that had been developed by the contractors and their law firms before the case was consolidated. These databases are now being reviewed and combined by the lead law firm. In addition, DOE has reimbursed the contractors over $6.6 million for developing a separate database—the Westlake database—that serves as a repository for the plaintiffs’ medical records. DOE has recently undertaken efforts to reduce the costs associated with this database by, first, relocating to a less expensive location and, second, scaling down the number of documents being entered into the database. DOE has no formal written policy on developing databases. However, DOE’s Office of General Counsel is looking closely at the number of databases for each class action case intending to consolidate as many as possible and eliminate those that are duplicative. Officials from this office told us that with the new policy encouraging contractors to select common counsel and the cost controls now in place, it is unlikely that a large number of databases will be generated in the future for any one case. Thank you, Mr. Chairman and Members of the Subcommittee. That concludes our testimony. We would be happy to respond to 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.
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GAO discussed the Department of Energy's (DOE) controls over the litigation costs of defending lawsuits against its management and operating contractors. GAO noted that: (1) DOE outside litigation costs were over $25 million in fiscal year 1995; (2) DOE has improved its control over outside litigation costs by issuing guidance for reimbursable costs and specifying unreimbursable costs, which has saved hundreds of thousands of dollars; (3) DOE cost control guidance is not consistently applied or followed nor is headquarters oversight of field office billing procedures as effective as it could be; (4) other issues that have a greater impact on overall DOE litigation costs include the number of law firms representing DOE contractors, the handling of discovery requests, and database development; and (5) DOE is taking action to address these issues, such as consolidating law firms and contractors in one lawsuit, requiring future codefendants to hire common counsel, issuing guidance on responding to discovery requests, and developing plans to combine litigation case databases.
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Treasury created CPP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of preferred shares and subordinated debt. Rather than purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen the capital levels of financial institutions. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in the financial system. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion, later reduced to $475 billion, in overall TARP funds for CPP. In March 2009, the CPP allocation was reduced to $218 billion to reflect lower estimated funding needs, as evidenced by actual participation rates. On December 31, 2009, the program was closed to new investments. Institutions participating in CPP entered into securities purchase agreements with Treasury. Under CPP, qualified financial institutions were eligible to receive an investment of 1 percent to 3 percent of their risk-weighted assets, up to $25 billion. In exchange for the investment, Treasury generally received preferred shares that would pay dividends. As of the end of 2014, all the institutions with outstanding preferred share investments were required to pay dividends at a rate of 9 percent, rather than the 5 percent rate that was in place for the first 5 years after the purchase of the preferred shares. EESA requires that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator, and after repayment, institutions are permitted to repurchase warrants on common stock from Treasury. Treasury continues to make progress winding down CPP. As of December 31, 2016, Treasury had received repayments and sales of original CPP investments for more than 97 percent of its original investment. For the life of the program, repayments and sales totaled almost $200 billion (see fig.1). In 2016, institutions’ repayments totaled about $25 million. Moreover, as of December 31, 2016, Treasury had received about $227 billion in returns, including repayments and income, from its CPP investments, which exceeds the amount originally disbursed by almost $22 billion. Income from CPP totaled about $27 billion, and included about $12 billion in dividend and interest payments, almost $7 billion in proceeds in excess of costs, and about $8 billion from the sale of warrants. After accounting for write-offs and realized losses from sales totaling about $5 billion, CPP had about $0.2 billion in outstanding investments as of December 31, 2016. Investments outstanding represent about 0.1 percent of the amount Treasury disbursed for CPP. Treasury’s most recent estimate of lifetime income for CPP (as of Sept. 30, 2016) was about $16 billion. As of December 31, 2016, 696 of the 707 institutions that originally participated in CPP had exited the program (see fig. 2). A total of 6 institutions exited CPP in 2016. Among the institutions that had exited the program, 262 repurchased their preferred shares or subordinated debentures in full. Another 165 institutions refinanced their shares through other federal programs. In addition, 190 institutions had their investments sold through auction, 43 institutions had their investments restructured through non-auction sales, and 32 institutions went into bankruptcy or receivership. The remaining 4 merged with other CPP institutions. The method by which institutions have exited the program has varied over time. From 2009 through 2011, a total of 336 institutions exited the program. During this 3-year period, most institutions exited by fully repaying the investment or by refinancing the investment through another program. From 2012 through 2016, a total of 360 institutions exited the program. During this 5-year period, most institutions exited by Treasury selling the investment through an auction, repaying the investment to Treasury, or restructuring the investment. Repayments. Repayments allow financial institutions to redeem their preferred shares in full. Institutions have the contractual right to redeem their shares at any time provided that they receive the approval of their primary regulator(s). Institutions must demonstrate that they are financially strong enough to repay the CPP investments to receive regulatory approval to proceed with a repayment exit. As of December 31, 2016, 262 institutions had exited CPP through repayments. Restructurings. Restructurings allow troubled financial institutions to negotiate new terms or discounted redemptions for their CPP investment. Treasury requires institutions to raise new capital from outside investors (or merge with another institution) as a prerequisite for a restructuring. With this option, Treasury receives cash or other securities that generally can be sold more easily than preferred stock, but the restructured investments sometimes result in recoveries at less than par value. According to Treasury officials, Treasury facilitated restructurings as an exit from CPP in cases where new capital investment and the redemption of the CPP investment by the institutions otherwise was not possible. Treasury officials said that they approved the restructurings only if the terms represented a fair and equitable financial outcome for taxpayers. Treasury completed 43 such restructurings through December 31, 2016. Auctions. Auctions allow Treasury to sell its preferred stock investments in CPP participants. Treasury conducted the first auction of CPP investments in March 2012, and has continued to use this strategy to sell its investments. As of December 31, 2016, Treasury had conducted a total of 28 auctions of stock from 190 CPP institutions. Through these transactions, Treasury received over $3 billion in proceeds, which was about 80 percent of the investments’ face amount. As we have previously reported, thus far Treasury has sold investments individually but noted that combining smaller investments into pooled auctions remained an option. Whether Treasury sells CPP investments individually or in pools, the outcome of this option will depend largely on investor demand for these securities and the quality of the underlying financial institutions. As of December 31, 2016, 11 institutions remained in CPP (see fig. 3). The largest outstanding investment, about $125 million, accounted for almost two-thirds of the outstanding CPP investments. The investments at the 10 other institutions ranged from about $1.5 million to $17 million. As figure 4 illustrates, Treasury’s original CPP investments were scattered across the country in 48 states and Puerto Rico and the amount of investments varied. Almost 4 percent (25) of the investments were greater than $1 billion and almost half (314) of the investments were less than $10 million. The largest investment totaled $25 billion and the smallest investment totaled about $300,000. The 11 institutions that remained in CPP as of December 31, 2016 were in Arkansas, California (2), Colorado, Florida, Kentucky, Maryland (2), Massachusetts, Missouri, and Puerto Rico. Treasury officials said that they expect the majority of the remaining institutions will require a restructuring to exit the program in the future because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. However, they added that repayments, restructurings, and auctions all remain possible exit strategies for the remaining CPP institutions. Since we last reported in May 2016, Treasury continues to maintain its position of not fully writing off any investments. Treasury officials anticipate that the current strategy to restructure the remaining investments will result in a better return for taxpayers. According to officials, any savings achieved by writing off the remaining CPP assets and eliminating administrative costs associated with maintaining CPP would be limited, because much of the TARP infrastructure, such as staff resources, will remain intact for several years to manage other TARP programs. Treasury officials also noted that writing off the remaining assets, thereby not requiring repayment from the remaining institutions, would be unfair to the institutions that have already repaid their investment and exited the program. Treasury officials told us that they continue to have discussions with institutions about their plans to exit the program. Overall, the financial condition of institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011. As shown in figure 5, the median of all six indicators of financial condition that we analyzed improved from 2011 to September 30, 2016. However, some institutions show signs of financial weakness. As figure 5 illustrates, the median for the first three financial condition indicators—Texas ratio, noncurrent loan percentage, and net chargeoffs to average loans ratio—have decreased, which indicates stronger financial health. The median for the remaining three financial condition indicators—return on average assets, common equity Tier 1 ratio, and reserves to nonperforming loans—have increased, which also indicates stronger financial health. However, some institutions show signs of financial weakness. For example, 5 of the 11 institutions had negative return on average assets for the third quarter of 2016. Six institutions had a lower return on average assets for the third quarter of 2016, compared to the third quarter of 2011. The remaining institutions also had varying levels of reserves for covering losses, as measured by the ratio of reserves to nonperforming loans. For example, 4 institutions had lower levels of reserves for covering losses for the third quarter of 2016 compared to the third quarter of 2011. For 1 institution, four of the financial indicators had weakened from the third quarter of 2011 to the third quarter of 2016. Treasury officials stated that the remaining CPP institutions generally had weaker capital levels and poorer asset quality relative to institutions that had exited the program. They noted that this situation was a function of the life cycle of the program, because stronger institutions had greater access to new capital and higher earnings and were able to exit, while the weaker institutions had been unable to raise the capital or generate the earnings needed to exit the program. Of the remaining 11 CPP institutions as of December 31, 2016, 1 of the 9 required to pay dividends made the most recent scheduled dividend or interest payment. The 8 institutions that are delinquent have missed an average of 28 quarterly dividend payments, with 19 being the fewest missed payments and 32 being the most. Institutions can choose whether to pay dividends and may choose not to pay for a variety of reasons, including decisions they or their federal or state regulators make to conserve cash and capital. However, investors may view an institution’s ability to pay dividends as an indicator of its financial strength and may see failure to pay as a sign of financial weakness. Treasury officials told us that Treasury regularly monitors all institutions remaining in the program. For example, Treasury’s financial agent has provided quarterly valuations and credit reports for all of the institutions remaining in the CPP portfolio. In addition, Treasury has requested to attend the Board of Directors meetings at nine of the remaining institutions and has observed meetings at eight institutions. One institution has declined Treasury’s request. Treasury officials said that the agency currently does not plan to take any other actions with respect to its request to send a board observer to that institution but will continue to monitor the institution’s financial condition. As discussed previously, Treasury officials told us that they have continued to have discussions with institutions remaining in the program. We provided Treasury with a draft of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Treasury, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any 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. In addition to the contact named above, Karen Tremba (Assistant Director), Anne Akin (Analyst-in-Charge), William R. Chatlos, Lynda Downing, Risto Laboski, John Mingus, Tovah Rom, Jena Sinkfield, and Tyler Spunaugle have made significant contributions to this report.
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CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. The Emergency Economic Stabilization Act of 2008, as amended, includes a provision that GAO report at least annually on TARP activities and performance. This report examines (1) the status of CPP, including repayments, investments outstanding, and number of remaining institutions; and (2) the financial condition of institutions remaining in CPP. To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO reviewed information from Treasury officials to identify the agency's current efforts to wind down the program. Finally, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP. GAO provided a draft of this report to Treasury for its review and comment. Treasury provided technical comments that GAO incorporated as appropriate. The Department of the Treasury (Treasury) continues to make progress winding down the Capital Purchase Program (CPP). As of December 31, 2016, investments outstanding stood at almost $0.2 billion (see figure), which represents about 0.1 percent of the original amount disbursed. Treasury had received almost $200 billion in repayments, including about $25 million in 2016. Further, Treasury's returns for the program, including repayments and income, totaled about $227 billion, exceeding the amount originally disbursed by almost $22 billion. Of the 707 institutions that originally participated in CPP, 696 had exited the program, including 6 institutions in 2016. Treasury officials expect that the majority of the remaining institutions will require a restructuring to exit the program. Restructurings allow institutions to negotiate terms for their CPP investments. With this option, Treasury requires institutions to raise new capital or merge with another institution and Treasury agrees to receive cash or other securities, typically at less than par value. Treasury officials expect to rely primarily on restructurings because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. The financial condition of the institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011, but some institutions show signs of financial weakness. For example, 5 institutions had negative returns on average assets (a common measure of profitability) for the third quarter of 2016.
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Medicare covers skilled nursing and rehabilitative therapy for beneficiaries being treated in SNFs for conditions related to a hospital stay. The hospital stay must have been for at least 3 days and have occurred within 30 days before admission to the SNF. For beneficiaries who qualify, Medicare will pay for all necessary services, including room and board, nursing care, and ancillary services such as drugs, laboratory tests, and physical therapy, for up to 100 days under Medicare part A, the hospital insurance portion of Medicare. In 2001, beneficiaries are responsible for a $99 daily copayment after the 20th day of SNF care, regardless of the cost of services received. If the beneficiary stay is not covered under part A, Medicare will pay for covered services, provided the beneficiary has purchased part-B supplemental insurance. Part-B covered services include physician, hospital outpatient, and ancillary services (such as laboratory tests and physical therapy). For most part-B services, coinsurance is 20 percent of Medicare payments, but for services and procedures provided in hospital outpatient departments the coinsurance is higher. For over a decade beginning in 1986, Medicare part-A SNF spending rose dramatically—averaging 30 percent annually. This high growth was due to a number of factors. Implementation of a PPS for inpatient hospital care in 1983 created an incentive to discharge patients from the hospital sooner, which may have resulted in more beneficiaries needing SNF care. Indeed, the number of Medicare beneficiaries receiving SNF services more than doubled between 1983 and 1990. Technological advances also contributed to a change in the mix of services provided by some SNFs, allowing some SNFs to offer more complex services that had previously been delivered only in hospitals. For example, SNFs now admit beneficiaries who require ventilator support, specialized wound care, or intravenous medications following their hospital stay. Medicare’s cost-based reimbursement method for SNFs, which provided few checks on spending, combined with minimal program oversight, contributed to SNF expenditure growth. Medicare’s payment method controlled spending for routine costs, such as room and board, but spending for ancillary services and capital costs was not constrained. In most cases, ancillary services such as therapies were provided by outside suppliers that billed the SNFs. The outside suppliers’ charges, in turn, became the SNFs’ costs to provide these services. These costs were reimbursed by Medicare, so that the more SNFs spent, the more they were paid. Under this payment approach, SNFs had no financial incentive to furnish only clinically necessary ancillary services or to control their costs. As a result, SNFs provided more services and higher cost services to Medicare beneficiaries, making the SNF benefit one of the fastest growing components of Medicare. In response to rising SNF spending, the BBA required a PPS for SNF services, which HCFA began to phase-in on July 1, 1998. SNFs now receive a fixed daily payment to cover the cost of most services provided to beneficiaries during a part-A covered stay. Because not all patients require the same amount of care, per diem rates are adjusted to reflect differences in patient characteristics that affect the cost of care, as measured by the Resource Utilization Group (RUG) system. The RUG system uses clinical and other factors to assign each patient to 1 of 44 different RUG categories. These categories group patients who receive similar services and therefore have similar costs. The daily payment rate is based on the national average cost of treating beneficiaries in that RUG category. The PPS creates the incentive for SNFs to control their costs because they financially benefit if their costs are below their payments, but are liable if their costs exceed their payments. SNFs can control their costs by reducing the number of services delivered, changing to a less costly mix of services, or controlling the cost of each service. However, the PPS may encourage undesirable provider responses. SNFs may lower their costs by withholding medically necessary services, substituting lower quality services, or avoiding higher cost beneficiaries. In conjunction with the PPS, the BBA made each SNF financially responsible for almost all services provided during a part-A stay, including services rendered by an outside supplier. This “consolidated billing” provision minimizes the potential for duplicate billing and prevents facilities from reducing their costs by having outside providers furnish ancillary services for additional Medicare payment. Consolidated billing results in these services being covered under part A. Providers have been concerned that SNF payments are too low, but our previous work on the SNF PPS indicated that in aggregate, SNF payments are likely to cover the costs of care needed by beneficiaries. However, we have noted that refinements to the payment system are needed to better match payments with patient needs. These refinements would be similar to those routinely implemented in Medicare’s inpatient hospital PPS. The costs of certain services provided during a SNF stay were excluded from the calculation of the daily PPS payment and separate payments are made for these services under part B. Because additional payments are made for these services, SNFs do not have to cover the costs of these services under the daily payment rate. This removes any financial disincentive to the SNF for providing these services or admitting beneficiaries who require these services. Services were excluded from the PPS at three different junctures (see table 1). In mandating the implementation of a PPS, the BBA was explicit that payments to practitioners (such as physicians) not be included under the PPS, continuing the distinct payments Medicare generally makes for facility and for professional services. Next, in a 1998 interim final rule to implement the PPS, HCFA identified a set of facility services to exclude from the PPS rate. HCFA characterized these services—such as cardiac catheterization, magnetic resonance imaging (MRI), ambulatory surgery performed in an operating room, and emergency services—as beyond the scope of SNF care if they were provided in a hospital outpatient department. Because HCFA lacked statutory authority to exclude services provided during a part-A stay from the PPS, it used its administrative rule-making authority to redefine “residency status” so that beneficiaries are temporarily not SNF residents while they receive certain services in hospital outpatient departments. This site-of-service distinction enabled HCFA to exclude these services if they were provided in a hospital outpatient department. These facility services are then covered by Medicare under part B, even though they are being provided during a part- A eligible stay. Following the implementation of the PPS, HCFA added radiation therapy, angiography, and lymphatic and venous procedures to the list of services that are excluded when provided in a hospital outpatient department. All of these facility services are excluded from the SNF rate and are paid for separately under part B. Based on HCFA recommendations, in the BBRA Congress excluded another set of services from the daily rate. The BBRA excluded specific services within three broad categories (chemotherapy, radioisotopes, and customized prosthetic devices) and it excluded ambulance transportation for dialysis. The BBRA also granted the Secretary of HHS the authority to modify the list of excluded services within these three broad categories and specified that Medicare payments for these services would be determined in the same way as when these services are paid for under part B. HCFA generally relied on three criteria to guide the selection of services to be excluded from the PPS rate. To be excluded, services had to be high cost, infrequently needed by SNF beneficiaries, and not likely to be overprovided. The first two criteria identify services that a SNF might inappropriately avoid delivering or that could financially compromise a facility that did provide them. The third criterion minimizes the opportunities for facilities to boost Medicare revenues by providing services for separate payment. Almost all of the clinical experts we consulted agreed with the criteria and with the specific services excluded from the PPS. The majority raised concerns, however, about the adequacy of beneficiary access to certain services that were not excluded from the PPS. Without systematic review of cost and use data for all services provided to SNF residents, it is not possible to determine if all services that meet the criteria were excluded. The agency does not have, nor does it plan to develop, the data necessary to conduct a systematic evaluation, nor is it developing a strategy to periodically review the excluded services to ensure that services that meet the exclusion criteria are excluded and paid for separately from the PPS rate. In establishing its three criteria, HCFA excluded services that cost substantially more than the daily SNF payment rate because the SNF would have strong financial incentives to avoid providing them or admitting the beneficiaries who would be likely to need them. If the high- cost services were provided infrequently, the daily payment rate, which is based on average costs of care for a typical patient in a payment category, could be much lower than the actual costs of treating a patient needing some of these high-cost services. Facilities treating a disproportionate number of beneficiaries requiring these services could be disadvantaged compared to facilities that did not. Frequently provided high-cost services would boost average daily costs, so they would be reflected in the PPS rate. The third criterion, that the service not be easily overprovided, helps ensure that the PPS minimizes overall costs by reducing the opportunity for providers to seek additional reimbursements outside of the PPS rate. Facilities have an incentive to ensure that they provide only medically needed care for services that are included in the PPS rate. However, they may be less concerned about evaluating the need for a service when the service is paid for separately. Clinical consultants we interviewed generally agreed that the three criteria used to select services for exclusion are reasonable. When deciding on the service exclusions, HCFA lacked detailed service cost and use data to examine which services met the criteria. Instead, HCFA relied on its staff’s clinical and institutional expertise to identify services that appeared to meet the exclusion criteria. It also consulted with the medical directors of the contractors responsible for processing SNF claims and with providers. To elicit public input in developing its recommendations to Congress for services to exclude in the BBRA, HCFA held a public meeting to receive comments on the proposed rules and to gather suggestions for service exclusions. HCFA considered these suggestions and some—for example, related to ambulance transport for beneficiaries with ESRD—were adopted. But several services that were proposed for exclusion were kept in the rate because, according to agency officials, they did not appear to meet all three criteria (see table 2.) The clinical experts we consulted told us additional services should have been excluded from the PPS, though they agreed the current exclusions were reasonable. For example, all of the clinical experts we interviewed disagreed with the agency’s policy regarding ambulance transportation.They argued that without additional payment for ambulance transport associated with excluded services beneficiary access to certain services could be impaired. Most experts we interviewed also thought that ambulatory surgery for many beneficiaries, CT scans, and MRIs performed in nonhospital settings should be excluded from the PPS regardless of where they are provided. These services are excluded, however, only if they are provided in a hospital outpatient setting. There was less agreement about whether other services currently included in the daily rate should be excluded. Some thought that excluding services would lead to overprovision of certain services, such as modified barium swallows, orthotics, and hyperbaric oxygen therapy. However, more often we were told that beneficiaries who are likely to need services included in the daily rate may face barriers to SNF admission, or as residents, may not receive the care that they need. One expert noted that the current exclusions may encourage the substitution of a more expensive service for a less expensive alternative that remained in the daily rate. With medical advances and as providers respond to payment incentives, the services meeting the exclusion criteria are likely to shift. Certain services that are currently excluded may not warrant exemption in the future and, conversely, services that have not been excluded may at some time meet the exclusion criteria. Agency officials stated that they consider modifying which services are excluded in response to public comments they receive on proposed PPS regulations. However, objective and systematic evaluation of the excluded services is not possible without data on all services provided to beneficiaries in a SNF and the costs of these services. HCFA did not have these data available in developing the PPS and agency officials told us they do not plan to require SNFs to include on billing records the specific services provided during a part-A stay. These officials told us that complete data on all services would require considerable changes to provider billing requirements and to the computer systems that process the claims. CMS’s current exclusion policies have three unintended consequences. First, coverage has been shifted from part A to part B for excluded facility services that otherwise would have been covered in the daily rate, thereby increasing beneficiary liability. As a result of this shift in coverage and because certain services (primarily self-administered prescription drugs) are not covered under part B, beneficiaries would lose their coverage under Medicare if these services were excluded from the PPS. Therefore, HCFA did not consider excluding these services from the PPS. Second, excluding services based on where they are provided may encourage SNFs to refer beneficiaries to hospital outpatient departments, when other, often less costly ambulatory settings could be appropriate. This site-of- service incentive is likely to increase beneficiary liability and program spending. Finally, SNFs may have an incentive to classify certain services as emergencies so that they are excluded from the PPS and can be paid for separately. The BBRA provided that the amounts paid for excluded services are to be determined in the same way as when the services are paid for under part-B payment rules and that the funds for the services are to come from the part-A program. The law is silent on whether coverage for these services is to be determined under part A or part B. In its interpretation of the BBRA language, HCFA applied part-B coverage rules to the excluded services delivered during a part-A covered stay. In shifting coverage from part A to part B, excluded services are subject to part-B cost-sharing requirements. As a result, beneficiaries are responsible for the coinsurance for the excluded services, even though they would have had no additional cost-sharing obligations had the services remained in the PPS rate. The application of part-B coverage rules also restricts the services that HCFA considered excluding from the PPS to those covered under part B. Since the agency has no authority to pay for non-covered services, excluding them from the PPS and shifting their coverage to part B would eliminate any reimbursement for them. For example, no expensive medications were excluded from the rate because most self-administered prescription drugs are not covered under part B. Agency officials have noted that by keeping these services in the PPS rate, providers at least receive a higher daily payment rate than if these services were excluded. Yet the higher daily rate is unlikely to cover the costs of these services for any given patient, so that SNFs would have a financial incentive to avoid admitting anyone who is on expensive drug regimens. CMS’s policy of excluding certain services only when provided in hospital settings creates an incentive for SNFs to send beneficiaries to hospitals rather than other ambulatory settings to receive those services. The site- of-service policy raises concerns that SNFs will make decisions about where services will be provided based solely on financial considerations, even though other settings may be clinically appropriate. Almost all of the clinical experts we consulted disagreed with current policy to exclude ambulatory surgery procedures and imaging services (CT scans and MRIs) only when provided in hospital outpatient departments. The majority argued that nonhospital settings provide similar services and therefore should be treated the same as hospital outpatient departments, though several cautioned that hospitals may be a more appropriate treatment site for certain services provided to high-risk beneficiaries. Some of the clinicians commented that many nonhospital settings are much better than hospitals at handling frail elderly patients, for example, in terms of facilitating their transportation, admission, and discharge. This site-of-service policy also has important cost implications. Because Medicare’s payments are often higher for services provided in hospital outpatient settings compared with other ambulatory settings, Medicare expenditures may be higher as well. For example, in 2001, Medicare pays about $50 more for a CT scan of the head when furnished in an outpatient department of a hospital compared to one furnished in a freestanding imaging center in the same area. Likewise, beneficiary cost sharing is likely to be substantially higher when services are provided in hospital settings compared with other ambulatory settings. Furthermore, ambulance transport is paid for separately only in conjunction with the provision of the services excluded when provided in a hospital outpatient department. Most of the clinical experts we consulted disagreed with CMS’s current policy, saying that patients receiving some of the other excluded services, such as chemotherapy, are equally likely to need ambulance transport. Payments for medical emergencies are made outside of the PPS rate to help ensure appropriate treatment and protect SNFs that arrange for prompt medical care. Medicare’s definition of what services constitute “emergency” care is broad to provide important protection for beneficiaries. However, the exclusion for emergency services, combined with the broad definition of emergency, could invite abuse and increase Medicare expenditures. SNFs have a financial incentive to send beneficiaries to emergency departments for nonemergent care to receive separate payments for services that otherwise would be included in the PPS rate. The clinical experts we consulted uniformly agreed that the provision was open to overuse by SNFs. They gave examples of patients sent by SNFs to emergency rooms because they needed expensive drugs or time-consuming nursing services. While CMS is reviewing claims to make sure it is not paying twice for the same service, it is not analyzing whether the services should have been provided in the emergency room, nor is it identifying if particular providers appear to be overusing the emergency room exclusion. Congress and HCFA recognized that certain services needed to be excluded from the SNF PPS rate to help ensure beneficiary access to appropriate care and to financially protect the SNFs that take care of high- cost patients. The criteria used to identify services— high cost, infrequently provided during a SNF stay, and not likely to be overprovided—and the services currently excluded appear reasonable. Although the criteria and current exclusions appear reasonable, questions remain about whether beneficiaries have appropriate access to services that are covered in the rate or whether additional services should have been excluded. A second concern is that Medicare coverage for excluded facility services has been shifted from part A to part B, which will increase beneficiary liability and limit the services considered for exclusion. In addition, beneficiary liability and program spending may increase because certain services are excluded only when provided in hospital settings, thus discouraging the use of less expensive, clinically appropriate sites of service. Finally, though providing important broad protection for beneficiaries, excluding services from the PPS rate when they are provided in emergency rooms may lead to overuse of this setting and could unnecessarily increase Medicare spending. CMS does not plan to collect data on all services provided to beneficiaries during their SNF stays. Without these data, CMS will be hampered in its efforts to update the exclusions over time. The lack of information about services provided to beneficiaries during their SNF stays will also severely limit efforts to refine the payment system. An analysis of which settings (for example, SNF, hospital outpatient department, ambulatory care, and emergency department) are used to deliver services to SNF patients is also important to ensure that services are provided at the most efficient and appropriate site. Because coverage under part B increases beneficiary liability and limits the services that are considered for exclusion from the SNF PPS, Congress may wish to clarify whether Medicare coverage of facility services excluded from the SNF PPS rate should be provided under part B or under part A. To help ensure that services are provided in the most appropriate setting, we recommend that the Administrator of CMS exclude services from the PPS if they meet the exclusion criteria, regardless of where they are provided. To refine and adjust the SNF PPS and to ensure adequate beneficiary access to appropriate medical services, we recommend that the Administrator of CMS develop a strategy to collect and analyze cost and utilization data on all services provided to Medicare beneficiaries during a SNF stay. In its comments on a draft of this report (see app. I), CMS stated that in excluding services from the SNF PPS, it was concerned about maintaining the integrity of the PPS and the intent of the consolidated billing requirement that SNFs be responsible for essentially all residents’ services provided during a Medicare part-A covered stay. It disagreed with our recommendation to eliminate the site-of-service restriction on certain excluded services, stating that it has used its administrative authority to modify the BBRA provisions to the fullest extent possible and noted in its technical comments that this recommendation needed to be directed to Congress. It stated that these services require the intensity of hospital outpatient settings to be provided safely and effectively but added that it would consider reincorporating these services back into the SNF PPS rate once they could be provided safely elsewhere. In addition, CMS agreed with our analysis that excluding services from the PPS increases beneficiary liability. Further, CMS acknowledged the need for cost and utilization data but indicated that its previous efforts to collect such information met with intense industry opposition. Finally, in its technical comments it acknowledged that monitoring the use of emergency room services is important and may be a focus for program safeguard contractor activities. We agree with CMS that additional service exclusions must balance the need to protect SNFs and beneficiaries with the need to maintain the cost- control potential of the PPS and be mindful of the effect exclusions have on beneficiary liability. However, we disagree with CMS’s rationale regarding the site-of-service exclusions. Medicare currently covers these services in other settings for other beneficiaries. Although CMS used its broad administrative authority to redefine SNF residency status to exclude patients receiving certain services in hospital outpatient departments, it gave no reason as to why it could not use this same authority to redefine the residency status of beneficiaries receiving the same services in other settings. We believe that services should be provided in the most appropriate setting and that this site-of-service distinction will effectively limit the choice of where services are provided for beneficiaries in SNFs. Except to acknowledge that shifts in coverage increase beneficiary liability for these services, CMS did not address the shift in coverage from part A to part B that results from its policies. We believe part-B payment rules could be applied to excluded services while maintaining part-A coverage. In our Matters for Congressional Consideration, we state that Congress should clarify if coverage for facility services excluded from the PPS should be provided under part A or part B. Finally, while recognizing the importance of cost and utilization data, CMS raised concerns about the administrative burden this collection might impose. We believe that CMS should explore less burdensome ways to collect adequate data to evaluate the current service exclusions or additional exclusions proposed by the industry. Without a data collection strategy, it will be difficult to make informed decisions about refinements to the PPS over time. We are sending copies of this report to the Administrator of CMS and interested congressional committees. We will also make copies available to others upon request. If you have any other questions about this report, please call me at (202) 512-7119 or Carol Carter, Assistant Director, at (312) 220-7711. Cristina Boccuti and Dan Lee also contributed to this report.
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Congress and the Health Care Financing Administration recognized that certain services needed to be excluded from the skilled nursing facility (SNF) prospective payment system (PPS) rate to help ensure beneficiary access to appropriate care and to financially protect the SNFs that take care of high-cost patients. The criteria used to identify services--high cost, infrequently provided during a SNF stay and likely to be overprovided--and the services currently excluded appear reasonable. Even so, questions remain about whether beneficiaries have appropriate access to services that are covered in the rate or whether additional services should have been excluded. A second concern is that Medicare coverage for excluded facility services has been shifted from part A to part B, which will increase beneficiary liability. and program spending might increase because certain services are excluded only when provided in hospital settings, thus discouraging the use of less expensive, clinically appropriate sites of service. Finally, excluding services from the PPS rate when they are provided in emergency rooms may lead to overuse of emergency rooms, unnecessarily increasing Medicare spending. The Centers for Medicare and Medicare Services (CMS) does not plan to collect data on all services provided to beneficiaries during their SNF stays. Without these data, CMS will have difficulty updating the exclusions over time. The lack of information about services provided to beneficiaries during their SNF stays will also severely limit efforts to refine the payment system. An analysis of which settings (for example, SNF hospital outpatient department, ambulatory care, and emergency department) are used to deliver services to SNF patients is also important to help ensure that services are provided at the most efficient and appropriate site.
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In fiscal year 2014, GSA had over 1,500 federally owned buildings in its inventory. These buildings are occupied by a wide variety of federal agencies and are used to fulfill agency missions. In some instances, these buildings are old and in significant need of repair, renovation, or modernization. For example, according to GSA, the average age of its inventory is 49 years, and funding difficulties have led to deterioration of an already aged portfolio. In addition, GSA reports that more than a fourth of its inventory of federally owned buildings is listed in or eligible for the National Register of Historic Places, the nation’s listing of historic properties, and approximately half of this inventory is more than 50 years old. We have previously reported that deferring maintenance and repair can reduce the overall life of federal facilities, lead to higher costs in the long term, and pose risks to safety and agencies’ missions. GSA addresses the need for repairs and alterations in the buildings in its inventory through its repair and alteration program. The program is implemented through repair and alteration projects in all 11 of GSA’s regional offices. In fiscal year 2015, about $800 million was appropriated from the Federal Buildings Fund (FBF) to perform major and minor repairs and alterations. This is down slightly from the $1.1 billion appropriated in fiscal year 2014. GSA can make repairs or alterations on its own initiative or at the request of tenant agencies. Repairs or alterations made on GSA’s own initiative can be classified as “major”— that is, exceed the current $2.85 million threshold requiring preparation of a prospectus that is submitted to Congress for approval—or “minor.” Minor repair or alteration projects are those projects where the construction costs exceed $25,000 but are less than the prospectus level threshold. According to GSA officials, major repair and alteration projects, among other things, primarily focus on reducing the agency’s real property footprint, achieving energy savings, and improving the condition of and protection of public assets and occupants’ health and safety. Minor repair and alteration projects primarily focus on building repairs and equipment and other replacement issues and funding is requested as a lump sum dollar amount for the program. Financing for GSA-initiated repair and alteration work comes from the FBF. The FBF is a fund that is primarily financed by rents received from other agencies and it was authorized and established by the Public Buildings Act Amendments of 1972. Instead of GSA’s receiving direct appropriations, the FBF operates as the primary means of financing the operating and capital costs associated with federal space, although GSA sometimes receives supplemental appropriations to meet repair or new construction needs, such as appropriations received from the American Recovery and Reinvestment Act of 2009. Congress exercises control over the FBF through the appropriations process that sets annual limits—called obligational authority—on how much of the fund can be obligated for various activities. Repair and alteration work is also performed at the request of tenant agencies. This work is done under an RWA. RWA work can range from installation of equipment and security upgrades to major renovations of buildings. According to GSA’s RWA National Policy Document, to be accepted by GSA, an RWA must meet certain criteria, including that there is a bona fide need for the work, there is a preliminary scope of work that clearly describes the objectives and requirements of the customer request, a cost estimate, and proper funding certification and client signature. According to the RWA National Policy Document, the signed RWA authorizes GSA to execute the scope of the client agency request based on the authorized amount. The work is done on a reimbursable basis, and GSA bills the client agency as expenses are incurred. RWAs can be amended for changes in scope of work or authorized amounts as long as funding is legally available for that purpose. The RWA National Policy Document indicates there are four categories of RWAs— severable, non-severable, recurring, and non-recurring. Non-recurring RWAs, those RWAs that, according to GSA would be applicable to repair and alteration work, are established to cover an indefinite period that must not exceed 5 fiscal years from the end of the last year in which authority to obligate funds is available. In fiscal year 2014, GSA accepted about 3,400 RWA projects in federally owned buildings held by GSA with a total value of about $670 million. In general, about 75 percent of these projects were less than about $80,000; however, about 2 percent of the projects were valued at $1.9 million or higher. Planning and executing repair and alteration projects follows a process which is prescribed by GSA and other federal requirements. In general, this process has five phases: (1) pre-project planning, (2) project development and design, (3) contracting, (4) construction, and (5) project closeout (see fig. 1). GSA officials told us that, with the exception of certain checklists, prospectus-level RWA projects are treated the same as regular capital projects. The following briefly describes these five phases: Pre-project planning: According to GSA’s Project Planning Guide, the pre-project planning phase is where GSA develops the contextual knowledge of its inventory, facilities, budgets, and stakeholders. This is to enable GSA to identify potential projects, alternative solutions, and implementation strategies. Among other things, this phase would include facility condition and other special studies to assess the condition of GSA’s inventory and identify repair and alteration needs. Project development and design: This phase is where GSA begins to develop a repair and alteration project in more detail, to refine options, and to develop project management plans (PMP). According to GSA officials, project development also includes risk assessment, including documentation of known and likely unknown conditions. GSA’s Project Planning Guide indicates both a feasibility study, which defines project goals, scopes customer need, and assesses alternatives, and a program development study, which reviews previous project assumptions, plans, and budgets and proposes a construction budget and implementation strategy, would be prepared. In addition, cost estimates are to be completed, an initial Capital PMP is to be prepared, and preliminary design concepts are to be developed. A Capital PMP is a document that, among other things, defines the goals of a project and the organization required to accomplish the goals, as well as target budgets and schedules. According to GSA, the PMP should also set forth the acquisition strategy for the project and identify any constraints or risks associated with the project. Contracting: Acquisition planning begins in the early stages of project development and GSA’s Project Planning Guide recommends that as part of the feasibility study an implementation plan be prepared that identifies the best strategy for procuring a project. During the contracting phase, GSA solicits bids for architect/engineering services and repair and alteration work, evaluates these bids, and awards contracts. Construction: This phase is when the repair and alteration work is done. Construction includes construction of building and site improvements, arranging for utilities, and preparing for building occupancy. According to GSA officials, when unforeseen site conditions are discovered they are documented through contract change orders and modifications if they require a change to the contract. GSA uses both an electronic system and paper records to record contract changes. Contract change orders and modifications are also recorded in GSA’s electronic project management system. Project closeout: Project closeout is when the work is completed, final payments are made, and contracts are closed. GSA’s Acquisition Manual requires that appropriate steps be taken to ensure that physically completed projects are formally closed out in accordance with FAR and GSA requirements. Project closeout includes filing as- built drawings in project records. In January 2015, GSA began implementation of a Central Facilities Repository, which will be used to house project documents, including as-built drawings and other building information. To help address unexpected events or circumstances, including unforeseen site conditions, repair and alteration projects may include construction contingencies. According to GSA, contingencies are a part of total estimated project costs and cover costs that may result from incomplete design, unforeseen and unpredictable conditions, or uncertainties concerning project scope. GSA officials said contingencies are held by the owner (GSA) and are not part of the contract price at award. GSA currently recommends a 10 percent construction contingency for repairs and alterations and a 7 percent construction contingency for new construction. Contingencies are also applied to RWA projects, and according to GSA, prospectus-level repair and alteration RWAs would generally have a 10 percent construction contingency. According to industry stakeholders we interviewed, unforeseen site conditions are common in repair and alteration projects. Ten of the 11 stakeholders told us that unforeseen site conditions were very prevalent, and the other stakeholder said unforeseen site conditions were somewhat to very prevalent. Some of the stakeholders said the older the building the more likely unforeseen site conditions would be encountered. Officials from the Architect of the Capitol said they run into unforeseen site conditions on most of their projects. Officials from the U.S. Postal Service also said unforeseen site conditions are prevalent and most often appeared in paving projects, in underground storage tanks that were leaking, and in roof replacements with deteriorated decking. The industry stakeholders we interviewed identified the main types of unforeseen site conditions as: environmental hazards (such as asbestos and lead-based paint), and conditions being different than in building drawings or items not located where they were expected to be. Stakeholders also told us impacts of unforeseen site conditions are generally cost increases and schedule delays but the impacts can vary depending on the project. For example, one industry stakeholder told us typical impacts include costs, increased time and schedule delays, as well as the need for greater resources to mitigate impacts. Another stakeholder told us the impacts of unforeseen site conditions depend on how prepared the property owner is to address the condition and what was and was not planned for. GSA has also reported that unforeseen site conditions are common in repair and alteration projects. As noted earlier in this report, in 2001 the GSA Office of Inspector General examined 45 prospectus-level repair and alteration projects and found that in 10 projects completed in fiscal years 1998 and 1999 unforeseen site conditions accounted for about 43 percent of the cost growth in these projects. Officials in four of the five GSA regional offices we contacted described unforeseen site conditions as very prevalent and officials in one regional office said they were somewhat to very prevalent. Officials in this office went on to indicate that unexpected asbestos, lead, and mold can be found anytime during construction. The GSA officials identified hazardous materials as being one of the main types of unforeseen site conditions found. Although industry stakeholders and GSA told us unforeseen site conditions are common in repair and alteration projects, data on the overall extent and impacts of unforeseen site conditions are limited. For example, as discussed in more detail below, GSA officials told us that the agency tracks but does not analyze project change orders to determine whether they resulted from unforeseen site conditions. Most of the projects we reviewed had unforeseen site conditions. Specifically, unforeseen site conditions were encountered in 11 out of the 18 repair and alteration projects, including two of the three prospectus projects and nine of the 15 RWA projects (see table 1). As shown in table 1, the types of unforeseen site conditions varied. For example, in one prospectus project we reviewed—a project to, among other things, build a Pavilion at the Daniel P. Moynihan U.S. Courthouse in New York City—GSA discovered that the existing wall in the plaza area was reinforced concrete rather than a standard concrete masonry unit, which was what the building drawings indicated. The reinforced concrete made demolition of the wall more difficult and, according to the project manager, GSA spent approximately an additional $70,000 to pay for more labor to demolish the wall. However, despite the prevalence of unforeseen site conditions in our selected projects, our review showed that the overall impact of these conditions appeared largely limited. On nine of the 11 projects we selected that experienced unforeseen site conditions, the cost for remediating those conditions accounted for 1 to 5 percent of the project’s original construction contract award (see fig. 2). On one of the 11 projects—a prospectus project to, among other things, modernize the heating, ventilation, and air-conditioning system at the New Executive Office Building in Washington, D.C.—the cost for addressing unforeseen site conditions was approximately 6 percent of the original construction contract award. All of the reported costs for remediating unforeseen site conditions on the projects we reviewed were below the typical 10 percent construction contingency that GSA attaches to repair and alteration projects. In addition, the impacts on project schedules also appeared to be limited. Three of the 11 projects that encountered unforeseen site conditions experienced schedule delays. These ranged from 23 to 105 days due to the unforeseen site condition. For example, in an RWA project to replace power generators at a Social Security Administration center in Maryland, GSA encountered an unidentified masonry wall buried in the ground which interfered with the planned installation of wiring. As a result of this unforeseen condition, GSA issued a contract change order, which, among other things, called for the contractor to remove the wall. The removal added 23 days to the project’s schedule. In another project for the Social Security Administration, the existence of conduits in the ceiling that were unexpected led to a 75-day delay in the project schedule. Although only 3 of the 11 projects we reviewed appeared to experience schedule delays based on the records we reviewed, unforeseen site conditions may have caused additional delays. For example, some GSA project managers and contracting officers we interviewed said that extensions due to unforeseen site conditions can sometimes be absorbed into other project delays. As a result, it is not clear how much of a delay, if any, can be attributed to some unforeseen site conditions. Three of the RWA projects we reviewed were associated with larger projects that experienced unforeseen site conditions. None of the three RWA projects had unforeseen site conditions, but unforeseen site conditions were experienced in the three larger projects. The following provides information about these projects: One of the RWAs we reviewed was attached to a prospectus project to renovate the St. Elizabeth’s Campus in Washington, D.C., for the Department of Homeland Security. The RWA was to complete, among other things, tenant-requested improvements to building 49 on the campus. GSA officials told us the RWA we reviewed did not encounter any unforeseen site conditions. However, they also told us the building where the tenant improvements were being made had undergone extensive renovations prior to the start of the RWA project. GSA officials said that this earlier work essentially eliminated the risks of unforeseen site conditions on the RWA project since the building was gutted as part of the prospectus project. As part of the larger prospectus project, GSA encountered unforeseen site conditions, which included steel beams that were buried in the ground under the building. According to the GSA officials, the beams were unforeseen, deteriorated, and had to be replaced. GSA also abated lead-based paint and asbestos in the building prior to the start of the RWA project. GSA officials said remediating these unforeseen site conditions cost about $2.4 million. The estimated construction cost for the renovation work conducted as part of the prospectus project was $84.3 million. One RWA project called for an upgrade of security and other equipment for the Department of Homeland Security’s Customs and Border Protection at the San Ysidro Land Port of Entry in San Diego, California. This project was attached to a larger prospectus project to reconfigure and expand the entire land port of entry. According to the project manager, GSA did not encounter unforeseen site conditions during the RWA project we reviewed, but unforeseen site conditions were encountered on the prospectus project. This included greater than expected contaminated soil conditions that needed to be remediated. The remediation added almost $2 million to the cost of the prospectus project, which had an estimated site development cost of about $287 million. A third RWA project called for the renovation of spaces occupied by the U.S. Marshals Service at a federal building in Honolulu, Hawaii. This RWA was attached to a larger project to modernize the building funded through the American Recovery and Reinvestment Act of 2009. According to a GSA official, there were no unforeseen site conditions associated with the RWA project but unforeseen site conditions were experienced in the larger project. The project manager told us the cost to address the unforeseen site conditions was paid for from the larger project. Among the unforeseen conditions experienced were additional electrical conduits in the ceiling that were not on as-built drawings and were not discovered until the ceiling was demolished. The project manager estimated the cost to remediate the unforeseen site conditions was approximately $168,000. There can be a variety of causes for unforeseen site conditions in repair and alteration projects. For example, 5 of the 11 industry stakeholders we interviewed cited old, inaccurate, or not up-to-date building drawings as a cause of unforeseen site conditions. Among other causes cited by the stakeholders were the level or type of building maintenance, lack of information about previous renovations, construction, or use of hazardous materials, and an insufficient number, type, or scope of environmental tests or surveys. Some of the causes these stakeholders cited were similar to the possible causes of unforeseen site conditions we identified in the projects we reviewed based on project records and discussions with GSA officials (see fig. 3). For example, as the figure shows, for projects we reviewed, incomplete building drawings and lack of building information were among the possible causes for unforeseen site conditions. We also identified access issues, tenant alterations, and a building not built up to code as possible causes. We did not identify such things as hazardous materials, naturally occurring site conditions, and other causes (“other”) mentioned by industry stakeholders. We found that incomplete, inaccurate, or out-of-date building drawings— including as-built, electrical, and mechanical drawings—were the possible cause for the unforeseen site conditions in 9 of the 11 projects we reviewed that encountered unforeseen site conditions. For example, in an RWA project to build out a mobile workplace at the headquarters of the U.S. Agency for International Development in Washington, D.C., GSA encountered a sprinkler main and storm pipe that were placed lower in a portion of the ceiling than other pipes. According to a GSA official, the height of the water main and pipe were not shown in the building’s mechanical and electrical drawings. Furthermore, the pipes were not identified during a building survey. According to the official, that section of the water main and pipe were the only ones that were lower than the rest of the main and pipe in the ceiling. This unforeseen site condition caused GSA to redesign that section of the office to have the ceiling lowered by 6 inches in order to accommodate the system and pipe. In addition, lack of information about buildings was also a top possible cause. For 9 of the 11 projects we reviewed that encountered unforeseen site conditions, the possible cause was lack of information about a building’s condition. We defined this category to include unforeseen site conditions that resulted from such things as poor building records, as well as inadequate surveys and testing. For example, one RWA project we reviewed was for the renovation of the U.S. Forest Service Headquarters in Washington, D.C. to allow Forest Service staff to vacate leased space and consolidate in the headquarters building. According to project officials, during demolition, GSA discovered wood subflooring, and that the subflooring lacked fire retardant. Prior to demolition, GSA was not aware of the existence of the wood subflooring, because the wood floor was hidden by carpet. In addition, the building being renovated was built in 1880, and, according to the PMP, original construction documents were not available. In general, project officials said that there was no information available that would lead them to know that wood subflooring existed and that they did not expect to encounter wood subflooring. Remediation of the unforeseen site condition included installation of fire retardant on the floor and installation of a smoke detection system. GSA officials noted this project finished on schedule and within budget and any additional costs or time delays were absorbed by the schedule and budget contingencies. The possible causes of the remaining unforeseen site conditions were tenant alterations unknown to GSA (2 out of 11 projects), a building’s not being originally built up to code (2 of 11 projects), and difficulty faced by GSA in accessing the building for surveying and testing (4 out of 11 projects). GSA policies and procedures describe a variety of methods available to identify and assess potential risks on repair and alteration projects. These methods are used throughout the planning and execution of projects. The following describes some of the methods and tools used by project phase. Pre-project planning: GSA’s Project Planning Guide describes that during the pre-project planning phase GSA is to assess the condition of its facilities and prepare building reports and other studies (e.g., historic preservation plans) to establish project requirements. The Project Planning Guide also describes how site surveys and various tests may be conducted to identify possible project risks, such as hazardous materials. GSA officials told us reviews, employing private sector peers, are established during this phase, to assess the project team’s cohesion and the quality of communications to ensure that any issues that may arise during the project can be timely resolved so they do not turn into unforeseen conditions. Tools available during this phase include facility condition assessments and site surveys. Project development and design: GSA uses this phase to begin defining projects and their specifications as discussed earlier in this report. To begin identifying potential project risks the Project Planning Guide describes how GSA may conduct additional site surveys and tests and develop the initial PMP. The PMP includes a risk assessment that identifies and assesses potential risks to projects. In addition, GSA is to prepare a feasibility study and a program development study which, according to the Project Planning Guide, includes an assessment of potential project risks. A Project Definition Rating Index (PDRI) may also be prepared. GSA’s Capital Project: PM Guide describes the PDRI as, among other things, a tool used to identify a project’s readiness to move forward to the next phase, as well as identify areas of risk that may require better definition and possible mitigation. Finally, GSA’s Capital Investment and Leasing Program Call—a document used to identify requirements for repair and alteration projects to receive funding—requires various documents and checklists, including an Environmental Review Sheet and a Regional Office-Central Office Alignment checklist. These documents and checklists further identify and assess potential project risks. For RWA projects, GSA’s National Project Intake Guide, describes an initial risk determination tool that is used to assist project managers in assessing risks posed by a range of factors, including project size and complexity. Tools available during this phase include the PMP, feasibility study, program development study, PDRI, and RWA risk determination tool. Contracting: As part of this step, GSA officials told us that during project planning architect/engineering firms are hired to identify potential project risks through site investigations, preparation of project specifications, and initial designs. GSA’s Capital Projects: PM Guide states that GSA may also use Construction Managers to assist project teams in evaluating project execution and identify potential project risks. According to GSA officials, contract clauses are also incorporated into construction contracts to address unforeseen site conditions as they arise. Finally, construction contingencies are to be added to project cost estimates to cover risks that are not identified or mitigated in up-front planning. Tools available during this phase include contract provisions and construction contingencies. Construction: Risk identification and assessment during construction includes monitoring project budgets and schedules for cost growth or schedule delays and for “earned-value-management” purposes. GSA’s Capital Projects: PM Guide states that project status reports are prepared that include information on project spending and progress in meeting project schedules. According to the guide, this information is used to identify whether projects are experiencing difficulties and, if so, why. GSA officials told us that contract change orders and modifications are used to document unforeseen site conditions. Finally, GSA officials told us that lessons learned documents are sometimes prepared on repair and alteration projects. According to GSA’s Project Management Practices Guide, lessons learned documents should assess GSA’s risk response strategies. Tools available during this phase include monthly status reports, contract change orders and modifications, and lessons learned documents. Project closeout. GSA officials told us this step includes updating as- built drawings and filing them in project records. As mentioned, GSA’s Project Management Practices Guide also describes how project teams are to discuss projects and prepare lessons learned, including an assessment of GSA’s risk response strategies. Tools available during this phase include updated as-built drawings and lessons learned documents. Based on the interviews we conducted and project documentation we reviewed, GSA generally used at least one of the methods or tools to identify potential risks on 16 of the 18 projects we reviewed. To make this determination we reviewed such documents as PMPs and feasibility studies. GSA guidance calls for PMPs to identify constraints and project risks and to be used continuously throughout a project to identify risks. We found that, in general, GSA prepared PMPs for our selected projects. For example, GSA prepared PMPs for 13 of the 18 RWA and prospectus projects we reviewed. Five projects did not have PMPs—three were RWA projects associated with larger projects and no separate PMP was prepared for the RWA project, and for two projects, GSA officials were not sure if a PMP was prepared and were unable to provide documentation of a PMP. The project documents we reviewed generally discussed and identified potential project risks, including sections of the PMP that identified specific potential risks. Some of the projects we reviewed also had other risk identification documents such as feasibility studies, hazardous material surveys, and program development studies. Although GSA has risk assessment methods that were generally used on the projects we reviewed, these methods had inconsistent results in terms of identifying unforeseen site conditions that were later experienced. Based on the risk assessment methods, GSA identified a range of risks across the projects we reviewed and identified one or more types of unforeseen site conditions on at least 16 projects (see fig. 4). However, the risk assessment did not consistently identify the risk of specific unforeseen site conditions that materialized during 11 of the projects. The risks associated with unforeseen site conditions that GSA most often identified on the projects we reviewed included: access issues (7 projects): limiting access to areas may limit building information (for example, not being able to conduct site testing and evaluation in an occupied space may lead to an unforeseen site condition); presence of hazardous materials (9 projects); lack of accurate building drawings (4 projects); and other risks (11 projects), included risks that did not fall into other categories, including risks from procurement and acquisition methods. On 11 of the projects we reviewed that experienced an unforeseen site condition, GSA did not identify risks that later materialized. For example, an RWA project for the U.S. Marshals Service in Baltimore, Maryland, did not identify risks, including a lack of accurate building drawings, and the risk of tenant alterations in an occupied building, though these risks led to several unforeseen site conditions throughout the building. Another RWA project for the Social Security Administration in Richmond, California, identified the risk of hazardous materials through site testing but did not identify the risk of poor building drawings or a lack of access due to continued occupation during design and construction work. On five of the projects we reviewed that experienced unforeseen site conditions, GSA identified risks, and the project experienced those specific unforeseen site conditions later. For example, a renovation RWA project for the U.S. Marshal Service in Baltimore, Maryland, identified access issues early on as a risk to the project. According to GSA officials, there were limitations to reducing or eliminating this risk since the project was performed in a building with security concerns and while still occupied. In addition, on a prospectus project at the Daniel P. Moynihan U.S. Courthouse Building in New York City, an unforeseen site condition was experienced related to inaccurate as-built drawings even though the building drawings were reviewed in detail as part of a site inspection. On at least 16 of the projects, GSA both identified specific types of unforeseen site conditions, and these projects did not subsequently experience that type of unforeseen site condition during the project. For example, the presence of hazardous materials was recognized as a risk on nine of the projects, and none of these projects experienced an unforeseen site condition caused by the presence of hazardous materials. During a windows replacement RWA project for the Social Security Administration in Woodlawn, Maryland, GSA identified issues related to hazardous materials (asbestos) and re-scoped the project from replacing windows to caulking the windows. GSA officials told us this change was made so as not to disturb the asbestos. The re-scoping also resulted in a lower-cost project. While GSA officials noted that risks are important and that the risk assessment methods are designed to identify and assess risks associated with repair and alteration projects, we found that GSA is not analyzing project information it has available to identify risks that materialized and their impact on project costs and schedules. A good understanding of project risks and their impact on project costs and schedules is important. Standards for Internal Control in the Federal Government states that an agency’s approach to assessing risks should comprehensively identify agency risks using a variety of quantitative and qualitative methods and estimate the significance of those risks to help decide how to manage those risks and plan what actions should be taken. This approach is important in the context of repair and alteration projects given that, as discussed earlier, risks from unforeseen site conditions, if not mitigated, can increase project costs and potentially jeopardize project schedules. Similarly, GAO’s Cost Estimation and Assessment Guide states more specifically that agencies should, among other things, conduct root cause analysis; develop a list of likely risks for individual projects, including a list of emerging risk items that could impact costs and schedule; and perform trend analyses and monitor project risks to develop reliable and valid cost estimates. As discussed earlier in this report, development of cost estimates is an integral part of GSA’s project planning and execution process, as is establishing construction contingencies to cover the cost of unexpected events, such as unforeseen site conditions. Finally, the Project Management Institute’s Global Standard: Practice Standard for Project Risk Management also discusses the importance of identifying types of risks and their causes as part of project planning and management, as well as the effects of these risks on projects. GSA’s risk assessment methods for the most part are focused on identifying risks associated with individual projects and not identifying the risks related to change orders on a program-wide basis, or necessarily the cause of certain types of risks. GSA officials told us they use contract change orders and modifications to document unforeseen site conditions resulting in a change to the contract, and they track these for individual projects to assess project status in terms of budgets and schedules. They also told us they document reasons change orders or modifications are made using a findings-of-fact form. However, GSA officials also told us they do not analyze change orders or modifications to identify the primary causes of cost growth or schedule delays on repair and alteration projects, nor do they analyze the findings of fact to identify the primary reasons change orders or modifications were made. Furthermore, GSA officials told us this information is not used to identify types of risks experienced on repair and alteration projects or their impact on costs and schedules. GSA officials told us there are challenges to using contract change orders and modifications to identify the specific role unforeseen site conditions or other types of risks play in projects. Challenges include the inability to conduct searches of change orders, modifications, or findings of fact forms. According to GSA officials, neither the electronic project management system nor the electronic acquisition data system that GSA uses to record change orders and modifications, are structured to permit searches to identify instances where unforeseen site conditions were the reason for a change order or modification. Supporting documents which could indicate the possible cause of change orders or modifications also cannot be searched. Despite these challenges, GSA officials said they would be open to analyzing contract change orders and modifications, particularly if the analysis was focused on a sample of change orders and modifications and not all of them. One official told us such an analysis could help GSA identify when unforeseen site conditions occur and what their impact was during certain phases of projects. According to this official, most unforeseen site conditions are discovered during the demolition phase of projects after construction contracts have been awarded. Although the projects we reviewed largely had limited cost impacts resulting from unforeseen site conditions, change orders, including those from unforeseen site conditions, can impact the cost and schedule of repair and alteration projects. For example, during our design work for this study, we reviewed the renovation of the Department of Commerce’ headquarters building in Washington, D.C. This is an ongoing prospectus project with an estimated construction cost of $651 million. Unforeseen site conditions, including the presence of asbestos and lead paint, were experienced on this project and increased project costs by roughly $3 million. Also during the renovation of the Department of Interior’s headquarters building in Washington, D.C., another ongoing prospectus project we reviewed during our design work, contract change orders related to unforeseen site conditions resulted in $3 million in increased costs. The prospectus project had a current estimated construction cost of $282 million. GSA officials told us that unforeseen site conditions are driven by, among other things, the age of buildings. Therefore, as GSA’s average building age increases the risk of unforeseen site conditions and their related costs can be expected to increase. GSA officials also told us that unforeseen site conditions are a major driver of project risk in repair and alteration projects. We have previously reported that risk assessments allow project managers to identify and manage risks related to project’s costs, schedules, and other aspects and that assessing and mitigating risks reduces the probability of later encountering problems that can cause cost increases and schedule delays. Analyzing contract modifications and change orders to identify the causes of project cost growth and schedule delays would not only allow GSA to better know what role unforeseen site conditions play in project cost growth or schedule delays but also the magnitude of this type of risk. This information would then allow GSA to potentially better target these conditions in its risk assessments and potentially reduce the probability of encountering this risk in future repair and alteration projects. This approach will be important as the federally-owned buildings in GSA’s inventory continue to age and the probability of unforeseen site conditions increases. GSA’s repair and alteration program serves an important function in maintaining the inventory of federal buildings and facilities, and this program will continue to increase in importance as GSA’s inventory ages and continues to deteriorate. Repairs and alterations are expensive (over $1.2 billion to address immediate deferred maintenance and repair needs as estimated by GSA), and, therefore, it is imperative that the program operate as efficiently and effectively as possible and that costs, schedule delays, and project changes are minimized to the greatest degree possible. This strategy includes identifying and assessing major types of risks to projects, including those from unforeseen site conditions. Both industry stakeholders and GSA officials have said that unforeseen site condition risks are common, particularly in aging buildings, and can lead to increases in project costs and schedule delays. Of equal importance is identifying and understanding the cause of unforeseen site conditions, such as poor quality building drawings, so these causes can be addressed and not lead to unforeseen site conditions in the future. GSA has risk assessment methods that consider potential risks, including those from unforeseen site conditions. GSA also has a number of tools, such as PMPs and project-rating indexes that help the agency identify and assess risks. However, GSA can improve how it identifies types of project risks and minimize their impacts on repair and alteration projects. In particular, GSA can better analyze the information it has available, like contract change orders and modifications, an approach that would allow a more comprehensive identification of types of project risks, the role these risks play in repair and alteration projects, and the impacts these risks have on project costs, schedules, or scope of work. GSA is also not assessing the information it has available to identify the cause of unforeseen site conditions and identifying steps that could be taken to address these causes in order that they do not lead to unforeseen site conditions in the future. Such an analysis could also have broader benefits, including allowing GSA to identify if unforeseen site conditions or other types of risks are common to particular types of projects or locations, and if there are common causes for certain types of risks. This type of analysis would better inform GSA’s risk assessments and help minimize cost and other project impacts from unforeseen site conditions or other types of risks. To improve risk assessments for repair and alteration projects, we recommend that the Administrator of GSA develop and implement a plan to periodically analyze information GSA already collects, for example, based on a representative sample of repair and alterations projects, in order to: identify the specific impacts unforeseen conditions have had on project costs, schedules, and scope of work; analyze the causes of these conditions for those projects that experienced unforeseen site conditions; and identify actions that will be taken to address the potential causes of unforeseen site conditions. We provided a draft of this product to GSA for comment. In its written comments reproduced in appendix III, GSA agreed with the recommendation and said it will develop a plan to address it. GSA also provided technical comments that were incorporated, as appropriate. We will send copies of this report to appropriate congressional committees and the Administrator of the General Services Administration. In addition, we will make copies available to others upon request, and the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at 202-512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of this report were to (1) identify information about the extent, impact, and cause of unforeseen site conditions during selected repair and alteration projects in federally owned buildings held by the General Services Administration (GSA) and to (2) determine how GSA identifies and assesses the risks of unforeseen site conditions. The scope of the work was limited to buildings and facilities that are federally owned and held by GSA. We did not include leased buildings or facilities since these could be owned or managed by private sector entities and may not necessarily be under GSA’s jurisdiction related to repair and alteration work. In addition, in order to determine how GSA identifies project risks we focused on projects where GSA played a role in planning and developing projects. To identify information about the extent, impact, and cause of unforeseen site conditions during selected repair and alteration projects, we selected 18 repair and alteration projects across four GSA regions (National Capital, Northeast and Caribbean, Mid-Atlantic, and Pacific Rim). The projects included three prospectus projects and 15 reimbursable work authorization (RWA) projects. The prospectus projects were all those projects that received an appropriation from fiscal years 2010 through 2013. The RWA projects also received funding over this period. We chose this period to help ensure projects selected had progressed into the construction phase (where unforeseen site conditions might be identified) and yet were recent enough that electronic records were more likely to be available. To select repair and alteration projects to review, we applied four criteria: (1) project cost, (2) range of project years, (3) projects in construction, and (4) geographic diversity. There were a total of six prospectus projects that received funding from fiscal years 2010 through 2013. These included the following: East Wing Infrastructure Systems Replacements (Washington, D.C.) New Executive Office Building (Washington, D.C.) Eisenhower Executive Office Building (Washington, D.C.) Daniel P. Moynihan U.S. Courthouse (New York, NY) West Wing Design Phase II (Washington, D.C.) West Wing/East Wing Infrastructure Systems Replacements (Washington, D.C.) After additional research and discussion with GSA, we excluded three projects. This was because one of the projects was solely for design work (West Wing Design Phase II), not construction. According to GSA, the other two projects (West Wing Infrastructure Replacements and West Wing/East Wing Infrastructure Replacements) were combined. We selected the remaining projects for review. The RWA projects we reviewed were selected based on a list of RWA projects provided by GSA. According to GSA, the list was intended to be all RWA projects between fiscal years 2010 and 2013 that were for tenant repairs and alterations and were in federally owned buildings held by GSA. GSA has different types of RWA projects. For purposes of this study we reviewed A, B, and N-type RWAs. To select specific projects we first reviewed the list to ensure no single RWA project was represented multiple times in the data. We then combined and sorted the cost information of all RWA and prospectus projects and excluded all projects below a dollar-value cutoff ($2 million) and sorted the projects into GSA regional offices. We selected the three regional offices that accounted for the highest dollar amount of projects. Finally, we selected all relevant prospectus projects (see discussion above) and randomly selected 15 RWA projects from each of three regional offices. We selected more RWA projects than we planned to review to account for potential data reliability issues we might encounter. In selecting RWA projects, we excluded projects that based on their descriptions appeared to be for services and not construction, and we excluded projects that appeared to involve multiple sites. We asked GSA to verify the final list of RWA projects to, among other things, ensure they were in federally owned buildings held by GSA. We made additional adjustments based on GSA’s verification. We interviewed GSA project managers and contracting officers for the projects we selected and reviewed project documents to determine if the projects encountered unforeseen site conditions. We also interviewed these officials to identify the nature of any cost, schedule, or scope impacts from the unforeseen site conditions encountered. Finally, we reviewed project documents, including contract modifications, to obtain information about the unforeseen site conditions encountered. This included a description of the unforeseen condition, the cost to remediate the condition, and any schedule delays experienced. Where applicable, we asked GSA to clarify any discrepancies between what was in the documentation provided and what we were told in interviews. To identify the causes of unforeseen site conditions, we discussed with project managers and contracting officers the actual unforeseen site conditions experienced and their potential causes. Working independently, two analysts then coded these potential causes into one of nine different categories of unforeseen site condition causes—lack of building condition information, hazardous materials, tenant alterations, lack of accurate drawings, building not built up to code, technology changes over time, naturally occurring site conditions, access issues, and other. These nine categories were developed by reviewing the responses of (1) knowledgeable GSA officials, (2) officials in two government agencies (U.S. Postal Service and the Architect of the Capitol), and (3) individuals/representatives who were knowledgeable and experienced in private sector practices for repair and alteration projects. The results of our work are not generalizable to the universe of repair and alteration projects. Finally, we contacted 19 organizations and individuals (referred to in this report as industry stakeholders) with knowledge of or experience in the construction industry (see table 2). These contacts included industry trade associations as well as two construction companies that had done repair or alteration work for GSA and two public sector organizations—Architect of the Capitol and the U.S. Postal Service. Our selection of industry stakeholders was based on three methods: (1) asking GSA officials who would be the most appropriate to contact, (2) asking industry stakeholders about appropriate organizations or individuals to contact, and (3) obtaining referrals from various professional organizations. Of the 19 organizations and individuals contacted, we had an interview or some other type of positive contact from 14 organizations/individuals. Of the 14 for which we had a positive contact, we had an interview or received written responses to GAO questions from 11. In the interviews we discussed such issues as the prevalence of unforeseen site conditions, the types of conditions encountered, and the causes of unforeseen or differing site conditions. We also discussed potential impacts on projects such as cost increases or schedule delays. The results of our work are not generalizable to the entire universe of industry stakeholders. To identify how GSA identifies and assesses the risks of unforeseen site conditions, we reviewed documents related to GSA’s capital-planning and execution process and reviewed planning and risk assessment documents for projects we reviewed. Among the planning and project management documents we reviewed were GSA’s Capital Planning Guide, Capital Projects: Project Management Guide, and Project Management Practices Guide. We also reviewed GSA’s Fiscal Year 2017 Capital Investment and Leasing Program Call (Program Call), GSA’s P-120, Project Estimating Guide (P-120), GSA’s RWA National Policy Document, and National Project Intake Guide. The Program Call document outlined the requirements that must be met for a project to be considered for inclusion in GSA’s Capital Investment Program and the P-120 document, among other things, discussed the technical and administrative requirements for cost estimating and cost management tasks involved with construction projects’ planning and execution stages. GSA’s RWA National Policy Document states that it is the primary resource within GSA for RWA policy and use of RWAs. The National Project Intake Guide establishes national guidance for the intake of all Public Buildings Service projects and, among other things, supplements information in the Project Management Practices Guide. Finally, we reviewed other GSA policy and procedure documents, including GSA’s policy for using Project Definition Rating Indexes, GSA’s procedures for environmental account coding, and GSA’s Initial Risk Determination tool. We assessed whether or not GSA’s practices and procedures on the 18 projects we reviewed generally used a risk assessment tool as part of the project development process. The analysis of the risk assessment process and use of risk assessment tools included a review of documentation related to the project and GSA processes but was primarily focused on the project management plan (PMP), which is a key document that includes a risk assessment. Among the documents we reviewed were PMPs, feasibility studies, and program development studies. We interviewed GSA officials, both at headquarters and in five GSA regional offices (the four regional offices associated with the projects we selected plus Region 4, the Southeast-Sunbelt region), about GSA’s overall risk assessment methods and tools. These regions were selected since they accounted for about 80 percent of the funding for the RWA projects from which we selected projects to review. We also interviewed GSA project managers about how they identified and assessed risks for the specific projects we reviewed. Our analysis of project risks and causes of unforeseen site conditions included a comparison of the possible causes of unforeseen site conditions that were experienced on the 18 projects we reviewed with whether those same causes were identified as part of project planning. As discussed earlier, we discussed with project managers and contracting officers the possible causes of unforeseen site conditions encountered and coded the causes into nine different categories. We also reviewed such documents as PMPs, feasibility studies, program development studies, and hazardous materials studies for the projects that submitted documentation to identify the potential project risks and their causes identified during project planning. We then compared the potential project risks identified during project planning with the actual unforeseen site conditions and their potential causes that were actually experienced as coded into the nine categories of causes. This resulted in a grouping of projects based on whether or not project planning identified the risk and whether or not they experienced a related unforeseen site condition. As part of our analysis, we did not assess whether GSA did or did not comply with its stated risk assessment methods or tools, use the appropriate risk assessment tool or method, or correctly identify appropriate risks as part of its assessment. We also did not assess whether or not additional risks could or should have been identified by GSA as part of the risk assessment process. Rather, we reviewed risk assessment documents, such as PMPs and feasibility studies for each of our projects to determine whether these documents were prepared and the types of risks identified. In some instances, we used our professional judgement to determine the type of risk identified by GSA based on the language or intent contained in the source document. As part of evaluating how GSA identifies and assesses project risks to determine if improvements could be made, we reviewed Standards for Internal Control in the Federal Government and GAO’s Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs (Cost Guide). The Standards for Internal Control in the Federal Government provides the overall framework for establishing and maintaining an effective internal control system for the federal government. Among other things, the Cost Guide addresses generally accepted best practices for ensuring credible program cost estimates. It also discusses the role of risks and risk assessment in developing cost estimates. Finally, we reviewed the Project Management Institute’s (PMI) Global Standard: Practice Standard for Project Risk Management. PMI is a not-for profit professional membership organization for the project, program, and portfolio management profession. Among other things, this organization issues standards and conducts academic research to improve the profession of project management. The Global Standard: Practice Standard for Risk Management discusses principles of effective risk management, including risk identification and risk assessment. We conducted this performance audit from February 2015 to March 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. Project cost (in millions) Washington, D.C. New Executive Office Building Washington, D.C. Project cost (in millions) Washington, D.C. Washington, D.C. Washington, D.C. Washington, D.C. Renovation to upgrade all major building systems in order to accommodate the consolidation and relocation of employees from Rosslyn, Virginia, to Washington, D.C. Washington, D.C. Construction of firing range For Prospectus projects, project costs are the total amount appropriated or apportioned for the project and for reimbursable work authorization projects, the project costs are the original award amount and any amendments to the original award. In addition the individual named above, other key contributors to this report were Nancy Lueke, Assistant Director; Russell Burnett; Jenny Chow; Richard Jorgenson; Hannah Laufe; Malika Rice; Amy Rosewarne; Charles Schartung; and Crystal Wesco.
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GSA annually spends hundreds of millions of dollars making major and minor repairs and alterations to the more than 1,500 federally owned buildings that it holds. GAO's past work has indicated that GSA sometimes encounters “unforeseen site conditions”—conditions that are different from what was expected—in performing this work. Unforeseen conditions can add both time and cost to repair and alteration projects. GAO was asked to review issues related to tenant repair and alteration projects. This report addresses (1) information about the extent, impact, and cause of unforeseen site conditions on selected projects, and (2) how GSA identifies and assesses the risks of unforeseen conditions. GAO reviewed 18 non-generalizable repair and alteration projects funded from fiscal year 2010 to 2013, valued at $2 million or more; interviewed GSA project managers and contracting officers about these projects; reviewed project documents; and interviewed a non-generalizable sample of organizations and individuals knowledgeable about the construction industry (industry stakeholders). Both industry stakeholders and General Services Administration (GSA) officials told GAO that unforeseen conditions in repair and alteration projects are common. Such conditions, for example, included an unknown wood subflooring discovered during demolition work. Among the impacts identified by the stakeholders were increased project costs and schedule delays. In general, data are limited on unforeseen conditions since GSA does not analyze this type of information. Most of the repair and alteration projects GAO reviewed—11 of 18 projects--experienced an unforeseen condition. The overall impact of the unforeseen conditions on the 18 projects GAO reviewed was largely limited. On 9 of the 11 projects that experienced such conditions, the cost to remediate them accounted for 1 to 5 percent of the project's original construction contract award amount, and on one project the cost was approximately 6 percent. These amounts were below the typical 10 percent construction contingency GSA adds to project costs. Schedule impacts were also limited: 4 of the 11 projects experienced delays ranging from 23 to 105 days. GAO also found that three projects reviewed that did not experience unforeseen conditions were attached to larger projects that did experience these conditions. In two of these larger projects the cost increases from unforeseen conditions were about $2 million each. Incomplete building drawings and lack of building information were among the possible causes of the unforeseen conditions experienced in the projects GAO reviewed. GSA has a variety of methods to identify and assess risks of unforeseen conditions. GSA's Project Planning Guide states that, among other things, facility condition assessments and site surveys should be conducted initially. GSA guidance also calls for preparation of a project management plan (PMP), which includes a risk assessment matrix. GAO found that, in general, GSA used at least one of its risk identification methods on the projects reviewed. For example, GAO found that GSA prepared PMPs for 13 of the 18 projects reviewed. Three of the remaining five projects were attached to larger projects that had PMPs and GSA was unable to provide a PMP for the other two projects. However, GSA's risk identification was sometimes inconsistent with unforeseen conditions that were actually experienced. For example, on 11 of the projects, GSA did not identify risks that later materialized during the project. The Standards for Internal Control in the Federal Government state that agencies should comprehensively identify risks using a variety of quantitative and qualitative methods. GSA officials told GAO that contract change orders are used to document unforeseen conditions that result in a change to the contract, but that these change orders are not analyzed to identify what role these conditions represent on projects or their causes or impacts. As shown in the projects GAO reviewed, unforeseen conditions can delay schedules and increase project costs—in some cases in the millions of dollars. Analyzing project information such as change orders would allow GSA to better know what role unforeseen conditions play in repair and alteration projects and the magnitude of this risk. GAO recommends that GSA develop and implement a plan for analyzing information it collects to identify the role of unforeseen conditions in repair and alteration projects and the specific causes and impacts of these conditions. GSA agreed with the recommendation and the agency stated it will develop a plan to address it.
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JWST is a large, deployable, infrared-optimized space telescope intended to be the scientific successor to the Hubble Space Telescope. JWST is designed for a 5-year mission to find the first stars and trace the evolution of galaxies from their beginnings to their current formation. It is intended to operate in an orbit approximately 1.5 million kilometers—or 1 million miles—from the Earth. With its 6.5-meter primary mirror, JWST will be able to operate at 100 times the sensitivity of the Hubble Space Telescope. The JWST’s science instruments require extremely cold temperatures, so a tennis-court-sized sunshield will be used to protect the mirrors and instruments from the sun’s heat and allow them to observe very faint infrared sources. The Hubble Space Telescope operates primarily in the visible and ultraviolet regions of the electromagnetic spectrum. The observatory segment of JWST includes several elements (Optical Telescope Element (OTE), Integrated Science Instrument Module (ISIM), and spacecraft) and major subsystems (sunshield, cryocooler). These elements and major subsystems are being developed through a mixture of NASA, contractor, and international partner efforts. See interactive graphic, figure 1. For more information on the JWST’s organizational structure, see appendix III. Given JWST’s complexity, it requires a multiyear integration and testing schedule that includes five separate periods over the course of almost 7 years to build the observatory in preparation for launch. See figure 2 for the planned integration and test flow for JWST. For the majority of the work remaining, the JWST project will rely on three contractors: Northrop Grumman, Exelis, and the Space Telescope Science Institute (STScI). Northrop Grumman plays the largest role, developing the sunshield, the OTE, the spacecraft, and a cooling subsystem for the Mid-Infrared Instrument (MIRI). Northrop Grumman performs most of this work under a prime contract with NASA, but its work on the MIRI cooler is performed under a separate subcontract with the Jet Propulsion Laboratory (JPL). Exelis is manufacturing the test equipment, equipping the test chamber, and assisting in the testing of the optics of JWST. Finally, STScI will collect and evaluate research proposals from the scientific community and will receive and store the scientific data collected by those observations, both of which are services that they currently provide for the Hubble Space Telescope. Additionally, for JWST, STScI will develop and operate the ground system that manages and controls the telescope’s observations on behalf of NASA. MIRI—one of JWST’s four instruments in the ISIM—requires a dedicated, interdependent two-stage cooler subsystem designed to bring the infrared light detector within MIRI to the required temperature of 6.7 Kelvin (K), just above absolute zero. This major subsystem is referred to as a cryocooler. The cryocooler moves helium gas through 10 meters (approximately 33 feet) of refrigerant lines from the spacecraft located on the sun-facing surface of the JWST observatory to the colder, shaded side where the ISIM is located. According to NASA officials, a cooler of this configuration has never been developed or flown in space before. See figure 3 for a depiction of the cryocooler on JWST. Project officials stated that the MIRI cryocooler is particularly complex and challenging because of the relatively great distance between the cooling components and the need to overcome multiple sources of unwanted heat through the regions of JWST before the subsystem can cool MIRI’s detector. Specifically, the cooling components span temperatures ranging from approximately 300K (about 80 degrees Fahrenheit, or room temperature) where the spacecraft is located on the sun-facing surface to approximately 40K (about -388 degrees Fahrenheit) within the ISIM. Complex development efforts like JWST must plan to address a myriad of risks and unforeseen technical challenges. To do this, projects reserve extra time in their schedules—which is referred to as schedule reserve— and extra money in their budgets–which is referred to as cost reserve. Schedule reserve is extra time in the project’s overall schedule that is allocated to specific activities, elements, and major subsystems in the event there are delays or to address unforeseen risks. Each JWST element and major subsystem has been allocated schedule reserve. When an element or major subsystem exhausts schedule reserve it may begin to affect schedule reserves on other elements or major subsystems whose progress is dependent on prior work being finished for its activities to proceed. The element or major subsystem with the least amount of schedule reserve determines the critical path for the project. Any delay to an activity that is on the critical path will reduce schedule reserve for the whole project, and could ultimately impact the overall project schedule. Cost reserves are additional funds that can be used to address unanticipated issues for any element or major subsystem. Cost reserves are used to mitigate issues during the development of a project. For example, cost reserves can be used to buy additional materials to replace a component or, if a project needs to preserve schedule reserve, reserves can be used to accelerate work by adding extra shifts to expedite manufacturing and save time. NASA’s Goddard Space Flight Center (Goddard)—the NASA center with responsibility for managing JWST— has issued requirements that at project confirmation establish both the level of cost and funded schedule reserves that projects must hold. After this point, a specified amount of schedule reserve continues to be required throughout the remainder of development. Prior to 2011, early technical and management challenges, contractor performance issues, low level cost reserves, and poorly phased funding levels caused JWST to delay work, which contributed to significant cost and schedule overruns. After years of requirements changes, cost growth, low reserve funding, deferred work, and launch delays, the Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies requested an independent review of JWST. NASA commissioned the Independent Comprehensive Review Panel, which issued its report in October 2010, and concluded that JWST was executing well from a technical standpoint, but that the baseline funding did not reflect the most probable cost with adequate reserves in each year of project execution, resulting in an unexecutable project. Following this review, the JWST program underwent a replan in September 2011 and Congress in November 2011 placed an $8 billion cap on the formulation and development costs for the project. On the basis of the replan, NASA rebaselined JWST with a life-cycle cost estimate of $8.835 billion that included additional money for operations and a planned launch in October 2018. The revised life-cycle cost estimate included a total of 13 months of funded schedule reserve. In the President’s fiscal year 2013 budget request, NASA reported a 66 percent joint cost and schedule confidence level for these cost and schedule baselines. A joint cost and schedule confidence level, or JCL, is the process NASA uses to assign a percentage to the probable success of meeting cost and schedule estimates and is part of the project’s estimating process. In January 2014, GAO found that the JWST project was generally executing to its 2011 revised cost and schedule baselines, but that the most recent work was taking longer than planned. We noted that roughly half of the project’s cost reserves for fiscal years 2014 and 2015 had been committed before those years had even begun, which would constrain JWST’s cost reserve spending in the near term. We reported that while the cryocooler subcontractor was making technical progress, cryocooler development remained an ongoing challenge as there were still unresolved technical issues related to its performance, and its schedule was both optimistic and unreliable. We also found that three of the element and major subsystem schedules the project was using to manage were unreliable and did not meet best practices, which called into question the reliability of the integrated master schedule that is built from those schedules. In 2012, we reported that the accuracy of the project’s cost estimate was lessened because the summary schedule used for the joint cost and schedule confidence level was not detailed enough to determine how risks were applied to critical project activities. We recommended that NASA conduct an updated joint cost and schedule risk analysis to address the issues we identified and use more detailed cost information to adjust its cost estimates. While NASA concurred with our recommendation, officials subsequently stated that they did not plan to conduct an updated joint cost and schedule confidence level analysis, and that the project’s monthly analyses were sufficient for the project’s needs. Thus, we expressed concern in our January 2014 report that NASA’s continued lack of up-to-date cost estimates that incorporate new risks which had emerged since 2011 would inhibit NASA’s ability to effectively monitor its contractors’ progress. We proposed that Congress consider requiring NASA to conduct an updated joint cost and schedule confidence level analysis to address this concern. The JWST project has 11 months of schedule reserve remaining—more than required by Goddard standards. In the case of JWST, however, the most significant risks lie ahead in the remaining 4 years, as the project must complete five integration and test periods, three of which have not yet started. Essentially, the risk is defined by bringing all of the complex JWST elements and major subsystems together, testing them, and resolving problems when there is limited schedule left for resolution. All of JWST’s five elements and major subsystems have just weeks of reserve left before their schedules become pacing items on the project’s critical path, potentially reducing the reserve further. More milestones established annually for the various elements and major subsystems have been delayed or deferred during fiscal year 2014 than in the previous 3 years following the replan. For example, the MIRI cryocooler deferred seven milestones until fiscal year 2015 as a result of manufacturing and development delays. Schedule risks are further heightened as the project entered fiscal year 2015 with approximately 40 percent of its cost reserves already committed, leaving fewer dollars available to mitigate other threats to the project schedule. The JWST schedule reserve was diminished this year following the need to address several significant technical challenges across the project’s various elements and major subsystems, and as a result of the October 2013 government shutdown. Specifically, in the past 14 months, the overall project schedule reserve declined from 14 months to 11 months.With less than 4 years until the planned launch in October 2018, the project’s overall schedule reserve is above the Goddard standard and JWST plan—which was set above the Goddard standard and included more reserve than required—for schedule reserve at this point in the project. The scale of JWST’s integration and test effort, however, is more complex than most NASA or Goddard projects. For example, JWST has five major integration and test periods to build the telescope, test the optics, integrate the various elements and major subsystems, and ensure they work properly together. While JWST’s total integration and test cycle runs almost 7 years, the next longest integration and test cycle for a current project managed by Goddard Space Flight Center is over 3 years and the average length of integration and testing for all other current Goddard projects, excluding JWST, is just over 2 years. The JWST project has used over 20 percent of the schedule reserve it held in the past 14 months with almost 4 years remaining for its integration and test effort, where GAO’s prior work has shown and NASA has concurred problems are commonly found and schedules tend to slip. All individual element and major subsystem schedules have lost schedule reserve since last year. While some use of schedule reserve is expected, this widespread use has resulted in every JWST element and major subsystem schedule being within weeks of becoming the critical path of the project, before most have entered their integration and testing periods. The proximity of all of the element and major subsystem schedules to the critical path means that an issue on any of the schedules may reduce the overall project schedule reserve further, which could then put the overall project schedule at risk. As a result of this, the project has less flexibility to choose which issues to mitigate. As an illustration, the critical path has switched numerous times to several different schedules as a result of using schedule reserve in the past year. See the different amounts of schedule reserve remaining on all elements and major subsystems, their proximity to the critical path and the total schedule reserve for the critical path in figure 4. Delays were also evident in key milestone slips where more than half of the project-identified key milestones for fiscal year 2014 were completed late or deferred to fiscal year 2015—the most in any year since the replan. Seven of the 11 deferred milestones are related to the development of the cryocooler. The other 4 are due to delays in reviews or assembly for components of the sunshield and spacecraft and late completion of some integration activities for the chamber to test the optics of JWST in 2016. See figure 5 for a list of total milestones and their status. The project has mitigated a number of issues that could have further impacted the status of schedule reserve by reorganizing work to obtain efficiencies and maintain schedule or stem further losses. For example, a component of the cryocooler had some planned acceptance testing reorganized along with a reduction in the length of time of the testing to accommodate delays. However, with further progression into subsequent integration and test periods, flexibility will be diminished because work during integration and testing tends to be more serial. This is particularly the case with JWST given its complexity. To some extent, projects have the ability to use cost reserves to maintain schedule. For example, if work is taking longer than expected, a project may be able to fund a second shift of work to speed it up and maintain schedule. In the short term, however, this option may be limited for JWST project officials because approximately 40 percent of the project’s fiscal year 2015 cost reserves were already committed prior to the start of the fiscal year. As such, one of the project’s top issues for fiscal year 2015 is its cost reserve posture, which the project reported is less than desired and will require close monitoring. The project’s cost reserve status for fiscal year 2015 is slightly better than in fiscal year 2014 that we reported on in January 2014, where the project successfully managed low reserves without delaying work. This issue, however, will likely require continued monitoring until fiscal year 2016 when more program level reserves will be available to the project. With schedule losses having already occurred on most elements and major subsystems across the project prior to most of the project’s integration and testing efforts, the fiscal year 2016 funding may arrive too late to prevent further schedule delays and the risk of such delays impacting the launch date is heightened. The project continues to face major technical challenges building the cryocooler that have significantly delayed delivery of key components, have made it the driver of the project’s overall schedule or the project’s critical path, and required the use of a disproportionate amount of project cost reserves. Since the 2011 replan, the cryocooler development has experienced over 150 percent cost growth. Consequently, it was one of the largest users of project cost reserves in fiscal year 2014 and is contributing to the project’s limited cost reserve status for fiscal year 2015. All three cryocooler components (the cold head assembly, the compressor assembly, and the electronics assembly) fell significantly behind the delivery dates established during the cryocooler’s April 2013 schedule replan. As we reported in January 2014, the schedule that was adopted during the April 2013 cryocooler replan did not take into account significant risks identified by the cryocooler subcontractor and was overly optimistic—a sentiment that was shared by the cryocooler subcontractor program manager. Moreover, the cryocooler design was not mature at the time of the 2013 replan. The cryocooler subcontractor program manager’s low confidence in the replanned schedule was validated in 2014, when design and manufacturing problems contributed to further delays. In late 2013 and early 2014, implementation of a design change to resolve a manufacturability issue resulted in a 4-month delay to the cryocooler compressor assembly schedule. Additionally, as cryocooler manufacturing efforts accelerated, the cryocooler subcontractor program manager indicated that further delays occurred as a result of design immaturity, manufacturing, and process issues. See figure 6 below for the delays since the April 2013 replan to subcontractor Northrop Grumman’s delivery of the various cryocooler components to JPL or Goddard Space Flight Center. As a result of NASA concerns with the sliding compressor assembly delivery date, the schedule for that component was again replanned in July 2014. However, the planned delivery date for the compressor assembly has already begun slipping. According to the cryocooler subcontractor program manager, the delivery schedule remains overly optimistic and meeting it would have required perfect execution of the remaining work. For example, according to project, JPL, and subcontractor officials, the July replan’s February 2015 subcontractor delivery date for the cryocooler compressor assembly was achievable only under a best case scenario where the subcontractor’s manufacturing issues did not persist. However, since July, issues such as a manufacturing error and manufacturing process oversight have delayed delivery until at least April 2015. For example, one delay occurred when a subcontractor employee conducted unauthorized work on one of the cryocooler compressors that led to a concern of possible compressor contamination. Ultimately, the subcontractor determined that no contamination occurred and the compressor was still usable—but not before a 3 week halt in work on the specific compressor for the investigation into the incident. JPL officials noted that the schedule impact would only be 8 days as they would be rearranging hardware flow and adding some holiday work to recover most of the time lost. Subsequently, a separate manufacturing error on a compressor assembly component resulted in 3 weeks of additional delay. In addition to these manufacturing issues, according to the subcontractor program manager, the subcontractor continues to encounter problems resulting from design immaturity of certain parts of the compressor assembly as they pursue the manufacturing effort. Given the cryocooler subcontractor’s history of prior schedule delays and continued performance challenges, the project recognizes the cryocooler’s late delivery to JWST’s integration and testing schedules as a top issue to the project and is planning mitigation strategies in anticipation of further schedule slips—which would reduce the project’s overall schedule reserve further. JPL’s analysis of subcontractor performance trends on the compressor assembly schedule projects that the subcontractor is very unlikely to meet the current April 2015 delivery date and the compressor assembly is projected to be as late as November 2015, if past performance trends continue. The cryocooler used more schedule reserve than any JWST element or major subsystem in the past year, expending 5 months. Currently, the cryocooler schedule contains approximately 11 months of schedule reserve, of which 6 follow Consequently, without modifications spacecraft integration and testing.to the current integration and testing schedule, a subcontractor delivery of the compressor assembly to JPL after August 2015 would begin depleting the schedule reserve that follows spacecraft integration and testing. Through the reordering and compression of JPL’s test schedule following delivery of the compressor assembly, the project and JPL have accommodated cryocooler schedule slips to date. In anticipation of further delays to the cryocooler compressor assembly, the project and Northrop Grumman are exploring impact mitigation strategies in the event of JPL’s late delivery of the compressor assembly to spacecraft integration and testing, which is to begin in February 2016. The cryocooler subcontractor has, however, resolved other significant challenges related to cryocooler design and valve leakage that, as we have previously reported, have been the basis of prior delays. For example, in 2014, a verification model for one of the cryocooler’s two compressor types was successfully tested, which confirmed that the design would achieve the temperatures required for the initial cooling stage—a key technical issue we reported on in 2014. Additionally, the project selected a valve for the cryocooler’s cold head assembly, the component of the cryocooler that allows it to cool MIRI to the 6 degree Kelvin temperature required for the instrument’s function. Northrop Grumman experienced a significant manufacturing problem during the construction of the large composite panel that forms part of the sunshield’s primary support structure. This problem resulted in a loss of overall project schedule reserve and put the sunshield on the project’s critical path temporarily before it was overtaken by the cryocooler. Specifically, after the initial panel was manufactured, Northrop Grumman determined that it did not meet strength requirements. Because of the weakness identified in the panel, Northrop Grumman and NASA took some time to determine a root cause—moisture was absorbed into the panel during the manufacturing process—and implemented corrective actions for remanufacture of the panel. This total effort resulted in a loss of 1.75 months of total project schedule reserve. JWST officials expressed confidence in Northrop Grumman’s proposed remanufacture plan, which involves the incorporation of a moisture barrier to the tool upon which the panel is made to prevent moisture transfer. According to contractor officials, the replacement panel, which was manufactured using the modified process, was completed in October 2014 and a second, smaller panel is to be completed by January 2015. As early as 2010, the project and Northrop Grumman understood that the manufacturing process for the sunshield’s two composite panels would be complex and took risk mitigation steps, such as expedited manufacturing preparations, to address potential schedule impacts of this risk. Project officials maintain that these mitigation steps prevented the panel remanufacture from using the full 8 months of sunshield schedule reserve. The contractor has made progress, however, on the manufacture of other components of the sunshield, such as the sunshield subsystem’s membrane layers and other structural hardware. Northrop Grumman successfully demonstrated the sunshield’s membrane deployment concept by conducting a full deployment test of a full scale engineering model of the membrane system in July 2014. Currently, one of the five flight membrane layers has been manufactured and work has begun on an additional two. Further, Northrop Grumman has completed manufacturing of the main beams of the sunshield’s primary support structure and tubes that assist in deploying the mid-boom structure. The ISIM schedule has lost schedule reserve since our January 2014 report, and is a half month away from becoming the critical path of the project. The ISIM has used 3 months of schedule reserve out of the 7.5 months it held in 2013, due in part to longer than expected integration and testing for NIRCam and NIRSpec and to additional anticipated testing time for the second and third cryovacuum tests. The first of three ISIM cryovacuum tests—in which a test chamber is used to simulate the near absolute zero temperatures in space—was completed in November 2013, with two of the observatory’s four science instruments integrated. This first test was considered a risk reduction effort that provided insight into how to efficiently conduct the remaining two cryovacuum tests and how to analyze test results. The disruption of this first test from the government shutdown did result in some deferred testing, which increased the planned duration for the subsequent cryovacuum test. The second cryovacuum test, which included all four science instruments, began in June 2014 and finished in October 2014. According to project officials, the second ISIM cryovacuum test progressed as expected, with no technical disruptions. However, the schedule to prepare ISIM for the approximately 3.5-month-long third cryovacuum test—scheduled to commence in late July 2015—is considered very ambitious by NASA officials. Between the second and third cryovacuum tests, additional testing must be carried out, as well as the retrofitting of certain components, such as the near infrared detectors on two of the instruments. The OTE has also used schedule reserve during preparations for the element’s integration with the ISIM. The OTE now has 4.5 months of schedule reserve remaining of the 7 months it held in 2013, putting it in the same position as ISIM in terms of currently held schedule reserve. Contractors successfully completed structural integrity testing of the OTE’s primary mirror backplane support structure that will hold the observatory’s science instruments and its 18-segment primary mirror. Additionally, for the 2015 readiness assessment of the chamber and test equipment for the subsequent integrated OTE and ISIM—known as OTIS—cryovacuum testing, the project is preparing a testing structure that incorporates a two-segment primary mirror and a secondary mirror. For this effort, the project took delivery of an engineering model of the OTE backplane’s center section at Goddard Space Flight Center in July 2014 and completed the process of mounting the two primary mirror segments. The spacecraft element also used 2.5 months of its schedule reserve over the past year, putting it a half month from the critical path. Specifically, the project reported that manufacturing challenges with the spacecraft structure required the use of schedule reserve to accommodate the delays. Despite these manufacturing challenges, the spacecraft completed significant milestones this year. Specifically, in January 2014, NASA assessed the spacecraft element as having successfully completed its critical design review, a major milestone indicating that the spacecraft’s design maturity was deemed appropriate to support proceeding with full-scale fabrication, assembly, integration, and test. While the review required actions to be taken, such as the effort to further mature certain technologies, most of these have been addressed, though work is ongoing on a few key spacecraft components. Among the technologies requiring further maturation is a release mechanism we reported on in January 2014, which was causing excessive shock when engaged. This mechanism has been modified and shock is now within an acceptable range, though testing is ongoing on the modified design. The project continues to address other technical risks and challenges as it continues development and testing of the various JWST elements and major subsystems. For more information on selected risks and challenges, see appendix IV. The JWST project and prime contractor cost risk analyses have not been updated since the project’s replan in 2011 and do not account for newer risks. GAO best practices call for programs to regularly update cost risk analyses to account for new risks. We planned to conduct an independent updated cost risk analysis, but the prime contractor did not allow us the access necessary to execute our planned methodology. The project did subsequently agree to conduct its own cost risk analysis of the prime contractor’s remaining work. If properly conducted, its analysis will provide the project with the reliable information necessary to gauge whether the contractor’s budget is on target or at risk of future cost overruns. Neither NASA’s joint cost and schedule confidence level (JCL) analysis nor Northrop Grumman’s cost risk analysis to support the prime contract has been updated since 2011. Additionally, both NASA and Northrop Grumman reported that they do not intend to update their risk analyses, despite the fact that these analyses are 3 years old and almost 4 years remain until launch. As we have reported previously, GAO’s best practice criteria call for risk analyses to be updated regularly over the life of a project in order to ensure an estimate’s accuracy over time and account for actual costs and new project risks. Without regular updates to the cost risk analysis, JWST decision makers and stakeholders for the project cannot be certain that its existing cost estimates accurately portray the project’s financial status. Updating these analyses is particularly important in light of prior project optimism and newly discovered risks that threaten the project’s cost and schedule reserves. Although our previous work found that the JWST project’s 2011 JCL was not fully reliable, the JWST project continues to rely on its original cost estimate, which was confirmed by the JCL, to provide the basis of its budget estimates and requests. Based on this estimate, the JWST project is currently reporting that the project remains on schedule to launch in October 2018 and within the $8 billion developmental cost cap designated by Congress. The JWST project manager stated that the project conducts a number of programmatic and analytical activities to monitor the health of its cost and schedule that he believes provides him with accurate information on the project’s status. In addition, the project conducted two schedule risk analyses in response to a recommendation we made in 2014, but analyses have not been completed for all schedules. The project stated one of its many methods of measuring cost and schedule health is analysis of earned value management (EVM) data. However, EVM analysis provides a cost and schedule projection based on past performance that does not reflect the potential impact of future risks. The 2011 JCL was the last risk analysis performed to model impacts of future risks on the project’s cost and schedule. In 2012 and 2014 we made both a recommendation to NASA and provided a matter to Congress for consideration related to the need to update the JWST JCL to address weaknesses we found and to incorporate new risk information. However, a new JCL has not been conducted to date and NASA has indicated it does not intend to update the JCL for JWST. As a result of the significant changes that have occurred over the last 3 years since the 2011 replan and lacking reliable cost estimates, we determined that an updated cost risk analysis was warranted to provide Congress with insight on JWST’s remaining work. The changes we observed include risks that have been encountered both by JWST and Northrop Grumman that were not included in their 2011 cost risk analyses. For example, the highest risk for the JWST project in September 2014 was the delivery date of the cryocooler to mission integration and testing events, which was entered into the project’s risk database in January 2013. By October 2014, this risk had become one of the JWST project’s top issues and is threatening cost and schedule reserves. Additionally, 67 percent of the risks present in April 2014 on Northrop Grumman’s list of project risks were not present in September 2011. The JWST project’s budget system provides a means of quantifying future threats to the project’s budget by estimating a threat’s potential cost and likelihood of occurrence. However, our analysis of the system’s data since the replan found that almost 70 percent of reserve spending has not been anticipated as threats by the budget system. Without an analytical framework that comprehensively captures future risks into potential project costs, the project’s estimates do not represent a comprehensive portrayal of the financial status of the project. As a consequence, the project and Congress do not have all the data necessary to be confident in the project’s projected budgetary needs. To address the lack of updated information, GAO planned to conduct an updated cost risk analysis on the Northrop Grumman prime contract, given that it represents the most significant contractor work remaining on the project. The methodology for this analysis, which has been cited as an important tool by NASA’s cost estimating community, would have provided an updated level of confidence associated with the project meeting its cost estimate and allowed decision makers to determine if additional cost reserves were warranted to mitigate future risks. However, we were unable to execute our methodology because Northrop Grumman declined to allow GAO to conduct an independent, unbiased analysis. GAO best practices for cost estimating require anonymous interviews with technical experts on a project to discuss the project’s risks. We were not able to create this environment because while Northrop Grumman officials were open to allowing us to conduct the analysis, they did not allow us to interview employees without a manager present. Anonymity is critical to the methodology in order to ensure the interviews are unbiased and provide a comprehensive portrayal of project risks. The JWST project and NASA disagreed with the approach of an independent cost risk analysis conducted by an outside organization at this point in the project. Additionally, neither believes that an organization external to NASA can fully comprehend the project’s risks, and any such analysis would be overly conservative due to the complexities of the risks. As a result, they asserted that the results of any outside analysis would not be representative of the real risk posture of the project. GAO’s best practices call for cost estimates to be compared to independent cost estimates in addition to being regularly updated. Without an independent and updated analysis, both the committee members’ and NASA’s oversight and management of JWST will be constrained since the impact of newer risks have not been reflected in key tools, including the cost estimate. In response to our concerns, NASA indicated it would conduct its own cost risk analysis for the committee members of the Northrop Grumman contract. The project already had plans to use additional EVM analysis, which the project does plan to use as a management tool, that incorporates risks to provide a health check on the project’s cost reserves. However, a NASA project official stated that data from the cost risk analysis was for the purpose of providing cost information to committee members, but the JWST project does not intend to use it to manage the project. Additionally, the project has indicated that it will consider updating the cost risk analysis in the future, but presently has not committed to regularly updating the analysis. To maintain quality cost estimates over the life of a project, best practices state that cost risk analyses be updated regularly to incorporate new risks and be used in conjunction with EVM analysis to validate cost estimates. If the project does not follow best practices in conducting its cost risk analysis or use it to manage the project, the resulting information may be unreliable and not substantively provide insight into JWST’s potential costs to allow either Congress or project officials to take any warranted action. The JWST project has used NASA’s award fee structure to implement incentives that align with conferee’s priorities for cost and schedule for JWST and contractors have been responsive to these incentives, for example by making changes to key practices to improve communication. When completed, JWST’s prime contract will have spanned almost two decades, during which there have been and could be future significant variances in contractor performance and key management changes among program officials. While NASA’s award fee guidance and its procurement regulations require the development of explicit evaluation factors to evaluate performance, evaluation criteria are not specified for the final evaluation of total contract performance in the project’s performance evaluation plans. Without clear criteria in award fee plans, it is unclear how JWST officials will assess contractor performance over the life of the contracts, as is required per NASA regulations—particularly for the prime contract, which will include a significant cost overrun, three launch delays, and almost 20 years of varying performance. Award fee contracts provide contractors the opportunity to obtain monetary incentives for performance in designated areas, which can be weighted differently at NASA’s discretion. For JWST’s award fee contracts, these areas include cost, schedule, technical, and business management and are established in the contracts’ performance evaluation plans. Award fees are used when key elements of performance cannot be defined objectively, and, as such, require the project officials’ judgment to assess contractor performance. Table 1 provides a general outline of the performance evaluation process. The JWST project has used NASA’s award fee structure to implement incentives that align with conferee’s priorities for cost and schedule for JWST. The JWST project has modified the fee structure for one of its two cost-plus-award-fee contracts, the Northrop Grumman prime contract, to enhance cost and schedule incentives. In December 2013, the JWST project completed contract negotiations with Northrop Grumman to incorporate the launch delay to October 2018. During negotiations, NASA and Northrop Grumman agreed to replace a $56 million on-orbit incentive fee with award fees to increase the available award fee for the entire contract to almost a quarter of a billion dollars. While award fees for the Northrop Grumman contract are intended to reward performance for cost, schedule, and meeting technical requirements, the on-orbit incentive would have been based on exceeding technical requirements. Both JWST and Northrop Grumman officials stated restructuring the award fee incentives gave NASA more flexibility to incentivize the contractor to prioritize cost and schedule performance over exceeding technical requirements. In addition, a $6 million schedule incentive fee was added to the contract that would be paid to the contractor for achieving three key deliveries ahead of schedule.modifications were intended to help ensure the Northrop Grumman contract contained proper cost and schedule incentives. According to NASA officials, these For JWST’s two award fee contracts—Northrop Grumman and Exelis— NASA award fee letters of award fee periods from February 2013 to March 2014 indicate that contractors have been responsive to interim award fee period criteria provided by NASA. Also, contractor officials from both award fee contracts confirmed that they pay close attention to this guidance in prioritizing their work. For example, Northrop Grumman officials reported that they had made specific changes to improve communications in direct response to this guidance which was validated by award fee letters from NASA. The JWST project does not have sufficient award fee guidance for two of its largest contracts, as required by the NASA Federal Acquisition Regulation Supplement. Our finding is consistent with the NASA Office of Inspector General findings that cost-plus-award-fee contracts did not include explicit criteria related to the final evaluation.assessing Northrop Grumman’s prime contract do not specify that in the final evaluation performance metrics for cost and schedule should reflect performance prior to the replan. If performance prior to the replan is not considered, the contractor could receive award fee that does not reflect its performance over the life of the contract. To see how JWST’s cost- plus-award-fee contracts compare to NASA policy and guidance for both contracts, see table 2. As the JWST project enters fiscal year 2015 with under 4 years until launch, project officials have made progress building significant pieces of hardware, but continue to face numerous technical challenges that have eroded schedule reserve for the first time since the 2011 replan. While some use of schedule reserve is expected, JWST is a schedule-driven program and preserving the reserve is critical. The project will have fewer opportunities for the types of workarounds it has been able to incorporate thus far because initiating work is often dependent on the successful and timely completion of the prior work. Further, the project has limited funds available in the short-term to use to preserve schedule. Effectively managing and making targeted use of existing cost reserves to preserve schedule reserve until fiscal year 2016, when more reserves are available, is critical to maintaining the planned launch date in October 2018. Three years after the 2011 replan, project officials and the prime contractor have not recently assessed risks for the potential impact to cost to ensure they are measuring progress against a valid baseline. While the project reports that JWST remains on schedule and within its developmental cost cap, this is based on outdated analysis and risks that were present in 2011. Without incorporating the myriad of new and sometimes significant risks into any assessment of cost risk, the project’s cost risk posture cannot be independently validated. While NASA has chosen to conduct a cost risk analysis of Northrop Grumman’s remaining work itself, its quality hinges on whether NASA chooses to follow best practices. Doing so would better ensure that the results of the analysis would be reliable and would provide an accurate portrayal of status that can then be used to ensure better informed decisions are being made about project funding forward, at least for Northrop Grumman’s remaining work. Furthermore, because JWST is one of NASA’s most expensive and complex science projects and any issues can have significant impacts to other science projects, going above and beyond what is required per policy or guidance is one small step that could help demonstrate NASA’s commitment to the success of JWST and to improving acquisition management outcomes. Effectively using the award fee evaluation process to thoroughly and fairly assess contractor performance is critical given the size and long duration of the JWST contracts, in particular its prime contract with Northrop Grumman. Without clear guidance for both NASA officials and contractors on how to conduct the final award fee evaluation and account for performance over the life of the project, the final determination of all award fees for two of JWST’s largest contracts may not accurately reflect the contractor’s performance. Fairly assessing that performance over the life of the contract is especially critical for JWST given the variance in performance that Northrop Grumman has shown from contract award in 2002 to the present. Not doing so could result in Northrop Grumman receiving a higher percentage of award fee than interim scores would warrant. We recommend that the NASA Administrator take the following two actions: In order to provide additional information and analyses to effectively manage the program and account for new risks identified after the 2011 replan, direct JWST project officials to follow best practices while conducting a cost risk analysis on the prime contract for the work remaining and ensure the analysis is updated as significant risks emerge. In order to ensure JWST’s award fee contracts’ final evaluations thoroughly and fairly evaluate contractor performance over the life of the contract and to provide clarity to the process that will be used for the final evaluation, direct JWST project officials, in conjunction with the performance evaluation board for JWST and the Goddard Space Flight Center fee determining official, to modify performance evaluation plans for its award fee contracts to ensure they (a) specify evaluation criteria that reflects total contract performance in advance of the final evaluation, and (b) clearly describe the process the performance evaluation board and fee determining official will use to evaluate contractor performance in the final evaluation. NASA provided written comments on a draft of this report. These comments are reprinted in appendix V. In responding to a draft of this report, NASA partially concurred with one recommendation and concurred with another. NASA partially concurred with our recommendation directing the JWST project to follow best practices while conducting a cost risk analysis on the prime contract for the work remaining and ensure it is updated as significant risks emerge. In response to this recommendation, NASA stated that the JWST program and project use a range of tools to assess all major contractors’ performance and that the approach the project has in place is consistent with best practices. NASA indicated that it will continue to use the tools currently in place to manage JWST. Furthermore, NASA noted the JWST project initiated a cost risk analysis of the prime contract that is incorporating best practices and will update it when required by NASA policy. NASA policy did not require cost risk analyses when the JWST project began, therefore the project is also not required to update such an analysis. Policy notwithstanding, NASA and GAO’s best practices do support conducting a cost risk analysis and updating it as product development progresses. Specifically, NASA's cost estimating handbook states that while the product is being designed, developed, and tested, there are changes which can impact the estimate and the risk assessment. It is critical to capture these changes to maintain a realistic program estimate now and in the future. During this phase, programmatic data may have just as much of an impact on the estimate and risk assessment as technical data. We acknowledge in the report the JWST project’s use of EVM data, but reiterate that it does not reflect the potential impact of future risks. As our report notes, the JWST project has only started two of the five integration and test periods and risks have changed significantly since a cost risk analysis was last conducted on the prime contractor's work. As the telescope is one of NASA's most complex and expensive projects, both JWST and NASA officials have a tremendous stake in the success of the JWST project. As a result, an important best practice NASA can follow is to conduct a cost risk analysis in the future so that realistic estimates are being communicated to Congress, especially as new risks emerge in future testing. We encourage JWST officials to rely not on policy direction but on good management practices to spur them to update the cost risk analysis they are conducting on the prime contractor's work as significant risks continue to emerge. NASA concurred with our recommendation directing the JWST project, in conjunction with the performance evaluation board for JWST and the Goddard Space Flight fee determining official, to modify its performance evaluation plans for its award fees to ensure they (a) specify evaluation criteria that reflects total contract performance in advance of the final evaluation, and (b) clearly describe the process the performance evaluation board and fee determining official will use to evaluate contractor performance in the final evaluation. NASA indicated it will revise the performance evaluations plans to clarify that criteria in the existing plans applies to both interim periods and the final award fee determination and will revise the plans to specify the process that will be used to conduct the final evaluation and final determination. Once complete, these actions should address our recommendation to clarify the criteria and the process that will be used so a thorough and fair final evaluation may occur that incorporates information from performance over the life of each contract. NASA also provided technical comments, which have been addressed in the report, as appropriate. We are sending copies of the report to NASA’s Administrator and interested congressional committees. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-4841 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 VI. Our objectives were to assess the extent to which (1) technical challenges are impacting the James Webb Space Telescope (JWST) project’s ability to stay on schedule and budget, (2) budget and cost estimates reflect current information about project risks, and (3) the project uses award fee contracts to motivate and assess contractor performance. To assess the extent to which technical challenges are impacting the JWST project’s ability to stay on schedule and budget, we reviewed project and contractor schedule and cost documentation, analyzed the progress made against planned milestones established during the project’s replan in 2011, and held interviews with program, project, and contractor officials. We reviewed project monthly status reviews, quarterly provided flight program reviews, information from the project’s risk database, and other technical documentation to gain insights on the project’s progress since our last report in January 2014. In addition, we reviewed briefings and schedule documentation provided by project and contractor officials. These documents included information on the project’s technological challenges and risks, mitigation plans, timelines for addressing these risks and challenges, and available schedule reserve. We analyzed the project’s reported schedule reserve data across multiple elements and major subsystems. We also interviewed project officials to clarify information and to obtain additional information on element and major subsystem level risks and technological challenges. Further, we attended flight program reviews at the National Aeronautics and Space Administration (NASA) headquarters on a quarterly basis where the current status of the program was briefed to NASA headquarters officials outside of the project. Finally, we interviewed officials from Exelis, the Jet Propulsion Laboratory, and different divisions of Northrop Grumman Aerospace Systems concerning risks and challenges on the elements and major subsystems, instruments, or components they were developing. To assess the extent to which budget and cost estimates reflect current information about project risks, we reviewed project, contractor, and subcontractor documentation and held interviews with officials from all of these different organizations. We reviewed project monthly status reviews, quarterly provided flight program reviews, and contractor information on the potential cost to address identified risks. To identify whether JWST’s current cost management practices were sufficient, we reviewed its earned value management (EVM) and budget systems and compared them to GAO best practices.To identify new risks that had emerged since the 2011 replan, we conducted analysis to compare the prime contractor’s current risk documentation to the risk documentation at the time of the 2011 replan. Further, we analyzed the project’s cost reserve data since the 2011 replan to identify where the project has expended cost reserves and predicted threats, and conducted interviews with contractors to discuss their cost reserve management practices. We also examined and analyzed EVM data from several contractors to identify trends in cost and schedule performance, entering both high-level and subsystem-level monthly contractor EVM data into a GAO-developed spreadsheet, which includes checks to ensure the EVM data provided was reliable. We discussed our assessments of the project’s data and analysis with JWST program and project officials from the Goddard Space Flight Center. To assess the extent to which the project uses award fee contracts to motivate and assess contractor performance, we reviewed the project’s documentation, conducted contract file reviews, examined performance evaluation plans for two contractors, and reviewed the NASA Office of Inspector General’s report on NASA’s use of award fees. examined the relevant portions related to award fees of the Federal Acquisition Regulation (FAR), NASA FAR Supplement, and NASA Award Fee Contracting Guide. We conducted interviews with project officials, NASA Office of Procurement officials, the JWST fee determining official, and contractor officials to obtain information on the project’s use of contract incentives and implementation of award fee evaluations. We evaluated the adequacy of JWST’s performance evaluation criteria and processes by comparing the processes and criteria in the project’s performance evaluation plans and other documentation to NASA’s policies, regulations, and guidance. We interviewed project and NASA headquarters officials to clarify information and obtain additional information on NASA’s typical award fee processes and plans for evaluating JWST’s contractors. NASA, Office of Inspector General, NASA’s Use of Award Fee Contracts, IG-14-003 (Washington, D.C.: Nov. 19, 2013). Our work was performed primarily at NASA headquarters in Washington, D.C., Goddard Space Flight Center in Greenbelt, Maryland, and Johnson Space Center in Houston, Texas. We also visited the Jet Propulsion Laboratory in Pasadena, California; Northrop Grumman Aerospace Systems in Redondo Beach, California; the Defense Contract Management Agency in Redondo Beach, California; and the Space Telescope Science Institute in Baltimore, Maryland. We conducted this performance audit from February 2014 to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix III: Organizational Chart for the James Webb Space Telescope Program The Jet Propulsion Laboratory is the contractor for the development of the cryocooler, but has subcontracted most of the work to a different division of Northrop Grumman than the one that is responsible for OTE, spacecraft, and sunshield development. Cristina Chaplain, (202) 512-4841 or [email protected]. In addition to the contact named above, Shelby S. Oakley, Assistant Director; Karen Richey, Assistant Director; Jason Lee, Assistant Director; Patrick Breiding; Laura Greifner; Samuel P. Harris; Jonathan Mulcare; Kenneth E. Patton; Timothy N. Shaw; Sylvia Schatz; Jay Tallon; and Ozzy Trevino made key contributions to this report.
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JWST is one of NASA's most complex and expensive projects, at an anticipated cost of $8.8 billion. With significant integration and testing planned until the launch date, the JWST project will need to address many challenges before NASA can conduct the science the telescope is intended to produce. GAO has made a number of prior recommendations to NASA, including in December 2012 that the project perform an updated joint cost and schedule risk analysis to improve cost estimates. NASA initially concurred with this recommendation, but it later indicated that the tracking of information it already had in place was sufficient and ultimately decided not to conduct another joint cost and schedule risk analysis. GAO was mandated to assess the program annually and report on its progress. This is the third such report. This report assesses, among other issues, the extent to which (1) technical challenges are impacting the JWST project's ability to stay on schedule and budget, and (2) budget and cost estimates reflect current information about project risks. To conduct this work, GAO reviewed monthly and quarterly JWST reports, interviewed NASA and contractor officials, reviewed relevant policies, and conducted independent analysis of NASA and contractor data. With just under 4 years until its planned launch in October 2018, the James Webb Space Telescope (JWST) project reports it remains on schedule and budget. Technical challenges with JWST elements and major subsystems, however, have diminished the project's overall schedule reserve and increased risk. During the past year, delays have occurred on every element and major subsystem schedule—especially with the cryocooler—leaving all at risk of negatively impacting the overall project schedule reserve if further delays occur. The project reports its overall schedule reserve is above its plan and standards. However, JWST is one of the most complex projects in the National Aeronautics and Space Administration's (NASA) history and has begun integrating and testing only two of the five elements and major subsystems. As such, maintaining as much schedule reserve as possible to navigate through almost 4 more years of integration and testing that remains, where prior work has shown problems are commonly found and schedules tend to slip, is critical. While the project has been able to reorganize work when necessary to mitigate schedule slips, this flexibility will diminish going forward. JWST is also facing limited short-term cost reserves to mitigate additional project schedule threats. The JWST project and prime contractor's cost risk analyses used to validate the JWST budget are outdated and do not account for many new risks identified since 2011. GAO best practices for cost estimating call for regularly updating cost risk analyses to validate that reserves are sufficient to account for new risks. NASA officials said they conduct sufficient analysis to monitor the health of the budget. These efforts, however, do not incorporate potential impacts of risks identified since 2011 into estimates. While the project has subsequently agreed to conduct a cost risk analysis of the contract, it is important that they follow best practices, for example, by regularly updating that analysis. Doing so would provide the project with reliable information to gauge whether the contractor is at risk of future cost overruns. Among other actions, NASA should follow best practices when updating its cost risk analysis to ensure reliability. In commenting on a draft of this report, NASA partially concurred with this recommendation.
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Work in several areas has moved forward since the Subcommittee’s October 18 CVC hearing, but additional delays have occurred, and AOC’s construction management contractor has identified several concerns about the project schedule. AOC has been addressing previously identified schedule-related problems. According to the October 2005 schedule prepared by AOC’s sequence 2 construction management contractor, the base CVC project can open to the public in December 2006, and the House and Senate expansion spaces will be finished by the end of February 2007. The contractor’s October schedule indicates that, with some exceptions, construction work on the base CVC project will be essentially complete by September 15, 2006, and the remaining work will be completed by December 8, 2006. This remaining work includes testing, balancing, and commissioning the HVAC system; testing and inspecting the fire protection system; completing punch-list items; and preparing for operations. For the East Front, the October schedule shows construction work, such as the roof restoration, finish work, and elevator/escalator installation, completed after September 15, 2006. The October schedule also shows other construction work, such as the installation of ceiling panels in the orientation lobby and painting in the atria, extending after September 15, 2006. AOC expects all this construction work to be done and the base CVC project to be ready for operations between September 15, 2006, and mid-December 2006, enabling the facility to open to the public in mid-December. Additionally, under the October project schedule, the House and Senate expansion spaces will be completed in December 2006, and the testing, balancing, and commissioning of the HVAC system and the testing of the fire protection system will be finished by February 26, 2007. According to AOC’s sequence 2 and construction management contractors, it is not yet clear whether the expansion space construction work will have progressed far enough to omit the temporary fire safety measures once considered necessary to open the CVC to the public. They said they are still analyzing the work associated with the areas where the base project and the expansion spaces come together to determine whether and how the need for temporary fire safety measures can be minimized or eliminated. Since the Subcommittee’s October 18 CVC hearing, construction work has continued on the CVC, the East Front, the plaza, the House and Senate expansion spaces, and the House connector and utility tunnels. For example, the installation of wall stone has continued in the auditorium, the orientation theaters, and the upper west lobby. Mechanical, electrical, and plumbing work has also been proceeding in the CVC. Overall, however, construction work, especially stonework, has taken longer than scheduled. Between the Subcommittee’s October 18 hearing and November 10, the sequence 2 contractor completed 8 of the 16 activities that we and AOC have been tracking for the Subcommittee, but only 3 of these activities were completed by the target dates shown in the contractor’s September 2005 schedule. (See app. I.) Delays have also occurred in interior stonework and in work on the East Front, the utility tunnel, and the penthouse’s mechanical systems. For example, according to AOC’s construction management contractor, similar to what happened in September, the sequence 2 contractor lost about 10 out of 21 possible workdays, both on critical interior stonework and on the utility tunnel. According to the construction management contractor, the stonework was delayed by the slow and late delivery of stone, a lack of critical pieces of stone, the need to address problems arising from sequence 1 work, and a shortage of stone masons. During October, the installation of wall stone in the great hall and exhibit gallery was especially impeded because the stone supplier failed to meet scheduled delivery dates and the sequence 2 contractor received less than 20 percent of the stone the supplier had agreed to provide. Moreover, according to the sequence 2 contractor, during several preceding months, deliveries of stone were only about half as large as expected. Additionally, the contractor said, the delivered stone was not in the appropriate sequence and did not cover complete areas. To help mitigate these problems, during October, the sequence 2 contractor transferred stone masons from areas such as the exhibit gallery, for which no wall stone was available, to the auditorium, for which wall stone was available. AOC’s construction management contractor cited other delays in October, especially in the utility tunnel and in the exhibit gallery. For instance, work on First Street for the utility tunnel was delayed by unforeseen site conditions, rain, and the need to do unanticipated work. However, the construction management contractor said that steps have been taken to mitigate the impact of the delays, including the sequence 2 contractor’s hiring of another subcontractor and the installation of piping in the tunnel. In the view of the construction management contractor and the sequence 2 contractor, these steps will enable the CVC’s air-handling units to start up in February 2006 rather than in March 2006, as indicated in the October schedule. In the exhibit gallery, besides the delay in wall stone installation, the construction management contractor identified several problems, including delays in drawings for marble and finishes and concerns about the acceptability of the gallery’s fire suppression system, that could further delay work in the exhibit gallery. The sequence 2 contractor resequenced activities involved in testing, balancing, and commissioning the HVAC system and made other schedule changes that had the net effect of moving the base project’s completion date forward 3 days. While the resequencing will result in a loss of 10 workdays for the HVAC activities, according to the contractor’s revised schedule, the other changes have advanced the base project’s scheduled completion date to December 8, 2006, rather than December 11, 2006, as indicated in the September schedule. AOC’s construction management contractor reports that it, the sequence 2 contractor, and AOC’s commissioning contractor have generally agreed on the revised schedule for testing, balancing, and commissioning the HVAC system. However, AOC’s Fire Marshal Division has not yet agreed on the schedule for those activities that relate to the CVC’s fire protection system, such as testing and inspecting the smoke control system, the fire alarm system, and stair pressurization. On October 31, the division provided its comments on the revised schedule for the fire protection system. The division’s Deputy Fire Marshal expressed several significant concerns about the schedule. AOC and its construction management contractor expect to complete their reviews of this part of the schedule and resolve the Fire Marshal Division’s concerns by December 31, 2005. The construction management contractor has identified 14 critical activity paths in the October schedule that will extend the base project’s completion date beyond AOC’s September 15, 2006, target date if expected lost time cannot be recovered or further delays cannot be prevented. Eleven of the 14 critical activity paths in the October schedule were also identified in the September schedule. For 4 of these 11 paths, such as the auditorium wall stone installation and the orientation theater millwork, the completion dates showed improvement compared with the September schedule, but for the other 7 paths, such as the utility tunnel and the exhibit gallery stonework, the completion dates slipped. The 3 paths newly identified in October are elevator installation, exhibit gallery steel framing, and 10- and 12-inch water line installation, each of which could delay the project if expected lost time cannot be recovered. In addition, our analysis of productivity data for interior wall stone installation, coupled with the sequence 2 contractor’s analysis of stone deliveries, indicates that AOC is not likely to meet its September 15, 2006, target date for completing the base project’s construction without significant increases in the pace of wall stone deliveries and installation. That is, without more stone masons and/or more work hours, more stone delivered more quickly, and faster stone installation, AOC is unlikely to meet its target schedule. The sequence 2 contractor believes that stone masons will be able to install more wall stone per day in some areas, such as the exhibit gallery, because the work is not as difficult as in the great hall or orientation theaters. However, the pace of this installation remains uncertain, in our view. Furthermore, given the project’s experiences to date with the number of stone masons, the quantity of stone deliveries, and the pace of installation, AOC’s construction management contractor notes that the completion of wall stone installation could extend up to several months beyond the July 2006 date shown in the project schedule without more work hours, higher productivity, and sufficient stone. The pace of wall stone installation is especially important because it affects the timing of other critical work necessary for the project’s completion, such as the ceiling’s installation and the HVAC system’s testing, balancing, and commissioning. The stone supply problem is the subject of litigation between the sequence 2 contractor and its subcontractors, and the sequence 2 contractor has been working to resolve the problem. However, at this time, it is not clear how or when this issue will be resolved. Most of the activities we have been discussing, such as the wall stone installation, fire safety inspections, and House connector tunnel construction, are among the activities that we previously identified as likely having optimistic durations, suggesting that those activities could take longer to complete than shown in the project schedule. These activities served as the basis for our September 15 recommendation that AOC rigorously evaluate the durations for the activities shown in the project schedule. Last week, AOC’s construction management contractor finished evaluating these durations and the logic for what it considered the most critical activities, such as wall stone installation, and discussed the impact of delays and sequence 2 contract changes on the project schedule. In its November 9 report to AOC, the construction management contractor said that (1) it was generally difficult to identify any activities that were completed within the planned duration; (2) none of the activities underway, primarily stonework, can be projected to be completed within the planned duration unless additional resources are applied; (3) the durations for a number of activities exceed 40 days compared with the contractual limit of 20 days; and (4) the sequence 2 contractor’s resequencing of work to mitigate the impact of delays will result in a “stacking of trades,” which will require more manpower. Moreover, although the sequence 2 contractor has said that the project schedule reflects the impact of contract modifications executed to date and delays, the construction management contractor noted that the schedule does not accurately reflect the impact of contract changes and of delays due to the schedule’s logic and raised concern about whether the schedule fully reflected the impact of changes and delays given their magnitude. The construction management contractor made several recommendations to AOC based on its findings. For example, the construction management contractor recommended the development of a revised schedule that reflects (1) enhanced logic and sequencing of work, (2) activity durations more in line with the contract’s 20-day maximum requirement, and (3) the impact of all delays and contract changes encountered to date and the use of available resources. The construction management contractor also recommended the development of a recovery schedule for each recognized delay, an analysis of the impact of the recovery activities on required resources, and an examination of the amount of time required to prepare for operations between completing construction and opening to the public. The construction management contractor’s findings and recommendations concerning the project schedule are generally consistent with ours. Although the sequence 2 contractor has taken, plans to take, and is considering various actions to recover lost time and prevent or mitigate further delays, we continue to believe that the contractor will have difficulty completing construction before early to mid-2007. Among our reasons for concern are the uncertainty associated with the fire protection system schedule, including the concerns expressed by AOC’s Fire Marshal Division and our earlier work that raised questions about the amount of time being provided for system testing and inspections; the schedule slippages to date; the optimistic durations for a number of activities based on the views of CVC team members and the results of the construction management contractor’s recently completed review; the large number of activity paths that are critical; and the risks and uncertainties that continue to face the project. In addition, the continued schedule slippages indicate that more and more work will have to be done in a diminishing amount of time, and we are concerned—as is the construction management contractor—that the project schedule may not reflect the impact of changes to sequence 2 work resulting from contract modifications. Many changes, some substantial, have been made to the sequence 2 contract since it was initially awarded in April 2003. Yet, according to the construction management contractor, none of the modifications that have added work to the sequence 2 contract or changed the facility’s design have been reflected in the project schedule. Moreover, as AOC’s construction management contractor has noted, several problems have developed with activities associated with the exhibit gallery, and delays in completing CVC ceiling work necessary for the HVAC and fire protection systems could be problematic, although the CVC team is considering ways to mitigate these risks. We also note that the Chief Fire Marshal has not yet approved the construction drawings for the fire protection system or the schedule for the system’s commissioning and testing. AOC and its construction management contractor have been working to implement recommendations we have made to improve AOC’s schedule management and to address other schedule-related issues we have identified. We have recommended for some time that AOC improve its schedule management and analyze and document delays and the reasons and responsibilities for them on an ongoing basis—at least monthly. In an October 20, 2005, letter, AOC asked its construction management contractor to implement this recommendation. The construction management contractor has begun to establish a process for doing so and plans to have it operational by December 31. We have also recommended that the project schedule show the resources to be applied to meet the schedule dates. While the sequence 2 contractor has shown proposed resource levels for many activities, it has not done so for many of the new activities added to the project schedule. The lack of such information can complicate the analysis of delays, including their causes and costs. AOC’s construction management contractor has expressed particular concern about the resources for the stone and finishing work and has requested additional resource information from the sequence 2 contractor for these activities. We have further recommended that AOC develop plans to mitigate risks and uncertainties facing the project. In July 2005, AOC asked one of its consultants—MBP—to assist it in identifying risks and developing plans to address those risks. As of November 1, AOC had identified 55 risks facing the project and had begun to develop and implement plans for managing these risks. As of November 1, AOC said that it had developed mitigation plans in varying levels of detail for about 30 risks and has been discussing or plans to discuss the remaining risks at a weekly meeting. AOC also said that it plans to add new risks to its list and develop mitigation plans for other risks as appropriate. In our October 18 testimony, we noted several problems associated with the CPP that could adversely affect the CVC, as well as other congressional buildings, if they are not corrected or addressed. For example, potential delays in completing the West Refrigeration Plant Expansion project and storm damage to electrical equipment that has precluded the use of an East Refrigeration Plant chiller could limit the ability of the CPP to provide enough steam and chilled water for the CVC’s air handlers to begin operating in March 2006, as shown in the October 2005 schedule. Staffing and training issues associated with operating the new equipment and a vacant CPP director position also pose management concerns. Work on the West Refrigeration Plant Expansion project could be delayed because AOC has directed the contractor to proceed with two significant contract modifications since the Subcommittee’s October 18 CVC hearing. Specifically, the contractor is authorized to (1) reconfigure piping so that the existing West Refrigeration Plant can be operated independently of the West Refrigeration Plant Expansion to enhance the CPP’s chilled water production capability and (2) change the design of the control system that will serve both the West Refrigeration Plant and new West Refrigeration Plant Expansion. These changes could affect the March 2006 completion date for the expansion project; however, AOC believes it will have sufficient chilled water capacity for the CVC even if the expansion project’s completion is delayed. Furthermore, AOC plans to restore power to the chiller in the East Plant by realigning existing equipment and is still determining why the electrical equipment (e.g., aging equipment, inadequate maintenance) was vulnerable to storm damage. Finally, the period for applying for the plant’s vacant director’s position closed on November 4. According to AOC, it received 26 applications and expects to fill the position in December. As part of a separate review for this Subcommittee, we are continuing to assess certain CPP issues, such as the staffing and training for, and the estimated cost to complete, the West Refrigeration Plant Expansion project. In our October testimony, we identified problems with coordination between the CVC project team and AOC’s Fire Marshal Division. To address these problems, AOC and its construction management contractor have established a process for the team and the division to arrange for and document CVC inspections. To help ensure that Congress receives a more reliable estimate of the project’s completion date in order to plan for the CVC’s opening to the public and make more informed decisions about AOC’s funding needs for CVC construction and operations, we recommend that the Architect of the Capitol (1) implement the recommendations (which are consistent with our prior recommendations on schedule management) made by its construction management contractor in its November 9 report on its schedule evaluation; and (2) reassess its proposal to open the CVC in mid- December 2006 when it is confident that it has a project schedule that reflects realistic durations, enhanced logic, the resolution of concerns expressed by the Fire Marshal Division, and the impact of delays and contract changes. Mr. Chairman, our preliminary work shows the cost to complete the entire CVC project at around $542.9 million without provision for risks and uncertainties. This preliminary estimate falls between our September 15, 2005, interim estimate of $525.6 million without provision for risks and uncertainties, and our November 2004 estimate of about $559 million with provision for risks and uncertainties. Our current estimate is substantially higher than MBP’s updated estimate, and it exceeds the funding provided for the project to date. As we said at the Subcommittee’s October 18 hearing, we are waiting for the project schedule to stabilize before we comprehensively update our November 2004 estimate of the cost to complete the project, including any costs to the government for delays. We plan to provide this updated estimate with and without allowances for risks and uncertainties and with adjustments for specific expected project completion dates. We would now like to discuss the basis for our estimate and why we expect the project’s costs to increase, why our estimate differs from MBP’s, how much funding is currently available for CVC construction and how much more may be needed, and how much the Library of Congress tunnel’s construction is likely to cost. Our preliminary estimate of the cost to complete the entire CVC project, which we will discuss today, is based on information provided by AOC and its construction management contractor. It reflects our review of MBP’s November 1, 2005, final report, which updates MBP’s October 2004 estimate and includes supporting data; our review of CVC contract modifications and changes proposed between August 1, 2005, and October 31, 2005; the knowledge and experience we have gained from monitoring this and other major construction projects; and our view that the base CVC project in not likely to be completed before the spring of 2007. We have discussed our preliminary estimate with AOC; however, we have not completed other work needed for a comprehensive update of our cost-to- complete estimate. For example, we have not updated our previous discussions of the project’s expected costs, risks, and uncertainties with other CVC project team members and fully assessed the schedule’s impact on costs, because the schedule has not been stabilized. Furthermore, we have not incorporated any costs for delays over and above the amount included in our November 2004 estimate. Delays have occurred since then, but as of October 31, 2005, CVC construction contractors had not filed any requests for adjustments or claims with AOC for delays occurring after November 2004. AOC nevertheless expects to receive additional requests for adjustments, and AOC’s construction management contractor believes that AOC may incur more costs than budgeted for delays. At this time, it is unclear who will bear responsibility for the various delays that have occurred at the CVC site, and it is therefore difficult to estimate their possible costs to the government. Assuming that the base project and the House and Senate expansion spaces are completed in the spring of 2007 and considering the qualifications just discussed, our preliminary estimate of the cost to complete the entire project is about $542.9 million without provision for risks and uncertainties. This estimate is about $17.3 million greater than our September updated estimate of $525.6 million without provision for risks and uncertainties and about $16.1 million less than our November 2004 estimate of about $559 million with provision for risks and uncertainties. The $17.3 million increase is due largely to the following: 1. Actual and anticipated changes in the project’s work scope. Most of these changes were associated with sequence 2 work, but some also occurred or are expected in other project components, such as preconstruction. Significant sequence 2 changes include the modifications to the CVC fire protection system that we discussed at the Subcommittee’s October 18 CVC hearing, changes to the building’s automated control system, and additional work to address gaps in the scopes of sequence 1 and sequence 2 work, such as additional waterproofing. Changes in the preconstruction component include moving security screening trailers and doing additional materials testing. 2. Additional contingency funds. We believe that AOC will need significantly more contingency funds for the remainder of the project for three major reasons: First, the actual or estimated costs for changes in sequence 2, the East Front interface, and the preconstruction project components either exceed or account for the majority of the funds budgeted for unanticipated work, and available information indicates that additional changes in these areas are likely as the project progresses. For example, the actual and proposed sequence 2 changes to date are more numerous and more costly (without any provision for risks and uncertainties) than we, AOC, and MBP anticipated in late 2004, and the actual and estimated value of the already identified changes greatly exceeds the budgeted contingency funding. Moreover, according to AOC’s construction management contractor, only about half the value of sequence 2 work is complete. Given that about half the work remains and changes to the project have been frequent thus far, we believe that more changes are likely to require funding in the future. Second, a number of issues that were not included in MBP’s analysis, such as the need for temporary dehumidification, have arisen. Proposed change orders for work to address these issues were not completed in time for the work to be included in MBP’s report. Third, as MBP pointed out, the costs of many pending (proposed, but not yet approved) changes that were included in its report may be understated because they are based on AOC’s and its construction management contractor’s estimates rather than on the contractor’s price. According to MBP, historically, AOC’s construction management contractor has significantly understated the costs of pending changes. Thus, additional funds are likely to be needed to cover the difference between the estimated and actual costs of the approved changes. 3. Delay-related project management costs. The schedule analysis underlying our November 2004 cost-to-complete estimate suggested that the CVC base project would most likely be completed in December 2006, and our November 2004 and September 2005 cost estimates therefore included funding for AOC’s CVC staff and architectural and construction management contractors through that time. Although the specific expected completion date for the base project is still uncertain because AOC and its contractors have not yet finished their schedule reassessment, our work indicates that the base project is unlikely to be done before early 2007. Thus, our preliminary estimated cost to complete includes the estimated costs for extending AOC’s CVC staff and architectural and construction management contractors for the base project to March 2007. Our preliminary $542.9 million estimate of the cost to complete the CVC project is significantly higher than MBP’s November 1, 2005, $481.9 million estimate for several reasons. Our estimate includes the costs for the CVC’s air filtration system; MBP’s does not. MBP assumed the base project would be completed in December 2006; we considered the spring of 2007 more likely. MBP did not include the costs of all CVC construction-related work, such as the fabrication and installation of wayfinding signs or the fit-out of the gift shops. Our estimate includes these costs. MBP provided less contingency funding than we did for a number of project components (sequence 2, the House connector tunnel, the East Front interface with the CVC, and the House and Senate expansion spaces). We believe that our larger allowance is warranted, given the complexity of the work, the CVC project’s experience with changes, and our experience in monitoring other Capitol Hill construction projects. About $528.4 million has been provided for CVC construction, and an additional $7.7 million has been provided for CVC construction or operations. The $528.4 million consists of the 527.9 million we discussed during the Subcommittee’s October 18 CVC hearing and $500,000 that the Department of Defense (DOD) originally provided to AOC for security enhancements for the East Front of the Capitol and that AOC now intends, with DOD’s approval, to use for security enhancements related to the CVC’s air filtration system. According to AOC, it does not currently plan to use any of the $7.7 million for CVC construction. Thus, our preliminary $542.9 million cost-to- complete-estimate indicates that AOC would need about $14.5 million more to complete the project, assuming it is completed in March 2007. As noted, this estimate is preliminary and does not provide for contractor delay costs beyond the amount included in our November 2004 cost estimate. AOC does not believe that future changes will require as much funding as we do. We recognize that the total amount of funds that will be needed for contingencies, as well as for adjustments to contracts to offset the costs of delays, is unclear at this time and is subject to differing views. Nevertheless, the costs for these items will be a major factor in determining whether AOC will need additional appropriated funds. We plan to address both issues when we do our comprehensive cost-to- complete update early next year. Public Law 108-83 limits to $10 million the amount of federal funds that can be obligated or expended for the construction of the tunnel connecting the CVC with the Library of Congress. As of October 31, 2005, AOC estimated that the tunnel’s construction would cost about $8.8 million, and AOC had obligated about $4.7 million for it. The remaining estimated costs are for modifications to the Jefferson building to accommodate the tunnel and for contingencies. AOC expects to receive the bids for the Jefferson building work by November 22. Given that the work associated with the Jefferson building has not started and involves risks and uncertainties (since it will create an opening in the building’s foundation and change an existing structure), we believe that AOC could receive higher-than-expected bids and is likely to encounter unforeseen conditions that could increase costs significantly. Both we and AOC plan to monitor the tunnel’s construction closely to ensure that the statutory limit is not exceeded. Worker safety will remain an important issue at the CVC site as new hazards arise with changes in the site’s physical structure and increases in the number of employees and subcontractors in the months ahead. Since we testified in May 2005 on worker safety, AOC and its contractors have achieved improvements in key worker safety measures and actions. For example, the CVC injury and illness rate declined, from 9.1 in 2003 and 12.2 in 2004, to 5.9 for the first 10 months of 2005—below the 2003 industry average of 6.1. Furthermore, the CVC lost-time rate declined, from 8.1 in 2003 and 10.4 in 2004, to 4.0 for the same 10-month period— approaching the 2003 industry average of 3.1. The quality of the construction management contractor’s monthly CVC progress reports has also improved. Whereas the reports for 2003 and 2004 contained inaccurate data for key worker safety measures, as we testified in May 2005, the reports since June 2005 have contained accurate worker safety data. (In one instance, however, the draft report we received from the construction management contractor contained inaccurate worker safety data, which were corrected after we pointed them out to the construction management contractor.) Finally, AOC’s reporting of lost-time rates is now consistent with an updated definition issued by the Bureau of Labor Statistics in 2003. AOC and its contractors have taken a number of actions during 2005 to improve worker safety at the CVC site. For example, they have held periodic safety meetings with senior managers to elevate safety issues (and will schedule additional meetings as needed); held a project safety day to increase CVC project employees’ safety provided and scheduled training on fall protection and electrical safety, for example, to elevate safety awareness and avoid accidents; posted safety-related signs and banners around the CVC site to reinforce added a second safety professional at the CVC project. In addition, since this past summer, AOC’s Central Safety Office has been involved in CVC worker safety. Specifically, the responsible official has (1) clarified his role on the project with the CVC Project Executive, (2) visited the CVC project site to obtain an understanding of general site conditions, (3) attended periodic CVC safety meetings and (4) reviewed safety-related data, reports, and meeting minutes. Drawing upon these efforts, the official has made suggestions to CVC management on ways to improve worker safety. Poor housekeeping has been an ongoing issue at the site, and the sequence 2 contractor has recently taken actions to address this issue. Piles of construction debris and trash, improperly stored equipment and materials, and poorly maintained employee break areas have been identified in the construction management contractor’s past safety audits. Although no injuries have been attributed to housekeeping issues, the construction management contractor and the sequence 2 contractor have recognized that these issues present an ongoing problem. To address these issues, the sequence 2 contractor is daily (1) cleaning up construction material debris and other items, (2) cleaning up the site’s three assigned eating areas, and (3) removing five to seven truckloads of trash. In addition, the sequence 2 contractor has placed more bait traps around the site to control rodents. Mr. Chairman, this concludes our statement. We would be pleased to answer any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact Bernard Ungar at (202) 512-4232 or Terrell Dorn at (202) 512-6923. Other key contributors to this testimony include Shirley Abel, Michael Armes, John Craig, George Depaoli, Maria Edelstein, Elizabeth Eisenstadt, Brett Fallavollita, Jeanette Franzel, Jackie Hamilton, Bradley James, Scott Riback, and Kris Trueblood. Wall stone Area 2 base Wall stone area 1 layout Wall stone Area 3 base Excavate/shore Station Sta. 0.00-1.00 Concrete Working Slab Sta. 0.00-1.00 Waterproof Working Slab Sta. 0.00-1.00 Install Mat Slab Sta. 0.00-1.00 Install Mat Slab Sta. 1.00-2.00 Install Walls Sta. 1.00-2.00 11/4/05 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.
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This testimony discusses the progress on the Capitol Visitor Center (CVC) project. Specifically, this testimony discusses (1) the status of the project schedule since Congress's October 18, 2005, hearing on the project, (2) the project's costs and funding, and (3) worker safety issues. We will discuss the progress made and problems encountered in completing scheduled construction work and in continuing to develop the project schedule, as we indicated during Congress's October 18 hearing; however, we will not be able to estimate specific completion dates until the project schedule is stable and the Architect of the Capitol (AOC) and its construction management contractor--Gilbane Building Company--have completed their assessments of the schedule and we have had an opportunity to evaluate them. Also, we will update the information we previously provided on the project's costs and funding, using readily available data, but we will wait until the project schedule is stable and has been fully reviewed before we comprehensively update our November 2004 estimate of the cost to complete the project and update the provision in our estimate for risks and uncertainties facing the project. Construction work in several areas has moved forward since Congress's October 18 CVC hearing, but additional delays have occurred, and AOC's construction management contractor has identified several concerns with the schedule that raise questions about its proposed mid-December 2006 opening of the base CVC project to the public. AOC and its construction management contractor expect to resolve outstanding scheduling concerns and issues by the end of this year. When AOC and its construction management contractor have prepared what they consider to be a reasonably stable project schedule, we will reevaluate the schedule and inform Congress of our results. In the interim, to help ensure that Congress has better information for making CVC-related decisions, we are recommending that AOC (1) implement the recommendations for obtaining a more reliable project schedule contained in its construction management contractor's November 2005 report, which are consistent with our previous recommendations on schedule management, and (2) reassess its proposed December 2006 date for opening the CVC to the public when it has a more reliable construction schedule. Our preliminary work indicates that the entire CVC project is likely, at a minimum, to cost $542.9 million. This preliminary estimate falls about midway between our September 15, 2005, interim estimate of $525.6 million, which did not provide for risks and uncertainties, and our November 2004 estimate of about $559 million, which did provide for risks and uncertainties. Specifically, this current $542.9 preliminary estimate is about $17.3 million more than the September 15 interim estimate and about $16.1 million less than the November 2004 estimate. The current $542.9 million preliminary estimate does not provide for risks and uncertainties or for additional payments to contractors to cover the costs of certain delays and other contingencies. Even without providing for risks and uncertainties, though, we have increased our cost estimate since September 15 because additional and more expensive changes to the project have been identified; we have increased our allowance for contingencies; and we have added funding for AOC and contractor staff that we believe are likely to be working on the project through the spring of 2007. Our preliminary estimate substantially exceeds MBP's November 2005 updated estimate of $481.9 million, largely because MBP's estimate does not cover a number of project components and does not, in our view, provide adequately for contingencies. According to our analysis of CVC data, worker safety rates have improved substantially this year, although the lost-time rate remains above industry norms. The injury and illness rate for the first 10 months of 2005 declined 52 percent from the rate for 2004, putting the CVC site's rate 3 percent below the average for comparable construction sites. The lost-time rate decreased 62 percent during the same period, but the CVC site's rate is still 29 percent higher than the average rate for comparable construction sites. AOC and its contractors have taken a number of actions during 2005 to improve safety performance on the project, such as conducting training to elevate safety awareness and placing safety posters around the worksite. In addition, senior managers are meeting periodically to develop strategies to improve safety. Poor housekeeping, however, has been an ongoing issue at the site, and the sequence 2 contractor has recently taken actions to address this issue.
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Biological threats that could result in catastrophic consequences exist in many forms and arise from multiple sources. For example, several known biological agents could be made into aerosolized weapons and intentionally released in a transportation hub or other populated urban setting, introduced into the agricultural infrastructure and food supply, or used to contaminate the water supply. Concerned with the threat of bioterrorism, in 2004, the White House released HSPD-10, which outlines the structure of the biodefense enterprise and discusses various federal efforts and responsibilities that help to support it. The biodefense enterprise is the whole combination of systems at every level of government and the private sector that can contribute to protecting the nation and its citizens from potentially catastrophic effects of a biological event. It is composed of a complex collection of federal, state, local, tribal, territorial, and private resources, programs, and initiatives, designed for different purposes and dedicated to mitigating various risks, both natural and intentional. Biodefense is organized into four pillars—threat awareness, prevention and protection, surveillance and detection, and response and recovery— and multiple federal agencies have biodefense responsibilities within the pillars. Each of these pillars comprise numerous activities—such as controlling access to dangerous biological agents used in research—that generally require coordination across federal departments as well as with state, local, and international governments, and the private sector. Protecting humans, animals, plants, air, soil, water, and critical infrastructure from potentially catastrophic effects of intentional or natural biological events entails numerous activities carried out within and among multiple federal agencies and their nonfederal partners (see fig. 1). Emerging infectious diseases represent an ongoing threat to the health and livelihoods of people and animals worldwide. Many advances in medical research and treatments have been made during the last century, but infectious diseases are nevertheless a leading cause of death worldwide. In addition to causing nearly one in five human deaths worldwide, infectious diseases impose a heavy societal and economic burden on individuals, families, communities, and countries. Infectious diseases are a continuous threat for reasons that include: (1) emergence—at times rapid—of new infectious diseases; (2) re- emergence of previously-known infectious diseases; and (3) persistence of intractable infectious diseases. In an era of rapid transit and global trade, the public health and agricultural industries, as well as natural ecosystems including native plants and wildlife, face increased threats of naturally occurring outbreaks of infectious disease and accidental exposure to biological threats. According to the World Health Organization, infectious diseases are not only spreading faster, they also appear to be emerging more quickly than ever before. The ongoing outbreak of Zika virus in the Americas has heightened travel-related concerns regarding the spread of the virus. As of March 23, 2016, 273 cases of continental U.S. travel-associated Zika virus disease have been reported, according to Centers for Disease Control and Prevention (CDC). Figure 2 shows passenger arrivals from five regions of the world and the top five airports receiving passengers whose travel originated from each of these regions in 2014. According to the World Health Organization, about 75 percent of the new diseases that have affected humans in recent years are zoonotic and have been caused by pathogens originating from an animal. These emerging and reemerging diseases transmit between animals—including domestic animals and wildlife—and humans. Many of these diseases have the potential to spread through various means over long distances and to become global problems. In some cases, disease transmission is direct, in others the animals act as intermediate or accidental hosts, while in others transmission occurs, for example, via mosquitoes or ticks. Examples of emerging and zoonotic diseases include: Zika, chikungunya, and dengue viruses, West Nile virus, H1N1 (swine) influenza, severe acute respiratory syndrome (SARS), avian influenza, and rabies. Habitat loss and human encroachment on rural and wildlife environments are bringing populations of humans and animals, both farmed and wild, into closer and more-frequent contact. Increasingly, wildlife are involved in the transmission of diseases to people, pets, and livestock, and managing wildlife transmitters is an integral part of efforts to control the spread of zoonotic diseases. Diseases among wildlife can also provide early warnings of environmental damage, bioterrorism, and other risks to human health. Finally, potential bioterrorism threats also include the use of zoonotic diseases as weapons of mass destruction, such as anthrax, plague, tularemia, and brucellosis. Transmission and detection of Zika, chikungunya, and dengue viruses Zika, chikungunya, and dengue viruses are all spread by the Aedes aegypti mosquito, pictured below. These mosquitoes typically lay eggs in and near standing water in containers like buckets, bowls, animal dishes, flower pots, and vases. They prefer to bite people, and live both indoors and outdoors. Mosquitoes that spread dengue, chikungunya, and Zika are aggressive daytime biters, but also bite at night. Mosquitoes can become infected when they feed on a person already infected with the virus. Diagnosing Zika virus infection is complicated because it is difficult to differentiate it from other similar diseases, such as dengue or yellow fever, and some tests for Zika virus antibodies suffer from cross-reactivity with antibodies to similar viruses. For example, a person previously infected with another flavivirus such as dengue could be falsely identified as also having been exposed to the Zika virus (and vice-versa). Numerous federal, state, local, and private sector entities have roles and responsibilities for monitoring for pathogens in human, animal, plant, food, and the environment. Federal departments, such as the HHS, USDA, DHS, and the Department of Interior, play leading biosurveillance roles for certain domains such as human and animal health, food, and air, but they also rely on support from state and local authorities or partner with other federal agencies. In other cases federal departments or agencies play supporting roles. Officials at all levels of government, as well as Homeland Security Presidential Directive-21’s (HSPD-21) vision of a national biosurveillance capability, acknowledge that state and local capabilities are at the heart of the biosurveillance enterprise. According to federal, state, and local officials, early detection of potentially serious disease indications nearly always occurs first at the local level, making the personnel, training, systems, and equipment that support detection at the state and local level a cornerstone of our nation’s biodefense posture. While there is variation in organization and structure among public-health, animal-health, and wildlife functions at the state, tribal, local, and insular levels they all share in the nation’s biosurveillance responsibility. Some of the nonfederal partners with key responsibilities in the biosurveillance enterprise are presented in table 1. Bipartisan and independent commissions have identified a range of issues facing the biodefense enterprise, many of which mirror our findings. In October 2011, the WMD Center reported its assessment of various capabilities within the U.S. biodefense enterprise in which a team of leading biodefense experts assigned letter grades to each of the capabilities for different types of outbreak. The report assigned low marks to nearly all the capabilities for address large-scale and global disease outbreaks. For example, the team assigned the grade of D (meets few expectations) to the capability for detecting large-scale infectious outbreaks and the grade of F (fails to meet expectations) to the capability for detecting global contagious outbreaks. In 2014, a Blue Ribbon Study Panel on Biodefense (Study Panel) was established to assess gaps and provide recommendations to improve U.S. biodefense. The panel’s October 2015 final report identified 33 recommendations to execute over the short, medium, and long term. The Study Panel report echoed many of the same challenges highlighted in the WMD Center’s report, and highlighted a sense of urgency to address the ongoing and persistent biological threats—both naturally occurring, like Ebola and Zika, and from enemies, like The Islamic State of Iraq and the Levant (also known as ISIL and Da’esh) who have advocated for the use of biological weapons. The panel’s report identified several themes we have also highlighted in our biosurveillance work, including the lack of a centralized leader, no comprehensive national strategic plan, and no all- inclusive dedicated budget for biodefense. In 2011, we reported that reducing fragmentation in the biodefense enterprise could enhance assurance that the nation is prepared to prevent, detect, and respond to biological attacks with potentially devastating consequences in terms of loss of life, economic damage, and decreased national security. We reported that there are more than two dozen presidentially appointed individuals with some responsibility for biodefense. In addition, numerous federal agencies, encompassing much of the federal government, have some mission responsibilities for supporting biodefense activities. However, there is no individual or entity with responsibility, authority, and accountability for overseeing the entire biodefense enterprise. Because none of the federal departments has authority over the entire biodefense enterprise, in 2011 we reported that the Homeland Security Council (HSC) should consider establishing a focal point to coordinate federal biodefense activities. In December 2014 officials from National Security Council (NSC) staff, which supports the HSC told us that two of its directorates work together as the focal point for federal biodefense efforts. According to NSC staff, these focal points provide strategic leadership on all federal biodefense efforts, with responsibilities to coordinate across domestic and global priorities to prevent, detect, and rapidly respond to biological threats. The focal points are to host ongoing meetings with the federal biodefense enterprise to ensure a comprehensive and coordinated approach to biodefense. We recognize the policy work of the directorates as an important step in promoting a comprehensive and coordinated approach to biodefense, but strategic leadership issues persist. In October 2015, the Study Panel reported on ongoing leadership challenges for the enterprise. The report called for a focal point to provide strategic leadership by elevating authority above what any single agency has to help overcome the challenges faced by the biodefense enterprise. The Study Panel report noted mixed opinions on the effectiveness of the current NSC staff model for coordinating biodefense. Some have asserted that efforts remain fragmented under this system, but others pointed to the benefit of having a wider variety of staff involved across the spectrum of biodefense activities. However, the Study Panel found that White House councils and offices generally only become involved when a specific biodefense issue affects a prominent ongoing responsibility—a method which is not consistent with our call for a strategic approach. In 2011, we reported that while some high-level biodefense strategies have been developed, there is no broad, integrated national strategy that encompasses all stakeholders with biodefense responsibilities that can be used to guide the systematic identification of risk; assess resources needed to address those risks; and prioritize and allocate investment across the entire biodefense enterprise. We have also previously reported that choices must be made about protection priorities given the risk and how to best allocate available resources. Further, neither the Office of Management and Budget nor the federal agencies account for biodefense spending across the entire federal government. As a result, the federal government does not know how much is being spent on this critical national security priority. We reported that the overarching biodefense enterprise would benefit from strategic oversight mechanisms, including a national strategy, to ensure efficient, effective, and accountable results, and suggested the HSC take action. As of February 2016, NSC staff had not developed such a strategy. Rather, they assert that the National Strategy for Countering Biological Threats, the National Biosurveillance Strategy, and Presidential Policy Directive-8 work in concert to provide comprehensive strategic guidance to stakeholders with biodefense responsibilities. Although these documents demonstrate clear commitment to coordinating interagency biodefense efforts, they do not provide the strategic approach that we suggested in March 2011. For example, the National Biosurveillance Strategy, released by the White House in July 2012, does not provide a specific framework for prioritizing and trading off among approaches to build biosurveillance capabilities with limited resources. Moreover, as previously discussed, there are four pillars of the biodefense enterprise, each complex and in need of coordination: (1) threat awareness, (2) prevention and protection, (3) surveillance and detection, and (4) response and recovery. The National Strategy for Biosurveillance does not—alone or in combination with the National Strategy for Countering Biological Threats and Presidential Policy Directive-8—address all four pillars, and more specifically, it does not address the key fragmentation issues across the biodefense enterprise, such as ensuring strong linkage and identifying gaps in investments across the four pillars. Similarly, the Study Panel’s 2015 report identified the lack of a comprehensive national strategy and dedicated budget as challenges. The Study Panel noted that leadership issues were exacerbated by the lack of a comprehensive biodefense strategy and a unified approach to budgeting, which they called vital to any strategic interagency effort for the nation’s biodefense capabilities. They called for a unified approach to budgeting and prioritizing biodefense efforts. The Study Panel noted that the nation lacks a comprehensive, cohesive, and regularly updated strategy resulting in disorganization and loss of institutional knowledge associated with changes in administrations. Much like biodefense, biosurveillance faces key challenges that transcend what any one agency can address on its own. We have identified challenges related to the nation’s ability to detect and respond to biological events. Our findings have identified challenges at all levels of government, and our more recent and ongoing work continues to highlight these challenges. In June 2010, we found that there was no integrated approach to help ensure an effective national biosurveillance capability and to provide a framework to help identify and prioritize investments. Without a unifying framework and an entity with the authority, resources, time, and responsibility for guiding its implementation, we concluded that it would be very difficult to create an integrated approach to building and sustaining a national biosurveillance capability. We recommended the HSC establish a focal point to lead the development of a national biosurveillance strategy that clarifies roles and responsibilities, provides goals and performance measures, and identifies resource and investment needs, among other elements. However, the recommendations have not been fully implemented. The NSC staff, which supports the HSC, convened an interagency policy group that guided the completion of the National Strategy for Biosurveillance in July 2012, which addresses the intent of our recommendation to establish a focal point. However, our review of the strategy determined that the strategy alone did not fully meet the intent of our recommendation because, among other things, it did not provide the mechanism we recommended to identify resource and investment needs, including investment priorities. Subsequent to the release of the strategy, the NSC staff published a companion implementation plan, but it is not yet clear the extent to which the plan has been widely shared among and adopted by interagency decision makers as a means to help identify opportunities to leverage resources and direct priorities. The National Strategy for Biosurveillance also does not address issues we raised related to state and local biosurveillance efforts, and that we previously recommended. In October 2011, we reported that nonfederal capabilities should also be considered in creating a national biosurveillance strategy. The backbone of biosurveillance is traditional disease-surveillance systems—designed to collect information on the health of humans and animals to support a variety of public-welfare and economic goals. These systems support biosurveillance efforts by recording national health and disease trends and providing specific information about the scope and projection of outbreaks to inform response. Because the resources that constitute a national biosurveillance capability are largely owned by nonfederal entities, a national strategy that considers how to strengthen and leverage nonfederal partners could improve efforts to build and maintain a national biosurveillance capability. Moreover, efforts to build the capability would benefit from a framework that facilitates assessment of nonfederal jurisdictions’ baseline capabilities and critical gaps across the entire biosurveillance enterprise. Such an assessment of capabilities that support biosurveillance is called for in HSPD-10, which notes that the United States requires a periodic assessment that identifies gaps or vulnerabilities in our biodefense capabilities—of which surveillance and detection is a key part—to guide prioritization of federal investments. However, in a 2011 report, we noted that the federal government had not conducted a comprehensive assessment of state and local jurisdictions’ ability to contribute to a national biosurveillance capability. While the size, variability, and complexity of the biosurveillance enterprise makes an assessment difficult, we concluded in our October 2011 report that the federal government would lack key information about the baseline status, strengths, weaknesses, and gaps across the biosurveillance enterprise until it conducts such an assessment. To address these issues, and building on our June 2010 recommendation to develop a national biosurveillance strategy, we recommended for such a strategy to (1) incorporate a means to leverage existing efforts that support nonfederal biosurveillance capabilities, (2) consider challenges that nonfederal jurisdictions face, and (3) include a framework to develop a baseline and gap assessment of nonfederal jurisdictions’ capabilities. However, the July 2012 strategy did not adequately address the issues we raised related to state and local biosurveillance and acknowledged but did not meaningfully address the need to leverage nonfederal resources. Our recent work has also identified challenges with specific biosurveillance capabilities. Specifically, we have identified biosurveillance capability challenges with, among other topics, (1) state and local public heath capabilities, (2) animal health surveillance capabilities, and (3) two DHS specific biosurveillance efforts—the National Biosurveillance Integration Center (NBIC) and the BioWatch Program. In our October 2011 report on nonfederal biosurveillance efforts, we found many of the challenges that state and local officials identified were similar to issues we reported regarding biosurveillance at the federal level. We noted that many of the challenges facing the biosurveillance enterprise were complex, inherent to building capabilities that cross traditional boundaries, and not easily resolved. State and Local Public Health Capabilities. In 2011, we found that state and local officials identified common challenges to developing and maintaining their biosurveillance capabilities such as (1) state policies in response to state budget constraints that restricted hiring, travel, and training; (2) obtaining and maintaining resources, such as adequate workforce, equipment, and systems; and (3) the lack of strategic planning and leadership to support long-term investment in crosscutting core capabilities, integrated biosurveillance, and effective partnerships. For example, state and local officials we surveyed reported facing workforce shortages among skilled professionals—epidemiologists, informaticians, statisticians, laboratory staff, animal-health staff, or animal-disease specialists. We also found that although the federal government provided some resources to help control disease in humans and animals in tribal and insular areas, there were no specific efforts to ensure that their efforts can contribute to the national biosurveillance capability. Additionally, in 2011, we found that nonfederal partners relied heavily on grants and cooperative agreements to sustain their biosurveillance capabilities. For example, the Public Health Emergency Preparedness cooperative agreement (PHEP) and the Epidemiology and Laboratory Capacity for Infectious Diseases cooperative agreement (ELC) were essential for public health epidemiology and laboratory staff. We concluded that without assessing the baseline nonfederal capabilities that support biosurveillance, identification of investment needs for a national biosurveillance capability cannot be established. Animal Surveillance Capabilities. In the area of animal surveillance, we reported in May 2013 that USDA’s Animal and Plant Health Inspection Service (APHIS) had developed a new approach for its livestock and poultry surveillance activities, but had not yet integrated these efforts into an overall strategy with goals and performance measures aligned with the nation’s larger biosurveillance policy. Under its prior approach, APHIS focused its disease surveillance programs on preventing the introduction of certain foreign animal diseases and monitoring, detecting, and eradicating other reportable diseases already present in domestic herds. Under this previous approach, information about nonreportable diseases, including those that are new or reemerging, was not always captured by the agency’s disease surveillance efforts. We also reported in 2013 that under its new approach APHIS had begun to broaden its approach by monitoring the overall health of livestock and poultry and using additional sources and types of data to better detect and control new or reemerging diseases. For example, APHIS had been monitoring for the presence of pseudorabies—a viral swine disease that may cause respiratory illness and death—at slaughter facilities, but under the new approach, it proposed monitoring these facilities for a range of other diseases as well. However, we concluded that without integrating APHIS’s new approach to livestock and poultry surveillance activities 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. We recommended that APHIS integrate its new surveillance approach with an overall strategy that guides how its new approach will support national homeland security efforts to enhance the detection of biological threats. However, while the agency agreed, this recommendation has not been implemented. DHS Biosurveillance Efforts. In 2015, we identified persistent challenges related to two of DHS’s biosurveillance capabilities, NBIC and the BioWatch program. We reported in 2009 that NBIC was not fully equipped to carry out its mission because it lacked key resources—data and personnel—from its partner agencies, which may have been at least partially the result of collaboration challenges it faced. For example, some partners reported that they did not trust NBIC to use their information and resources appropriately, while others were not convinced of the value that working with NBIC provided because NBIC’s mission was not clearly articulated. In the 2009 report, we recommended that NBIC develop a strategy for addressing barriers to collaboration and develop accountability mechanisms to monitor these efforts. DHS agreed, and in August 2012, NBIC issued the NBIC Strategic Plan, which is intended to provide NBIC’s strategic vision, clarify the center’s mission and purpose, and articulate the value that NBIC seeks to provide to its partners, among other things. In September 2015, we reported that despite NBIC’s efforts to collaborate with interagency partners to create and issue a strategic plan that would clarify its mission and efforts, a variety of challenges remained. Notably, many of its federal partners continued to express uncertainty about the value NBIC provided. We identified options for policy or structural changes that could help NBIC better fulfill its biosurveillance integration mission, such as changes to NBIC’s roles, but we did not make specific recommendations. Additionally, since 2012, we have reported that DHS has faced challenges in clearly justifying the need for the BioWatch program and its ability to reliably address that need (to detect aerosolized biological attacks). In September 2012, we found that DHS approved a next- generation BioWatch acquisition in October 2009 without fully developing knowledge that would help ensure sound investment decision making and pursuit of optimal solutions. We recommended that before continuing the acquisition, DHS reevaluate the mission need and possible alternatives based on cost-benefit and risk information. DHS concurred and in April 2014, canceled the acquisition because an alternatives analysis did not confirm an overwhelming benefit to justify the cost. Having canceled the next generation acquisition, DHS continues to rely on the currently-deployed BioWatch system for early detection of an aerosolized biological attack. However, in 2015, we found that DHS lacks reliable information about the current system’s technical capabilities to detect a biological attack, in part because in the 12 years since BioWatch’s initial deployment, DHS has not developed technical performance requirements for the system. We reported in October 2015 that DHS commissioned tests of the current system’s technical performance characteristics, but without performance requirements, DHS cannot interpret the test results and draw conclusions about the system’s ability to detect attacks. DHS is considering upgrades to the current system, but we recommended that DHS not pursue upgrades until it establishes technical performance requirements to meet a clearly defined operational objective and assesses the system against these performance requirements. DHS concurred and is working to address the recommendation. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this concludes my prepared statement. I would be happy to respond to any questions you may have. For questions about this statement, please contact Chris Currie at (404) 679-1875 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Kathryn Godfrey (Assistant Director), Susanna Kuebler (Analyst- In-Charge), Russ Burnett, Marcia Crosse, Mary Denigan-Macauley, Tracey King, Jan Montgomery, Steve Morris, and Tim Persons. Key contributors for the previous work that this testimony is based on are listed in each product. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The nation's biodefense enterprise is the whole combination of systems at every level of government and the private sector that can contribute to protecting the nation and its citizens from potentially catastrophic effects of a biological event. It is composed of a complex collection of resources, programs, and initiatives, designed for different purposes and dedicated to mitigating various risks, both natural and intentional. In an era of rapid transit and global trade, the public health and agricultural industries, as well as natural ecosystems including native plants and wildlife, face increased threats of naturally occurring outbreaks of infectious disease and accidental exposure to biological threats. Also, threats of bioterrorism, such as anthrax attacks, highlight the continued need for biosurveillance systems that provide early detection and warning about biological threats to humans. This statement summarizes GAO's work on challenges to building and maintaining the nation's biodefense and biosurveillance. This statement is based on GAO work issued from December 2009 through March 2016 on various biodefense and biosurveillance efforts. GAO also reviewed the 2015 report of the Blue Ribbon Study Panel on Biodefense for updates, but has not independently assessed the entirety of the conclusions, recommendations or methods. To conduct the prior work, GAO reviewed relevant laws, presidential directives, policies, strategic plans, and other reports; surveyed states; and interviewed federal, state, and industry officials, among others. The biodefense enterprise is fragmented and does not have strategic oversight to promote efficiency and accountability. Specifically, the biodefense enterprise lacks institutionalized leadership enterprise-wide to provide strategic oversight and coordination. In 2011, GAO reported, there are more than two dozen presidentially appointed individuals with biodefense responsibilities and numerous federal agencies with mission responsibilities for supporting biodefense activities, but no individual or entity with responsibility for overseeing the entire biodefense enterprise. In 2011, GAO reported that the Homeland Security Council (HSC) should consider establishing a focal point for federal biodefense coordination. In December 2014, National Security Council (NSC) staff, which supports the HSC, told GAO that two of its directorates work together as the focal point for federal biodefense efforts. This is an important step in promoting a comprehensive and coordinated approach to biodefense, but strategic leadership issues persist. In October 2015, a report by the Blue Ribbon Study Panel on Biodefense stated strategic leadership issues persist and called for a focal point to provide strategic leadership, noting that elevating authority above the agency-level can help overcome the challenges faced by the biodefense enterprise. The Study Panel found that White House councils and offices generally only become involved when a specific biodefense issue affects a prominent ongoing responsibility—a method which is not consistent with our call for a strategic approach. In 2011, GAO also reported that while some high-level biodefense strategies have been developed, there is no broad, integrated national strategy that encompasses all stakeholders with biodefense responsibilities that can be used to guide the systematic identification of risk; assess resources needed to address those risks; and prioritize and allocate investment across the entire biodefense enterprise. GAO reported that the overarching biodefense enterprise would benefit from strategic oversight mechanisms, including a national strategy, to help ensure efficient, effective, and accountable results, and suggested the HSC take action. However, as of February 2016, such a strategy had not been developed. Biosurveillance, an aspect of biodefense, also faces key challenges at all levels of government that transcend what any one agency can address on its own, and our more recent and ongoing work continues to highlight these challenges. In 2010, GAO recommended the HSC establish a focal point to lead the development of a national biosurveillance strategy that clarifies roles and responsibilities, provides goals and performance measures, and identifies resource and investment needs, among other elements. However, the recommendations have not been fully implemented. Since 2009 GAO's has also identified challenges with specific biosurveillance capabilities. Specifically, GAO has identified biosurveillance capability challenges with, among other topics, (1) state and local public heath capabilities, (2) animal health surveillance capabilities, and (3) two Department of Homeland Security biosurveillance efforts—the National Biosurveillance Integration Center (NBIC) and the BioWatch Program (which aims to provide early indication of an aerosolized biological weapon attack). However, not all recommendations have been implemented.
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Sole proprietors own unincorporated businesses by themselves. As such, they are distinct from corporations and partnerships. In this report, the term sole proprietors refers to both the owners of the businesses and the category of business. In tax year 2003, 20.6 million sole proprietors filed tax returns (the latest year for which detailed IRS data were available). Sole proprietors constitute about 72 percent of all businesses in the United States but are small; they have only 4.8 percent of all business receipts. Sole proprietors include a wide range of businesses, including those that provide services, such as doctors and accountants; produce goods, such as manufacturers; or sell goods at fixed locations, such as car dealers and grocers. These activities may be full time or part time and may be all or part of an individual’s income. Figure 1 shows the distribution of sole proprietors and their gross receipts by the size of the proprietorship. Sole proprietors report their business-related net profit or loss on IRS Form 1040, U.S. Individual Income Tax Return, through their Schedule C Profit or Loss from Business (see app. III). The Schedule C requires sole proprietors to classify their type of business or profession, report gross receipts and income, place expenses in 23 categories, and provide additional data on vehicle expenses. Sole proprietors with expenses up to $5,000 may qualify for simplified tax reporting on Schedule C-EZ, which allows them to report all expenses on one line. Sole proprietors combine their business profits or losses, reported on Schedule C, with income, deductions, and credits from other sources that are reported elsewhere on the Form 1040 to compute their overall individual tax liability. In addition to income tax obligations, sole proprietors have other tax requirements. If they have employees, sole proprietors are responsible for withholding and paying Social Security, Medicare, and federal income tax, and paying federal unemployment tax under an employer identification number (EIN) that is the tax identification number (TIN) for the business. Whether they have employees or not, sole proprietors are required to pay self-employment tax, which is similar to the Social Security and Medicare tax for wage earners. Sole proprietors may prepare and receive information returns for payments made to them or made by them for services, known as nonemployee compensation (NEC), on an IRS Form 1099-MISC. IRS uses the NEC data in its matching programs, such as AUR, to help verify a sole proprietor’s receipts. Generally, a Form 1099-MISC needs to be filed with IRS and the recipient of the payment for payments of $600 or more for services performed for a trade or business, including a sole proprietor, by people who are not employees, such as contractors; rent payments of $600 or more, other than rents paid to real estate agents; and sales of $5,000 or more of consumer goods to persons for resale anywhere other than in a permanent retail establishment. Payments for purchases of goods and service to corporations generally are not required to be reported. Based on these rules, organizations (including sole proprietors) that make NEC payments for services provided may be required to submit information returns to IRS and the payee. For example, a store owner (a sole proprietor) who hires a self-employed computer programmer (another sole proprietor) to design the business Web site for $10,000 must submit a Form 1099-MISC information return to report the $10,000 payment made to the computer programmer. However, if the programmer is hired to design a personal, nonbusiness Web site for the store owner, no information return is required. Completing a Form 1099-MISC requires the payer to determine whether the payee is an independent contractor or an employee. To determine independent contractor status, payers are to use 20 common law rules. Numerous controversies over interpretation of the common law rules led to the enactment of Section 530 of the Revenue Act of 1978, which stops IRS and Treasury from issuing new interpretations of these rules. In 1996, we characterized these rules as confusing and resulting in many misclassifications. If the determination results in an employee-employer relationship, the organization is required to prepare a Form W-2 and withhold tax from each payment to the employee. Similarly, the payer must determine if the payee is a corporation, since such payments generally are not subject to Form 1099-MISC reporting. To determine if the service is provided by a corporation, service providers are asked to declare their corporation status and, if not a corporation, provide a TIN. To ensure that payees provide correct TINs on information returns filed with IRS, NEC payments may be subject to backup withholding. Independent contractors and Section 530 are discussed in appendix IV, and backup withholding rules are discussed in appendix V. IRS’s two main programs for ensuring compliance among sole proprietors are AUR and Examination. AUR matches the NEC income reported on the Schedule C of the sole proprietor’s tax return with the NEC income reported on Form 1099-MISC. AUR may send a notice to the sole proprietor if the AUR matching identifies a discrepancy between the NEC reported. The notice proposes adjustments to the tax return filed and requests payment of additional tax, interest, or penalties related to the discrepancy. If the taxpayer disagrees with the notice, the taxpayer is requested to explain the difference and provide any supporting documents. Figure 2 describes the NEC information reporting process. Examinations may address any type of noncompliance issue and come in three forms. Correspondence examinations are conducted through the mail and usually cover a narrow issue or two. Office examinations are also limited in scope but involve taxpayers going to an IRS office. For field examinations, IRS will send a revenue agent to a taxpayer’s home or business to examine the compliance problem that IRS suspects. IRS estimates the gross tax gap—the difference between what taxpayers actually paid and what they should have paid on a timely basis—to be $345 billion for tax year 2001, the most recent estimate made. IRS also estimates that it will collect $55 billion, leaving a net tax gap of $290 billion. IRS estimates that a large portion of the gross tax gap, $197 billion, is caused by the underreporting of income on individual tax returns. Of this, IRS estimates that $68 billion is caused by sole proprietors underreporting their net business income. This estimate does not include other sole proprietor contributions to the tax gap, including not paying because of failing to file a tax return, underpaying the tax due on income that was correctly reported, and underpaying employment taxes. According to IRS, estimates for some parts of the tax gap are more reliable than those for others. For both these reasons, the precise proportion of the overall tax gap caused by sole proprietors is uncertain. What is certain is that the dollar amount of the tax gap associated with sole proprietors is significant. IRS bases its estimates of the tax gap caused by underreporting of individual income on its compliance research program—NRP. The individual reporting compliance study was a detailed review and examination of a representative sample of 46,000 individual tax returns from tax year 2001. IRS generalized from the NRP sample results to compute estimates of underreporting of income and taxes for all individual tax returns. Because even the detailed NRP reviews could not detect all noncompliance, IRS adjusted the NRP estimates to develop final estimates of income misreporting and the resulting tax gap. IRS did not adjust all the NRP population estimates, only those necessary for developing its final tax gap estimates. However, NRP population estimates are a rich source of data about the nature and extent of sole proprietor noncompliance. Consequently, our report sometimes presents NRP population estimates and sometimes final tax gap estimates. The significant amount of sole proprietor noncompliance reported in IRS’s tax gap estimates is caused by underreporting of net business income, including the misreporting of both gross business income and expenses. The distribution of the resulting unpaid taxes is uneven. A small proportion of sole proprietors, but still a significant number, has relatively large amounts of unpaid taxes. Based on the unadjusted NRP results, an estimated 70 percent of Schedule C filers in 2001 (about 12.9 million) made an error when reporting net business income (that is, net profit or loss on line 31 of Schedule C). Most of the misreporting was underreporting. These NRP results showed that an estimated 61 percent of Schedule C filers underreported their net income and 9 percent overreported. These reporting errors resulted in $93.6 billion, before adjusting, of misreported net business income as shown in figure 3. This misreporting included an estimated $99 billion of underreported and $5.4 billion of overreported net income. The underreporting of net business income was caused by misreporting of both gross income and expenses, as shown in figure 3. An estimated 39 percent of sole proprietors (6.9 million) made an error on the gross income line of Schedule C and underreported about $53 billion net after subtracting overstatements from understatements. An estimated 73 percent of sole proprietors (10.9 million) made an error on the total expense line of the Schedule C and overreported about $40 billion net after subtracting understatements from overstatements. Overstating expenses reduces net business income and thus taxes. However, understating expenses may also contribute to understated tax if it is done to disguise understating higher amounts of gross income. The misreporting of expenses was spread over all the 23 expense categories on the Schedule C. However, 55 percent of expense misreporting was concentrated in four categories: car and truck, depreciation, supplies, and other. The unadjusted NRP results underestimate the amount of misreporting. The estimates in figure 3 are based on errors detected in the NRP reviews. IRS knows that not all misreporting is detected during its examinations, including NRP reviews. Unreported cash receipts, for example, are difficult to detect. IRS uses various methodologies and other sources of data (on cash transactions, for example) to adjust the aggregate NRP results (but not individual line items) to estimate misreporting. The NRP data limitations are more fully described in appendix I. After these adjustments, IRS estimates that sole proprietors misreported 57 percent of their net business income in 2001 and that the tax gap caused by this misreporting of sole proprietor net business income in 2001 was $68 billion. This is a substantial upward adjustment from the estimated $36.9 billion in understated taxes from all sources on returns with a Schedule C attached based on what NRP detected. Taxpayers misreport income and expenses for a variety of reasons. Some misreporting is intentional; some is unintentional. How much misreporting is in each category is not known. IRS refers some misreporting for criminal prosecution, but often it is impossible to tell from a tax return whether errors are intentional. Beyond intentional misreporting, reasons for errors include transcription mistakes, misunderstanding of the relevant tax laws or regulations, and poor recordkeeping. Examples from our review of NRP examination case files illustrate some of these types of reporting errors: The sole proprietor operated a cash-card business and reported about $900,000 in gross receipts on the Schedule C. The business is largely done with cash transactions. The examiner found evidence of more than $1 million in additional sales income, as well as additional expenses from purchases, leading to an adjustment of about $30,000 for Schedule C net income. The adjustment contributed to a total proposed additional tax assessment of about $8,000. The sole proprietor owned a construction business and reported Schedule C losses of over $30,000. The examiner found that that the sole proprietor had poor business skills and shoddy records. Organizing the documentation to support the Schedule C required over 25 hours of examiner time and resulted in net adjustments to receipts and expenses on the Schedule C of over $45,000. The sole proprietor owned a retail business and reported Schedule C gross income of almost $250,000. The examiner proposed adjustments of about $9,000 to Schedule C expenses because the expenses were undocumented or were personal living expenses not associated with the business. In protesting the related assessment to IRS Appeals, the taxpayer’s representative said that the taxpayer’s records were spread across several store accounts, several accounts for rental properties, and two personal accounts. Eventually, Appeals identified additional records and sent the case back to Examination. The taxpayer was selling craft-related items and admitted to the IRS auditor that the sales were not engaged in for profit. Accordingly, the taxpayer should not have filed a Schedule C, and several thousand dollars of expenses reported by the taxpayer on Schedule C were disallowed. The taxpayer was a minister and filed a schedule C. The examiner explained that although the taxpayer was self-employed in performing ministerial services for Social Security purposes, the taxpayer was considered an employee for income tax purposes. The taxpayer should not have filed a Schedule C. Understated taxes are spread unevenly among the population of sole proprietors, and slightly more than 1 million sole proprietors accounted for most of the understatements. On one hand, the amount of tax understatement caused by underreported net Schedule C income cannot be calculated precisely. Understated taxes on a return could result from the misreporting of multiple items, and the tax calculations depend on all such misreporting rather than just one item. On the other hand, using the best available data on underreporting detected by NRP, we estimate that 72 percent of the underreported adjusted gross income (AGI) on income tax returns filed by sole proprietors was caused by changes in Schedule C income. As a result, it is likely that most of the NRP-estimated $36.9 billion (unadjusted) in understated taxes on these returns can be attributed to underreported net business income on Schedule C. Although most sole proprietors had understated taxes, the amounts were skewed. Based on NRP estimates, half of sole proprietors who understated taxes on their individual income tax returns, understated less than an estimated $903 (the 50th percentile amount), as shown in figure 4. Above the 50th percentile, the amount of tax understatement significantly increased to an estimated $2,527 at the 75th percentile, $6,210 at the 90th percentile, and $20,387 at the 98th percentile. About 1.25 million sole proprietors accounted for the largest 10 percent of understatements for which the mean was about $18,000; for the largest 5 percent, the mean understatement was about $27,000. By comparison, as will be discussed further in the next sections, IRS’s field examiners assessed on average $27,800 of additional tax for examinations of individual returns without Schedule Cs. Most of the aggregate $36.9 billion of understated taxes (unadjusted NRP estimate) on returns filed by sole proprietors was concentrated in a small proportion of sole proprietors. As shown in figure 5, the 11.2 million sole proprietors at and below the 90th percentile understated their taxes by a cumulative $14.3 billion. The remaining 10 percent (1.25 million) above the 90th percentile understated a cumulative $22.6 billion in taxes, accounting for 61 percent of the total. When arrayed by the size of the sole proprietor and based on reported gross receipts, understated taxes are less skewed. Based on Schedule C gross receipts, those sole proprietors at or below the 90th percentile ($127,462) accounted for 65 percent of cumulative understated taxes ($23.9 billion of $36.9 billion). Those with the largest 10 percent of gross receipts accounted for the other 35 percent or $12.9 billion of the understated taxes. IRS’s two main programs for addressing sole proprietor reporting compliance— AUR and Examination—have limited reach over noncompliant sole proprietors, although they annually contact hundreds of thousands of taxpayers and recommend billions of dollars in assessments. Table 1 shows the types of sole proprietor noncompliance that AUR and Examination investigate, the percentage of the noncompliant sole proprietor population with recommended assessments, and the limitations of the programs. Assuming that Schedule C filers would misreport net income at the same rate in subsequent years as they did in 2001, AUR recommended that additional tax be assessed on about 2.7 percent of noncompliant sole proprietors for tax year 2003. Similarly, Examination recommended that additional tax be assessed on about 1.4 percent of noncompliant sole proprietors for returns from tax year 2004. AUR cannot detect all sole proprietor misreporting because the third-party information returns used for matching do not report all sole proprietor receipts or expenses. One quarter of sole proprietor receipts reported on a Schedule C in 2001 also appeared on a Form 1099-MISC that year. Since not all receipts are reported on a Schedule C, the true percentage would be lower. Exemptions to information reporting requirements prevent greater coverage of sole proprietor receipts. Most merchandise sales, nonbusiness services (such as construction or repairs for homeowners), and payments of less than $600 are exempt from Form 1099-MISC reporting. Additionally, because payments to corporations are generally exempt, sole proprietors that want to avoid information reporting of their receipts could incorporate. Several barriers may inhibit information return filing on NEC payments. First, preparing a Form 1099-MISC to report NEC payments can be a complex process. The general instructions for filling out any information return are 21 pages long, and the instructions for Form 1099-MISC are 8 pages long. Payers must figure out whether the businesses they have hired are independent contractors or exempt corporations and whether the payments meet other exemption criteria as well as acquire the payees TINs or EINs. Second, submitting Form 1099-MISC returns is not convenient. In its instructions, IRS requires payers to use forms printed with red, magnetic ink so that IRS scanners can more easily process the forms; payers are instructed not to print Form 1099-MISC off of IRS’s Web site. However, we observed plain paper Form 1099-MISC returns being scanned in IRS’s Ogden, Utah, processing center. Furthermore, payers must submit Form 1099-MISC returns separately from their tax returns. There is $50 penalty, as the instructions prominently remind payers, for failing to use the correct form. In practice, IRS may not assert the penalty for every violation because of the administrative and collection costs. IRS has an Internet-based system for submitting information returns called Filing Information Returns Electronically (FIRE), but barriers exist to the use of that system. FIRE requires payers to put return information in a particular format that IRS can use, which requires appropriate software that payers must purchase. Payers cannot simply call up a Web site and fill out an online form, and they need to register with IRS before using the system. The likelihood that a payer would submit a Form 1099-MISC return electronically decreases as the number of forms that the payer files decreases. For example, IRS data from tax year 2005 show that 93 percent of paper Form 1099-MISC returns were filed by payers with 24 or fewer submissions. One common tax preparation software package allows users to print Form 1099-MISC and submit them to IRS on paper, but the users cannot transmit Form 1099-MISC returns electronically as they can income tax returns. This software vendor said that it had a special arrangement with IRS for its users to print Form 1099-MISC on plain paper. Paper forms are more costly for IRS to process than electronically filed forms. With paper, IRS workers scan forms into a database and visually verify that the information was scanned correctly, a labor-intensive process. A substantial number of Form 1099-MISC returns are filed on paper. For filing year 2005, the Form 1099-MISC constituted 87 percent of all the paper information returns submitted that IRS could scan. Nearly 40 percent of Form 1099-MISC returns (31.5 million) were submitted via paper that year. Because of resource constraints, IRS officials said they do not contact taxpayers in all cases where AUR finds a mismatch between what was reported on an information return and what was reported on a tax return. The annual average of NEC-related contacts for tax years 1999 through 2003 is much less than half of the roughly 2 million cases that AUR officials say they annually identify for taxpayer contacts caused by potential NEC underreporting. Also, AUR matching generally does not address misreported Schedule C expenses. First, according to IRS, AUR does not match sole proprietors’ Schedule C expenses with the information returns they file for their own payments. Second, third-party information generally is not required on sole proprietor expenses. AUR reviewers are directed to consider the reasonableness of the taxpayers’ responses to notices but generally do not examine the accuracy of the information in the responses because they do not have examination authority. IRS officials said that addressing larger issues raised in the returns would take more time and possibly reduce the productivity of AUR overall. Consequently, taxpayers could, after being contacted by AUR about underreported NEC, create fictitious expenses to offset the underreported NEC. AUR does not systematically check for related parties trying to shift income from a tax return in a high-rate bracket to another return with a lower bracket. Related parties may include taxpayers who own multiple businesses, husbands and wives who file separate tax returns, unmarried couples, siblings, or parents and their children. IRS data showed that 3 percent of all Form 1099-MISC returns had the same address for the payer and the payee—one indicator that a related-party transaction might exist. A nonrandom file review of 55 Form 1099-MISC filings at IRS’s Ogden, Utah, campus found 8 examples in which the payer and payee had similar addresses or names. We did not determine the appropriateness of the apparent related-party transactions in the IRS Form 1099-MISC data based on the incidence of name and address matches. Two NRP cases are illustrative of apparent related-party transactions involving Form 1099-MISCs. In one case, a couple shared a financial account, and one of them was a sole proprietor. The sole proprietor, who earned more than $450,000 as an executive at a separate company, paid the other individual to run the sole proprietorship and deducted the payment on a Schedule C. The sole proprietorship had over $100,000 in losses and less than $1,000 in revenue. In the case file, an examiner noted that a Form 1099-MISC was filed on the NEC income paid from the executive to the person at the same address. This case file did not note whether the payment inappropriately shifted income to lower the couple’s overall tax liability or whether the payment was an allowable business deduction for services actually rendered as an ordinary and necessary expense of carrying out a business, as required by the Internal Revenue Code. In another case, however, IRS disallowed deductions for wages that a psychiatrist paid to his children because the taxpayer did not show that the children had rendered services or even that the wages were paid—only that the deductions were taken. Annually, AUR receives more than 80 million 1099-MISC forms. From those submissions, AUR contacts hundreds of thousands of taxpayers about potential sole proprietor misreporting on those forms and makes billions of dollars in recommended assessments. From tax years 1999 through 2003, AUR annually, on average, sent 371,989 notices on NEC cases and recommended $666 million in tax assessments. Figure 6 shows the trends in NEC contacts and total recommended assessments that AUR made from 1999 through 2003. Contacts and assessments related to underreported NEC make up a significant portion of the AUR caseload. Of more than 60 categories that AUR uses to sort income data, the two NEC categories combined rank first in the number of contacts with taxpayers and in the dollars of recommended assessments made from tax year 1999 through tax year 2003. NEC cases constituted 17 percent of all AUR contacts and 21 percent of all AUR assessments for tax years 1999 through 2003. Most of IRS’s examinations do not focus on noncompliance by sole proprietors. Correspondence examinations account for the majority of IRS’s examinations that IRS did in fiscal year 2006 and generally take the least amount of time to conduct, typically an hour or less, because they deal with simple, limited issues. Schedule C tax issues are generally too complex to make an examination through correspondence practical. For example, in our review of NRP files, we found a case in which an examiner manually sorted through a taxpayer’s records and organized them to accurately calculate the taxes owed—a task that could not occur through correspondence. In any case, IRS’s correspondence tax examiners, the lowest-graded examiners, do not have the training to examine many Schedule C issues, such as business depreciation or accounting methods. Schedule C tax issues typically must be addressed in field examinations. Field examinations took 20 hours on average to complete in fiscal year 2006. Furthermore, field examinations of returns with Schedule C forms took about 50 percent longer per return (7.2 hours more) to complete than those not categorized as Schedule C returns in that year. Among field examinations, the recommended additional tax assessed for examinations of returns with attached Schedule C forms tended to be smaller than for other types of examinations. For example, the average recommended assessment for revenue agents examining returns with attached Schedule C forms (the employees most likely to do these examinations) was $24,000 in fiscal year 2006. This was $3,800 less than examinations of returns without Schedule C attachments and was less than the average dollars per return for 18 other types of returns without Schedule C attachments, such as tax-shelter program cases. The relatively higher costs and lower yields for Schedule C examinations do not necessarily mean than Schedule C examinations are not cost- effective. The statistics reported above include only the additional taxes expected from the taxpayer who was examined. Examinations may have a deterrent effect on other taxpayers and increase the rate of voluntary compliance. Because the rate of noncompliance is so high for sole proprietors, any change in their voluntary compliance from doing more examinations could result in significant revenue increases. IRS has been examining more tax returns with attached Schedule C forms, resulting in billions of dollars in recommended tax assessments. From fiscal years 2001 through 2006, the number of examinations of returns that IRS categorized as Schedule C returns increased by 132 percent, from 128,062 to 297,626, as shown in figure 7. In fiscal year 2006, IRS examined about 3 percent of the Schedule C categorized returns. Recommendations of additional tax assessments also increased each year. The large increase in these assessments in 2005 was primarily for returns reporting income greater than $100,000. IRS officials also cited Son of Boss fraud cases from fiscal years 2005 and 2006 and increased examination efficiency as causes for the upward trends. Assessments do not reflect amounts actually collected. Amounts ultimately collected are not yet known from the examinations closed in 2005 and 2006. IRS did not apply negligence penalties in a substantial portion of NRP cases with a tax change. IRS uses negligence penalties to encourage compliance and to assure compliant taxpayers that the tax system is fair. Although sole proprietors were more frequently penalized than non-sole proprietors, just 62 percent of the sole proprietors who had a 100 percent or more tax change in their tax liability after the NRP examination and had a tax change of $10,000 or more were penalized. For smaller tax changes, the percentage penalized was lower. Figure 8 summarizes the penalty results from the NRP examinations for tax returns with a 100 percent or more change for sole proprietors and non-sole proprietors. Our NRP case file review provided some examples in which penalties were not assessed at all or seemed to be assessed inconsistently. A sole proprietor reported AGI of about $10,000 and zero tax liability on the return. An examiner proposed total adjustments of about $3,000, which included unreported Schedule C receipts and overstated expenses resulting in additional tax of about $450. The examiner proposed a negligence penalty of about $90, explaining that the taxpayer did not take reasonable care in preparing the tax return, which was done by a tax preparer. A sole proprietor reported AGI of about $90,000 and a tax liability of about $16,000. An examiner proposed total adjustments of about $35,000, based on unreported Schedule C receipts and overstated expenses, and a tax increase of $15,000. The examination workpapers explained that no negligence penalty was proposed since the tax preparer was responsible for most of the adjustments. The differences in individual cases might be caused in part by IRS procedures that give revenue agents discretion on whether to pursue a penalty, even when the tax change is substantial. Recommended penalties must be reviewed by the examiner’s manager. Explanations ranging from a lack of knowledge to reliance on a paid preparer can lead some examiners to mitigate a penalty but not others. IRS officials said the application of penalties in NRP cases should be similar to that for operational examinations because NRP examiners were required to follow IRS’s standard guidance for penalties. We have started work on a study that will more fully analyze the use of penalties in IRS’s operational examinations. The tax gap strategy issued by Treasury in September 2006 does not discuss sole proprietor noncompliance or specific options to address it. A number of options to improve sole proprietor compliance exist and could be considered as part of the overall tax gap strategy. Each option has both pros (such as improved compliance) and cons (such as burdens on taxpayers or third parties). Treasury’s tax gap strategy does not discuss specific options to address the tax gap overall or sole proprietor noncompliance in particular. As we discussed in February 2007 testimony, the strategy generally does not identify specific steps that Treasury and IRS will undertake to reduce the tax gap, the related time frames for such steps, or explanations of how much the tax gap would be reduced. Rather, the strategy broadly discusses opportunities for tax evasion and the preventive role of tax research, information technology, compliance activities, taxpayer service, tax law simplification, and working with stakeholders. For example, the portion on improving compliance activities generally discusses initiatives on expanded information reporting, improved document matching, refined detection programs, and increased examinations in selected areas. However, no specifics are provided. Without specifics, the strategy does not include actions that potentially would reduce the tax gap. Since the mid-1990s, we have reported on the need for a strategy to address the federal tax gap as well as sole proprietor noncompliance. In May 1994, we summarized many ideas on reducing the tax gap, including ideas on information reporting, tax withholding, and tax simplification. In August 1994, we reported on the lack of a comprehensive linkage between IRS’s compliance strategy and compliance efforts for sole proprietors and on the need for better systems to identify the causes of noncompliance and target enforcement resources. More recently, in July 2005, we reported that IRS needed a results-oriented approach to reduce the tax gap based on long-term, quantitative voluntary compliance goals and performance measures to determine the success of its strategies and adjust as necessary. In April 2006, we testified that IRS had established such compliance goals but lacked a data-based plan for achieving the goals. In February 2007, we testified on the need for multiple approaches to reduce the tax gap, including improved taxpayer services, tax code simplification, more information reporting, and an appropriate level of resources for tax enforcement. Our products related to the tax gap are listed in the Related GAO Products section at the end of this report. IRS is not without some of the elements of a tax gap strategy. IRS’s management continually makes decisions about reallocating resources and has taken steps that demonstrate an understanding of the value of a more strategic approach. One important step is NRP, which gives IRS management more information about the nature of noncompliance and is being used to better target examinations on noncompliant taxpayers. IRS’s annual budget requests include specific compliance program proposals. For example, the fiscal year 2008 budget submission had 16 legislative proposals on tax gap reduction. Some of these proposals related to sole proprietors, such as those requiring information reporting on certain government payments made for the procurement of property and services and on merchant card payment reimbursements. Several IRS and Treasury experts, and other knowledgeable individuals also commented that many of these options would be applicable to any small business regardless of its organizational form (such as partnerships, limited liability companies, and corporations). However, these elements do not make up the type of long-term, comprehensive strategy, described above, that provides an overall rationale and specific steps, time frames, and predicted impact on the tax gap. Many options exist that could help reduce sole proprietor noncompliance. These options range from enhancing IRS’s assistance to taxpayers to instituting tax withholding on payments made to all or certain types of sole proprietors. Each option has pros and cons. We identified options and their pros and cons by reviewing our reports and the reports of others on sole proprietor compliance as well as through extensive conversations with experts and knowledgeable individuals inside and outside of IRS. Consistent with our previous reports, we tried to identify options that represented a range of approaches, such as improving taxpayer service, more information reporting, and various enforcement actions. Many of the options are directed at the specific sole proprietor compliance problems and IRS program limitations described earlier in this report. We placed the options into broad categories of problems, such as poor recordkeeping, unreported business income, and overstated business expenses. Our list, in table 2, is not exhaustive and not ranked in any order. Appendix II contains a longer description of each option, including pros and cons. All the options have pros and cons. Because the options are presented as concepts, rather than as detailed plans ready for implementation, the pros and cons could vary with such detail. In most cases, pros and cons are described qualitatively and are not intended to be exhaustive; additional analysis might find others. In general, the pros include helping sole proprietors to comply voluntarily, helping IRS detect and prevent underreporting of income and understatement of taxes, and reducing the burden on taxpayers or third parties for filing tax returns and information returns. The cons include the costs and burdens imposed on sole proprietors, third parties, and IRS. We are not recommending particular options for a number of reasons: Trade-offs. IRS has other compliance objectives in addition to sole proprietor compliance. Devoting more IRS staff and other resources to close the sole proprietor tax gap means that fewer resources are available for combating other types of noncompliance, such as corporate, individual, or tax-exempt entity noncompliance. Forgoing enforcement revenue elsewhere is an opportunity cost of devoting more resources to sole proprietor noncompliance. Also, the resources and management capacity devoted to sole proprietor noncompliance may not be sufficient to implement all the options. Priorities would need to be established. Interaction between options. Some of the options may be substitutes for each other. Others may be complements. Improving assistance to taxpayers might reduce the need for some enforcement actions. Some of the options may reinforce each other—such as expanded information reporting and more convenient filing options—making it desirable to package them together. Policy judgments. Some of the options involve policy judgments about how the options would affect different groups of people. For example, information reporting invariably imposes some costs on the third parties required to report, but no objective criteria exist for assessing when third- party costs are excessive. In many cases, quantitative information about the effects is not available. Judgments would have to be made based on qualitative information. For all of these reasons, we are not ranking or otherwise making recommendations on the value of each option, nor are we opining on which options should be packaged together and in what manner. The options could be considered as part of an overall Treasury and IRS tax gap strategy. For most options, Treasury and IRS would need to develop the details on how the options would work both singly and as part of a coordinated strategy. Issues that could be considered in an overall strategy include how much emphasis should be placed on sole proprietor noncompliance versus other types of noncompliance, efforts to help sole proprietors voluntarily comply versus efforts to help IRS detect noncompliance after it occurs, the reporting requirements and added burden placed on sole proprietors versus the reporting requirements and burden placed on third parties, and legislative changes versus administrative changes at IRS. The tens of billions of dollars in tax revenue lost annually because sole proprietors underreport over half of their aggregate net income contribute to the nation’s long-term fiscal challenge. This underreporting is also unfair to compliant taxpayers. Because underreporting is spread among more than 12 million sole proprietors, much of it in small amounts, because the underreporting is for both gross income and expenses, and because IRS’s enforcement programs are limited and costly, the sole proprietor tax gap cannot be closed by IRS enforcement alone. As we have said before, improving compliance will require a variety of new approaches. Many options exist for improving sole proprietor compliance; however, they all have individual pros and cons, some may be substitutes for each other and some may reinforce each other. Trade-offs also exist at a broader level. Devoting more IRS resources to sole proprietor compliance must be judged relative to what those resources could accomplish in IRS’s other programs. Furthermore, IRS’s resources are not the only ones devoted to tax administration. Taxpayers and third parties spend their time and money to make our tax system work. For these reasons, the options are best considered as part of an overall strategy. Such a strategy would provide more assurance that taxpayer, third party, and IRS resources are being used efficiently to promote compliance. We recommend that the Secretary of the Treasury ensure that the tax gap strategy includes (1) a segment on improving sole proprietor compliance that is coordinated with broader tax gap reduction efforts and (2) specific proposals, such as the options we identified, that constitute an integrated package. We requested written comments from the Secretary of the Treasury and received comments on behalf of the Treasury from its Tax Legislative Counsel (see app. VI). In commenting on a draft of this report, the Treasury said that although not addressed specifically, the seven elements of the department’s strategy are intended to apply broadly to all types of businesses and individual taxpayers, including sole proprietorships. Treasury also stated that this report provides valuable insight for applying the strategy to the tax gap. IRS and Treasury also provided technical comments on a draft of this report, which we incorporated as appropriate. IRS did not provide written comments. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its 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 have any questions about this report, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. To describe the nature and extent of the noncompliance associated with sole proprietors, we analyzed the Internal Revenue Service’s (IRS) National Research Program (NRP) results, tax gap estimates, and Statistics of Income (SOI) data, and interviewed IRS officials. The NRP data are IRS estimates of individual tax reporting compliance based on reviews and examinations of filed tax returns. IRS randomly selected the returns for tax year 2001, which were filed with IRS during calendar year 2002. To compute the percentage of returns with an understatement or overstatement on a Schedule C line and the net misreported amounts, IRS used the following definitions, including related limitations: Percentage of returns with an error: This ratio is the weighted number of taxpayers that have a non-zero net misreported amount divided by the weighted number of returns that should have reported the amount. For some items, taxpayers may have errors that exactly offset each other resulting in no net tax change. For example, a taxpayer may have reported a transaction as an “office expense,” but an examiner reclassified the same amount as “repairs and maintenance.” NRP did not consider these offsetting changes as errors for those line items. Net misreported amounts (NMA): The NMA is the sum of all amounts underreported minus the sum of all amounts overreported for an item. The NMA does not include adjustments between schedules of the return. For example, the NRP examiner may disallow reported amounts for expense deductions on Schedule C that should have been reported on Schedule A and increase the deductions on Schedule A by the same amounts. Neither adjustment would be in IRS’s NMA. However, the adjustments would be included in IRS’s definition of the amounts that should have been reported, which are reflected in the denominator of the net misreporting percentage. The NMA does not include adjustments that were made because the taxpayer used the wrong form or line item. Because the percentage of returns with an error and the NMA are derived from samples, table 3 lists the confidence intervals for each amount. IRS did not compute confidence intervals for its estimates. When we calculated confidence intervals, we got slightly different point estimates than IRS. The difference appears to arise from varying definitions of sole proprietors. We are 95 percent confident that the percentages and amounts reported are between the low estimate and the high estimate. In the body of this report, we present IRS’s point estimates. Estimated understated tax amounts, as shown in figure 4, were derived from NRP sample data. Table 4 lists the estimated percentile amount and confidence intervals for each percentile. We are 95 percent confident that the percentages and amounts reported are between the low and high estimates. Estimated cumulative understated tax amounts, as shown in figure 5, were derived from NRP sample data. Table 5 lists the estimated percentile amount and confidence intervals for each percentile. We are 95 percent confident that the percentages and amounts reported are between the low and high estimates. According to IRS Research officials, NRP results are not tax gap-related estimates since they do not account for misreporting that the auditors did not detect. Typically, the undetected misreporting of Schedule C net income likely takes the form of understated gross receipts and overstated expenses, for which IRS did not prepare separate tax gap estimates. Overstated expenses tend to be detected since the burden of proof is on the taxpayer to justify them. However, when taxpayers intentionally understate gross receipts, they may also understate expenses to hide the gross-receipt underreporting from IRS. Also, NRP includes estimates of some net business income that is not reported on Schedule C. These amounts are not added to the line-item detail and are not included in the analyses for this report. We could not estimate the amount of tax change that would result from NRP’s examinations of Schedule C income because it must be combined with the taxpayer’s filing status, exemptions, other types of income, deductions, credits, and other taxes. To analyze the extent to which IRS’s enforcement programs address the types of sole proprietor noncompliance found by IRS’s most recent research, we used several data sources. We reviewed instructions for tax and information returns and filing guidance as well as program procedures. We analyzed program results data collected from the Automated Underreporter Program (AUR) and Examination officials, and interviewed IRS staff on the operations and results of AUR and the correspondence, office and field examination programs. We reviewed examination plans and Internal Revenue Manual procedures and other instructions to IRS staff describing program procedures. We analyzed data on examination results and numbers of Schedule C forms filed from the IRS Data Book, and data on paper Form 1099-MISC returns published by IRS’s Office of Research for 2006. We did not analyze IRS’s math error program since all NRP-examined returns were reviewed by this program, which is an integral part of IRS’s returns processing function. To calculate the percentage of noncompliant sole proprietors on which AUR and Examination made recommended assessments, we first multiplied the percentage of noncompliant sole proprietors found in NRP data by the number of Schedule C returns for the most recent years that we had available from the IRS Data Book that matched the most recent years for which we had complete AUR and Examination data (tax year 2003 for AUR and tax year 2004 returns for work Examination did in fiscal year 2005). Then we divided the number of recommended assessments made in each program by the number of noncompliant sole proprietors to arrive at the percentage of noncompliant sole proprietors on which the programs made recommended assessments. We reviewed a sample of completed NRP examination case files to understand the types of sole proprietor noncompliance being detected. We selected the sample using the NRP case results database to identify all NRP cases with adjustments to Schedule C items for sole proprietor tax returns. We then selected a nonestimation sample of NRP examination cases with adjustments to gross receipts or sales, total expenses, net profit or loss on the Schedule C, and the business income line on the Form 1040 return, because these lines summarize the sole proprietor’s operations. We also randomly selected some Schedule C adjustment cases. We also used NRP data and the NRP case file sample to analyze IRS’s use of penalties in NRP examinations. The analysis describes the proportion of NRP cases closed with adjustments and the proportion closed with a penalty recommended by the NRP examination. Because the cases with adjustments and penalties were not drawn from the population of all individual returns, they cannot be used to estimate a penalty assessment rate and other characteristics for all individual taxpayers. Even with these limitations, this analysis provides useful information on the outcome of the NRP sample. To estimate the percentage of reported Schedule C receipts that were on a Form 1099-MISC, we compared amounts reported on the Form 1099-MISC and on Schedule C (line 1 total gross receipts or sales). This analysis used SOI data on individual tax returns for tax year 2001, which included a sample of information returns. We found that three Form 1099-MISC items could be reported on a Schedule C, including nonemployee compensation (NEC), medical payments, and fish sales. According to IRS, these Form 1099-MISC items could also be reported on two other IRS forms— Schedule F, Profit and Loss From Farming, and Form 4835, Farm Rental Income and Expenses—other than the Schedule C. We found that about 4 percent of the amounts reported on the Form 1099-MISC were reported on Schedule F or Form 4835. This difference was not material to our computation. Further, our analysis did not consider several sources of noncompliance that could affect the computation, such as the nonfiling of the required Schedule C or Form 1099-MISC or the underreporting of Schedule C or Form 1099-MISC amounts. To estimate the percentage of Form 1099-MISC returns where the payer and the payee have the same address, we used an SOI data file with tax year 2001 individual income tax return information. We compared the postal codes and the numeric portion of street addresses reported by the payer and payee to identify whether they had the same address. For those who did, we reviewed a sample to verify that the addresses were the same. We also reviewed 55 Form 1099-MISC filings at the Ogden, Utah, campus, which provided 8 examples in which a payer and payee had similar addresses or names. We did not review other IRS records to determine whether these Form 1099-MISC filers were related parties. To assess the likelihood of being assessed a penalty, controlling for other factors, we used logistic regression analysis, an econometric method appropriate for analyzing variables with dichotomous outcomes. We used the deciles of the continuous variables as the independent variables in the model. We did not weight the NRP returns or incorporate the NRP stratification because penalties are a function of the audit and the NRP returns are not representative of audited returns. Controlling for use of a paid preparer, adjusted gross income, Schedule C amount, and total tax as reported by the taxpayer, a logistic regression was used to predict a penalty based on the absolute value of the difference between the total tax reported on the Form 1040 and the total tax after the NRP audit and the percentage of tax change (the difference in total tax divided by the total tax reported on the Form 1040). We found a significant effect of the percentage change in tax owed and the absolute value of the tax change on the likelihood of receiving a penalty. That is, individuals in higher deciles (5th through 10th deciles) of the percentage increase in tax were generally more likely than those in the lowest decile to be recommended for a penalty. Additionally, taxpayers in higher deciles of the absolute value of the tax change (4th through 10th deciles) were more likely than those in the lowest decile to be recommended for a penalty controlling for other factors. We also found that the odds of a penalty decreased with each decile increase in the taxpayer’s reported total tax liability. Although we did not test for interactions that could mitigate this effect, we found our results to be robust across a variety of model specifications. We did not control for other potentially relevant variables, such as differences among examiners, and did not test for whether the case was abated. We used several approaches to identify options to close the tax gap related to sole proprietors that could be included in the tax gap strategy being developed by the Department of the Treasury (Treasury). First, we sought ways to address the gaps between the nature of sole proprietor tax noncompliance and existing IRS programs. Second, we reviewed various research publications on sole proprietors and our recommendations, as well as those from the President’s Budget, President’s Advisory Panel on Federal Tax Reform, Treasury Inspector General for Tax Administration, IRS’s Taxpayer Advocate, and IRS advisory group reports. Third, we identified and discussed options and their the pros and cons with experts and knowledgeable individuals on sole proprietor compliance issues, including former Commissioners of Internal Revenue; persons who have experience with IRS or other federal programs related to sole proprietors; representatives for various national organizations representing sole proprietors, tax return preparers, or tax lawyers; tax staff working for Congress; and relevant staff at IRS and Treasury. All of the national organizations representing sole proprietors had large memberships and we contacted each organization’s committee which focuses on small business issues. From this work, we consolidated the list of options and pros and cons. We excluded a few options that were raised near the end of our work, lacked details, or generated comments or questions from experts and knowledgeable individuals on how the options would work. The list of options is not exhaustive and has limitations. Since data did not exist for analyzing the effect on the tax gap, taxpayers, or IRS for each option, we could not independently validate or weigh the pros or cons suggested by our experts and knowledgeable individuals. Because the experts and knowledgeable individuals had competing interests on questions of tax policy and administration, we did not seek consensus on the “best” options or on the pros and cons. Experts had limited time to discuss all the options and pros and cons. Thus, we did not discuss each option in detail in each interview, but overall, the interviews provided enough details for the options in our report. As a result of such limitations, we did not try to rank the options. Instead we described the options based on input from the literature and experts. More detailed proposals could raise other pros or cons not listed in our report. We used several approaches to assess data reliability. We assessed whether the examination results and data contained in the NRP database were sufficiently reliable for the purposes of our review. For this assessment, we interviewed IRS officials about the data, collected and reviewed documentation about the data and the system used to capture the data, and completed testing of relevant data fields for obvious errors in accuracy and completeness. We completed analytic testing to ensure that tax return items that should logically be equal were equal. For example, the net profit and loss line on Schedule C should be accurately transferred and equal to the similar line on the individual income tax return. We also compared the information we collected through our case file review to corresponding information in the NRP database to identify inconsistencies. This testing found that the NRP results for Form 1040 returns with Schedule C forms were sufficiently reliable for our review. The tax gap, SOI, AUR, and Examination data are all from sources that we used in previous reports. Based on assessments done for those reports, the fact that the sources are public and widely used, and additional testing we did to ensure that we were properly interpreting individual data elements, the data were sufficiently reliable for our review. We conducted our review at IRS Headquarters in Washington, D.C., and at IRS’s Ogden, Utah, campus from July 2006 through June 2007 in accordance with generally accepted government auditing standards. We have developed a list of options for reducing the tax gap for sole proprietors by reviewing our past reports as well as other related literature and by talking to experts and knowledgeable persons about sole proprietors’ tax compliance. As we built the list of options, we discussed the options and the related pros and cons with these experts, including past and current IRS and Treasury staff; former IRS Commissioners; congressional staff; representatives of organizations representing sole proprietors, tax preparers, and tax lawyers; and others who have working knowledge of tax compliance and IRS programs. This list is not exhaustive nor is the list of the pros and cons associated with each option. Many of the options are concepts rather than fully developed proposals with details of how they would be implemented. Additional detail could bring more pros and cons to light. The pros and cons are not weighted, and options should not be judged by the number of pros and cons. We are not making recommendations about the options or ranking their desirability. Rather, we have aligned these options with a series of known problems with sole proprietor tax compliance. Some of the options overlap, covering more than one problem while other options only deal with specific aspects of a problem. For our system of voluntary compliance to work, taxpayers must keep appropriate records. Our work on sole proprietors has raised issues about incomplete or inaccurate recordkeeping by sole proprietors as well as about the difficulties they face in dealing with complex tax rules. The options in this section look for ways to improve recordkeeping, simplify some of the rules, or provide more guidance and education to sole proprietors to reduce their burden. More education and better guidance could help sole proprietors comply with the complex tax rules for reporting on the Schedule C. IRS could work with small business and trade representatives to determine whether and how specific changes to IRS’s existing education and guidance would help those filing the Schedule C. Helping educate sole proprietors on their recordkeeping requirements and filing obligations (Schedule C and information returns) could reduce noncompliance. The costs to update the instructions is probably minimal, while the cost for the education would not be. Getting specific ideas that would help sole proprietors might take some time and effort, depending on the extent to which IRS tests these ideas. It may be difficult to target the education and guidance and improve instructions for the sole proprietors who need them the most, that is, those who keep poor records or make errors on the Schedule C. These sole proprietors may not have the time or incentive to pay attention. Changes may not help those who rely on a paid tax return preparer or bookkeeper because of IRS’s tendency to forward tax information to the taxpayer but not to the tax return preparer. Some education efforts could be costly to IRS, such as efforts to contact taxpayers individually. IRS could consider at least two broad approaches that would a) specifically target outreach to sole proprietors filing their first Schedule C to inform them about the option to receive regular e-mails on topics of interest, the small business hotline, the resource guide, and other services specifically targeted to help small businesses and b) automatically send computer-generated notices (i.e., soft notices) to first-time Schedule C filers who did not use a paid tax preparers (to reduce the number of notices) and who reported on certain Schedule C lines that involve more complexity or higher noncompliance (e.g., accounting method, depreciation, travel, or home office) about guidance on IRS’s Web site on reporting such issues. This would provide new sole proprietors with the specific information that they need to comply. It would also help new sole proprietors avoid “bad habits” before they become rooted. Using e-mail would reduce IRS’s costs. Using automated screening and soft notices would increase IRS’s “presence” without the costs of an enforcement contact (e.g., audit). There is no assurance that sole proprietors will read the information and comply. Some sole proprietors may not use e-mail or want to provide an e-mail address to IRS. IRS would incur some costs for the outreach and notices. Soft notices may not boost compliance if they are too vague or if sole proprietors perceive that IRS will not follow up in future tax years on the soft notices. Waiting to act until after the first Schedule C filing may be too late to change the behavior of some sole proprietors. Two requirements could help sole proprietors distinguish their business transactions and records from personal ones. Details would need to be worked out on any exceptions or tolerances; on offering incentives rather than requirements; and on enforcing and penalizing any noncompliance with the requirements, which follow. a) Require sole proprietors to include all business transactions in a business bank account or accounts used only for business purposes. Such transactions would include deposits of business receipts and payments of business expenses. Receipts or expenses generated outside of the business would not be part of these business accounts. Further, financial institutions could provide sole proprietors with an annual summary of inflows and outflows for the business account(s). b) Require each sole proprietor to obtain a taxpayer identification number (TIN) for a business. Currently, sole proprietors generally are required to obtain business TINs, known as employer identification numbers (EIN), when they have wage-earning employees for filing certain types of returns. In this option, sole proprietors could use EINs for their business transactions in lieu of using their Social Security numbers. Recordkeeping could improve, which would reduce the time and burden of preparing returns and responding to IRS’s inquiries. IRS could save money if its computer matching and audits could be done more quickly and with more certainty. Retroactively creating fictitious business expenses after the tax year would be easier to detect. Tax compliance would improve to the extent that sole proprietors would weed out personal expenses from their business expenses. Financial institutions may charge fees for separate business accounts and statements. Taxpayers who want to evade may not deposit all their income in the business accounts or still could run personal expenses through their business accounts. It might be unnecessary or burdensome for Schedule C filers who are not regularly operating a business but have intermittent Schedule C receipts and expenses. IRS may have difficulty enforcing such a requirement. Lift the limitations on IRS issuing rules and guidance on the criteria to determine whether a worker is to be treated as an employee or an independent contractor for tax purposes as well as on the related safe harbors for employers that classified workers as independent contractors. Guidance and rules might help clarify confusion in the myriad of employment relationships that have evolved since 1978. Clarification might help ensure that the correct amounts of taxes are being paid. Some types of sole proprietors might prefer legislative clarification rather than trusting IRS to lead the efforts to clarify and living with the current confusion rather than opening the door to changes, particularly if they do not trust IRS to make equitable decisions about the proper classification or the existing safe harbors. Information reporting offers a way to cover more of the income of sole proprietors who do not report all of their gross receipts. However, information reporting suffers when the information returns are not filed or are filed erroneously and late. Those filing the information returns may face difficulties or burdens in filing information returns on paper or when a sole proprietor does not provide a valid TIN. A number of options exist to better ensure that IRS receives the required information returns on payments made to sole proprietors while minimizing the burden of those filing these information returns. To the extent more Forms 1099-MISC are filed, sole proprietors are likely to be more compliant in reporting business income. The instructions would provide another outlet for notifying taxpayers of their Form 1099-MISC reporting obligations at a minimal cost. If those who are to file the required information returns do not read or follow the instructions, the clearer instructions would not boost required filings. If IRS receives more information returns, its costs to process and use them would rise. To the extent more Forms 1099-MISC are filed, sole proprietors are likely to be more compliant in reporting business income. Web-based filing could reduce the costs, burdens, and errors for everyone compared to filing/processing paper information returns. IRS may be able to reduce its start-up costs by modifying its Filing Information Returns Electronically system. If those who are to file the required information returns are not comfortable filing information through the Web, do not have access to computers, or do not want to file them at all, more filings of the required returns may not occur. If IRS requires extensive registration steps in order to file on the Web, some filers might find those steps too burdensome. IRS would incur start-up costs to create a new form and a Web-based filing system. IRS would incur additional costs to process and use the information from a significant increase in the number of filed information returns. Although payment of NEC would trigger the requirement to file a Form 1099-NEC, IRS could request other summary information in the expanded space on this separate form about payments to sole proprietors, such as expenses reimbursed, noncash payments, type of services received, or payments for goods. To the extent more information returns are filed with the new form and 1. sole proprietors are likely to be more compliant in reporting business 2. filing would be less confusing, 3. IRS could refine its computer matching to minimize “false” leads that burden compliant taxpayers, and 4. IRS would have better data to improve its research and case selection for enforcement contacts to the extent that IRS requested other information. IRS has no assurance that a new form would reduce taxpayers’ burden enough to lead to more filings of the required information returns. IRS would incur additional costs if it has to process a significant increase in the number of filed information returns and if it has to expand its existing enforcement activities to check compliance in filing these types of required information returns. For tax year 2001, about 70 percent of the sole proprietors misreported about 57 percent of their net business income. IRS’s examinations are limited in number and scope and do not find much of the unreported income. Information reporting offers a way to cover more noncompliant sole proprietors and focus on unreported gross receipts. However, information reporting covered just a quarter of the gross receipts reported on Schedule Cs. One reason for the gap is that current information reporting focuses on payments for services and excludes certain payments, such as those totaling below a certain threshold and those to corporations. These options attempt to address these gaps in information reporting for sole proprietors. Sole proprietors would break out their total gross receipts on the Schedule C to show the amount reported to them on information returns. Other information could be required, such as the number of information returns received and details on large payments. Sole proprietors could be more sensitized to use the information returns received and thus more accurately report gross receipts. IRS could be more productive in detecting unreported gross receipts by matching the Schedule C and information returns filed or analyzing the ratio of total gross receipts reported on the Schedule C and information returns in audit selection. No additional burden would be placed on third parties. The reporting is unlikely to stop all businesses that wish to hide payments. If their records do not account for whether the income was reported on a Form 1099-MISC, sole proprietors may have an additional burden to report the information. IRS would incur some costs to process and use the additional data. Information returns are not required on all payments for services, creating gaps when matching information returns that are filed to determine if all the service payments received have been properly reported. Two options to address these gaps include requiring information reporting on annual service payments that (1) are made to all corporations or to some subset , such as small corporations, non-publicly held corporations, or noncompliant corporations (clear definitions of exclusions would be needed), and (2) total less than $600, which now triggers information reporting. Sole proprietors who incorporate or receive payments below $600 should be more likely to comply in reporting business income. Sole proprietors would be less likely to structure payment amounts to avoid information reporting. Businesses would not have to distinguish between incorporated and unincorporated businesses in determining whether to file information returns. IRS could improve the productivity of its computer matching for unreported income. Businesses that file more information returns could incur significant costs and burdens, particularly if they have to expand their recordkeeping or make distinctions between small and large corporations. IRS would incur costs to process and match more information returns, and might not be able to use all of the new data if the number filed increases significantly. The information returns would be unlikely to encourage larger corporations that provide services to comply or help IRS find unreported income among larger corporations. Those receiving payments that are less than $600 might not account for much of the unreported income or might not be more noncompliant than other sole proprietors. These options would offer a way to get new information from organizations about payments made to sole proprietors. a) Require businesses that process credit card payments for merchants to report information on the amount of payments made to sole proprietors for a tax year. This reporting could be a summary or include details for payments above some specified amount. b) Require federal, state, and local governments to file information returns on all nonwage payments made (or those above a threshold) for property and services from corporate and noncorporate businesses. Certain payments, such as those related to interest, real property, and tax-exempt entities, would be excluded. c) Require financial institutions to file information returns on business deposits and withdrawals by sole proprietors, which would be facilitated to the extent that business transactions are segregated in business accounts under business TINs. Sole proprietors covered by any of these options might be more compliant in voluntarily reporting more business income on their Schedule Cs. Each of the options would provide information that IRS could use to select better enforcement cases or to be more productive in its enforcement activities. For example, credit card reporting could allow IRS to develop a ratio of credit card receipts to all receipts reported by sole proprietors by type of industry, and knowing deposit and withdrawal activity could allow IRS to better identify sole proprietors’ gross receipts through its bank deposit analysis method. Similarly, the information can be used to avoid selecting a company for audit if the information reports suggest that the taxpayer is compliant. Credit card companies and financial institutions would have some reporting costs. Governments would incur some reporting costs, but they already would have to incur similar costs to meet the tax withholding requirement that Congress approved for these payments starting in 2011, and federal agencies are already required to file some of these data with IRS for federal contracts. IRS would incur some costs to analyze the information from all the options and to figure out its best uses to identify underreporters. IRS might find it hard to use the increased amount of information returns at all or productively. If some businesses that use credit cards want to underreport income, they might move more transactions to the cash economy. The information would not help identify unreported income among sole proprietors who do not use credit cards, do not have accounts with financial institutions, or do not contract with governments. To the extent that financial institutions are reporting deposits and withdrawals related to nonbusiness activities, or that sole proprietors move funds between multiple business accounts, the information could create false leads for IRS that burden compliant taxpayers. This option envisions new information reporting by organizations but also by consumers. It would require property owners to report on payments made to contractors for improvements if the payments will be used to adjust the basis of the property for depreciation or sales purposes. Property owners would be required to report the contractors’ TINs. Absent the information return in their records, the property owners could not adjust the basis for tax purposes. Information reporting on such contracts could cover a substantial dollar value. Sole proprietors may be more likely to report the payments on their tax returns. The payment information could cover a larger portion of the gross receipts than just service payments. Consumers would not have to be burdened with distinguishing the type of business or type of payment in doing the reporting, and overall burden would be limited by how often they contract for improvements. Property owners would have some incentive to report the contractor payments and a defensible foundation for basis adjustments claimed in the future. The incentive for property owners may dissipate if their basis adjustments offer few tax benefits because they do not depreciate or are not expected to have a taxable gain when they are sold, or because property owners do not keep the information returns in their records in order to compute and justify adjustments to basis many years later. Property owners would have some burden to track and report the information and to deal with contractors that do not want to provide their TINs, for which some recourse would be needed. If contractors want to avoid having these payments reported to IRS, they could negotiate with property owners for a lower price in return for property owners not filing the information returns. IRS would have to spend some time and money sorting the information, particularly if the information is reported on paper rather than electronically, and then using the information for research or enforcement. IRS might find it hard to use all of the new information or to use it productively. Some may view disallowing a basis adjustment as a harsh penalty for failing to file an information return. A portion of the $68 billion sole proprietor tax gap arises from overstating deductions for business expenses. Based on what NRP detected, IRS has estimated for 2001 that about 73 percent of the sole proprietors misreported about $40 billion in expense deductions. Although IRS auditors find it easier to check claims for expense deductions than to hunt for unreported income, IRS audits cover few of the noncompliant sole proprietors who overstate business deductions. And the information reporting system does not cover payments made by sole proprietors that could be deductible business expenses. The options in this section look to provide more information about expenses to allow IRS to match or otherwise use to find overstated deductions. Sole proprietors would break out the amount of payments made for services on the relevant expense lines of the Schedule C. Additional information could be required, such as for payments above a specified amount. Sole proprietors might be more sensitized to the need to accurately claim expense deductions on the Schedule C and the need to also report them on required information returns. Tax preparers would have more incentive to check expense reporting compliance. If adequate, IRS could use the data to detect overstated expenses by matching amounts reported as expenses on the Schedule C lines with the amounts reported on information returns filed by the sole proprietor or by analyzing the ratio of total expenses to amounts reported on an information return’s audit selection. No additional burden would be placed on third parties. IRS might have difficulties processing and matching all of the new expense data. IRS would incur difficulties, such as extra costs, to process and use the additional data. If their records are incomplete on their expenses and information returns or their accounting systems do not break out expenses by the services provided, sole proprietors may have an additional burden to report the information. This would not stop all reporting noncompliance. IRS would match the existing information returns filed by sole proprietors to report their payments made for wages, services, and so forth to the related lines of the Schedule C in order to see whether the expenses claimed are consistent with the amounts reported on the information returns. As with any computer match, IRS would need to develop rules for doing the match and tolerances for contacting the sole proprietors about discrepancies. Such reverse matching could help identify excess deductions, especially for wages, without incurring the costs of audits. If sole proprietors learn about the reverse matching, they may become more compliant in reporting expenses This matching would not impose any new burdens on third parties and little burden on compliant sole proprietors if the matching criteria are effective. Beyond wages and possibly some types of nonemployee compensation, IRS may find it difficult to effectively match expenses in order to avoid contacting compliant sole proprietors. If sole proprietors want to overstate deductions and know that IRS can use the information returns they file to look for overstated deductions, some of them may file fictitious information returns. The expanded information reporting to cover expenses claimed on the Schedule C could include two options: a) Businesses receiving certain types of payments from sole proprietors in large amounts (i.e., thousands of dollars) would file information returns to report those amounts by type of expense. Beyond limiting such reporting to large dollar amounts (which would need to be set), the reporting also could be limited to certain types of payments that are easier to report or that tend to be overstated as expenses on the Schedule C (e.g., rents, fees, insurance, and travel). b) Businesses that process credit (and debit) card payments would be required to report information on the amount of payments by sole proprietors for each tax year. This reporting could be a summary total or include more details for payments above some specified amount. IRS would need to decide how it would use this information to check for overstated expenses on the Schedule C. Having the data might help IRS detect certain overstated expenses without incurring the costs of an audit. Otherwise, IRS would have more information on the expenses of sole proprietors for use in selecting cases for auditing. Sole proprietors might report their expenses more accurately with third- party data. Third-party businesses doing the reporting would have additional costs to file the information returns or burdens to know whether the payments are personal or business related. Some businesses might not want to report to IRS about payments they receive from sole proprietors, particularly if those payments account for most of their gross receipts and they underreport those payments on their tax returns. Sole proprietors wishing to avoid the credit reporting may use more cash purchases. If IRS were to use the information in a matching program, it would incur costs to process and match it in order to avoid contacting compliant sole proprietors and to identify personal expenses mixed in with business expenses. Through some form of review or audit of documentation, IRS could verify additional business expenses in those cases where sole proprietors claim additional expenses after IRS informs them that it has discovered unreported business income. IRS could improve the effectiveness of its AUR matching to the extent that it stops sole proprietors from claiming unverified expense offsets. If AUR staff do the verification, IRS would incur costs to train them to do the verification and find additional staff to keep up the volume of AUR contacts. If audit staff do the verification, IRS would have to make sure that the return on investment justifies allocating more expensive, better-trained staff to do the verification. If IRS develops some other verification program, it would incur start-up and operational costs. In addition to misreporting business income and expenses, the noncompliant sole proprietors do not pay their tax liabilities. Even so, they can receive government benefits, such as contract payments and Social Security credits. And they are not subject to a proven tax compliance technique for many individual taxpayers—tax withholding. This section lists options that could help induce sole proprietors to meet their tax obligations to receive benefits or avoid tax withholding. One way to induce sole proprietors to pay their taxes owed is to deny them government benefits unless they have paid the taxes. Federal agencies that provide the benefits would need to check for tax compliance with IRS, and the prohibitions against disclosing tax data would need to be revised to ensure that the authority exists. Two options for checking tax compliance before providing government benefits are to a) require that sole proprietors pay their self-employment tax obligations in order to receive credit for Social Security benefits or b) require federal agencies to do a tax compliance check with IRS before making a contract payment or otherwise providing a government benefit (certain loans or grants) to a sole proprietor (either all or just contractors). At a minimum, a check would be made to see whether the sole proprietor has unfiled tax returns or unpaid tax liabilities. Sole proprietors would have an incentive to meet their tax obligations. This would help ensure that compliant sole proprietors’ competitors pay their taxes. To the extent that sole proprietors are not motivated by the loss of Social Security credits or government benefits, some of them may continue to not pay their taxes. Sole proprietors could be unjustly denied credits or benefits because of a systemic/human error and thus would need some venue for seeking an administrative remedy. Federal agencies would incur costs to check compliance and might incur some contracting delays if the compliance checks take a lot of time. Denying some types of loans/grants (e.g., for disaster or poverty) may be seen as harsh. Another way to induce sole proprietors to pay their taxes owed is to require situational or universal tax withholding from the payments made to them. Two basic options would require those who are to file information returns (e.g., government and business entities) on payments made to sole proprietors to do tax withholding: a) Withhold a small amount from payments until the sole proprietor’s TIN is certified. This up-front withholding would replace “backup withholding” in those cases where, over a year or more later, IRS informs the sole proprietor that the TIN provided is invalid. IRS would need a system for quickly and accurately certifying TINs, which can be either EINs or Social Security numbers. Also, decisions would be needed on how much to withhold and on what to do with the withheld amounts (e.g., paid to the sole proprietor once the TIN is certified or remitted to IRS and reconciled when the tax return is filed). b) Withhold a small percentage of the payments made to sole proprietors for services either in all cases or in limited situations, such as when sole proprietors (1) voluntarily consent or (2) have a recent history of tax noncompliance and IRS has not annually certified that they are now tax compliant. Sole proprietors would be more motivated to provide TINs that can be certified, file their returns, report their income, and pay their taxes. Those paying sole proprietors would probably have fewer burdens from withholding the taxes up front compared to doing backup withholding over a year later. Using a low rate could get the sole proprietors into the system without necessarily creating an undue burden on their business operations. IRS would have fewer information returns with erroneous TINs that it spends resources trying to correct or that cannot be used in its computer matching programs. Withholding would create an added burden for those doing business with the sole proprietor, especially if they do not have systems for doing withholding or periodically remitting tax amounts to IRS, or if they would not have had to do backup withholding. Business relationships or operations might be disrupted if IRS’s system for validating TINs is slow or burdensome, or generates errors, while some businesses may refuse to validate the TINs or to withhold payments if requested to do so by the sole proprietor that they want to use. Even with one low withholding rate, some sole proprietors may be burdened if, for example, they operate on thin profit margins or have limited working capital. If multiple, withholding rates or exceptions for withholding were created by industry, location, years in business, compliance history, and so forth to minimize the negative business impacts on sole proprietors, questions might arise about complexity, equity, and opportunities for “gaming” the system to have a lower or no withholding rate. If withholding were limited to sole proprietors, some could incorporate or claim to be a corporation to avoid withholding. Following up on AUR mismatches and conducting examinations are costly. Furthermore, some of IRS’s compliance and enforcement actions mistakenly select compliant, rather than noncompliant, taxpayers. This section discusses options for more effectively using IRS’s limited resources by better using data and other tools. IRS could explore opportunities for improving its selection of sole proprietor tax returns and tax issues to be audited in at least two ways. a) IRS would use advanced automated selection systems to update the current manual classification system to better select returns and tax issues for audit. b) IRS would improve the ability of AUR to refer cases for audit, such as when unverified (e.g., oral) claims about income and expenses are made. AUR is limited in pursuing such cases, and IRS Examination already has selected many cases for audit by the time the referrals are made. IRS could select returns with a higher likelihood of tax changes at a lower cost and with lower burden on compliant sole proprietors. More automation could free a number of experienced audit staff who help select these returns and these tax issues for audit to do more audits. IRS might be able to increase the dollar yield from finding unreported income and denying unjustified claims for offsetting deductions. IRS would incur costs to collect and test enough data to create an effective automated system. IRS is likely to still need some manual intervention to account for location- specific issues that cannot be programmed into the automated system IRS might find that these AUR cases are still less productive than other audit cases. IRS would seek to improve data-sharing arrangements with the states. State data could include using business licensing, ownership of real estate or other large assets, sales receipts, and tax compliance data to identify unfiled returns and underreported income. IRS could cost effectively identify noncompliance, especially nonfilers, that it otherwise would miss. State data may be difficult to match with federal data because states impose different taxes than the federal government, may use a different taxable base, and may report the data in a format that IRS cannot easily use. IRS would send notices (soft notices) to Schedule C filers when it sees potential compliance issues that it does not have the resources to audit. These notices notify and educate the filers about a potential problem with a tax reporting obligation, and suggest that they either recheck their filed tax returns or change their reporting on future returns. IRS can expand its presence/education and sensitize sole proprietors about tax obligations without the costs of enforcement contacts. Some sole proprietors may become more compliant voluntarily. Some sole proprietors will ignore the soft notices, particularly if they are received years after a return was filed or if IRS will not take follow-up action regardless of what they do. One tool to increase compliance is to punish improper behavior with penalties. Two options to remedy the inconsistent application of penalties are to simplify the process for assessing penalties and develop standards to ensure the consistency of their application to sole proprietor errors and misconduct and make information return penalties scalable by increasing the dollar amount of penalties for subsequent failures to file required information returns (e.g., the penalty for the tenth failure to file an information return may be significantly higher than the first). Sole proprietors who are significantly noncompliant would be penalized, and the equity and consistency of penalty application might improve. Some sole proprietors might become more compliant if they are certain that penalties will be applied. If IRS applies the penalties more consistently, fewer sole proprietors may need to incur the burden of seeking abatements for unnecessary penalties. IRS could receive more required information returns that are accurate and timely. If the process becomes too rigid, some sole proprietors might resent the perceived inequities. Some sole proprietors might have equity concerns if IRS cannot reduce higher penalties caused by a systemic glitch for many information returns (e.g., a computer error that occurred over and over). If revised penalty rules go too far in accounting for inadvertent actions, hardships, and other reasonable causes, the penalty consistency may be hard to achieve. If many sole proprietors are required to file only a few information returns, scaling penalties would have little impact, and if only a small dollar amount of penalties is at stake, IRS procedures are likely to continue authorizing abatement of the penalties. With increased IRS enforcement of the employment tax laws beginning in the late 1960s, controversies developed over whether employers had correctly classified certain workers as independent contractors rather than as employees. In some instances when IRS prevailed in reclassifying workers as employees, the employers became liable for portions of employees’ Social Security and income tax liabilities (that the employers had failed to withhold and remit), although the employees might have fully paid their liabilities for self-employment and income taxes. In response to this problem, Congress enacted section 530 of the Revenue Act of 1978 (Pub. L. No. 95-600). That provision generally allows an employer who meets certain requirements (such as filing required information returns) to treat a worker as not being an employee for employment tax purposes (but not income tax purposes), regardless of the individual’s actual status under the common-law test, unless the taxpayer has no reasonable basis for such treatment. Under section 530, a reasonable basis is considered to exist if the taxpayer reasonably relied on (1) past IRS audit practice with respect to the taxpayer, (2) published rulings or judicial precedent, (3) long-standing recognized practices in the industry of which the taxpayer is a member, or (4) any other reasonable basis for treating a worker as an independent contractor. Section 530 also prohibits the issuance of Treasury regulations and revenue rulings on common-law employment status. Congress intended that this moratorium to be temporary until more workable rules were established but the moratorium continues to this day. The provision was extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982. The rules to classify a worker as an employee or an independent contractor are still complex and often difficult to apply. The determination of whether a worker is an employee or an independent contractor is generally made under a facts and circumstances test that seeks to determine whether the worker is subject to the control of the employer, not only as to the nature of the work performed but the circumstances under which it is performed. In general, the determination of whether an employer-employee relationship exists for federal tax purposes is made under a common-law test. IRS has developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists. The 20 factors were developed by IRS based on an examination of cases and rulings considering whether a worker is an employee. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. Misclassification of workers can be either inadvertent or deliberate. Because the determination of classification is factual, reasonable people may differ as to the correct result given a certain set of facts. Thus, even though a taxpayer in good faith determines that a worker is an independent contractor, an IRS agent may reach a different conclusion by, for example, weighing some of the 20 factors differently. The prohibition on issuance of general guidance by IRS may make the likelihood of classification errors greater; IRS is not permitted to publish guidance stating which factors are more relevant than others. In the absence of such guidance, not only may taxpayers and IRS differ, but different IRS agents may also reach different conclusions, resulting in inconsistent enforcement. A significant issue is the potential revenue loss to the federal government when employees are misclassified as independent contractors. An IRS survey of 1984 employment tax returns found that nearly 15 percent of employers misclassified employees as independent contractors. When employers classified workers as employees, more than 99 percent of wage and salary income was reported. When workers were misclassified as independent contractors, 77 percent of income was reported when a Form 1099-MISC was filed and only 29 percent was reported when no Form 1099-MISC was filed. Persons (payers) making certain types of payments must withhold and pay to IRS a specified percentage of those payments under certain conditions. Related to sole proprietors, for example, both (1) the commissions, fees, or other payments for work as an independent contractor and (2) payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch, are reported on Form 1099-MISC. Other payments are not subject to backup withholding, including wages, real estate transactions, foreclosures and abandonments, and canceled debts. Also corporations, governmental entities, and foreign governments generally are exempt from backup withholding. For backup withholding to be initiated on payments to sole proprietors, a payment must be reportable and the payee must fail to furnish a correct TIN. If an incorrect TIN is provided, IRS is to notify the payer regarding the missing, incorrect, or not currently issued payee TIN. At that time the payer is required to compare the listing with his or her records and send a notice to the payee, asking for the correct TIN. Under tax rules, if the payee refuses to provide a TIN, the payer is required to immediately begin withholding 28 percent of the amount of the payment and remit that amount to IRS. IRS procedures describe how the payer is to verify the TIN and request that the payee provide a correct TIN. The payer must make up to three solicitations for the TIN (initial, first annual, and second annual) to avoid a penalty for failing to include a TIN on the information return. If the payer files an information return with a missing TIN or with an incorrect name and TIN combination, or does not follow the procedure to correct the TIN, the payer may be subject to a $50 penalty for each incorrect return filed. In addition to the contact named above, Tom Short, Assistant Director; Evan Gilman; Eric Gorman; Leon Green; George Guttman; Shirley Jones; Donna Miller; Karen O’Conor; Anna Maria Ortiz; and Sam Scrutchins made key contributions to this report. Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap. GAO-07-488T. Washington, D.C.: February 16, 2007. Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap. GAO-07-391T. Washington, D.C.: January 23, 2007. Tax Compliance: Opportunities Exist to Reduce the Tax Gap Using a Variety of Approaches. GAO-06-1000T. Washington, D.C.: July 26, 2006. Tax Gap: Making Significant Progress in Improving Tax Compliance Rests on Enhancing Current IRS Techniques and Adopting New Legislative Actions. GAO-06-453T. Washington, D.C.: February 15, 2006. Tax Gap: Multiple Strategies, Better Compliance Data, and Long-Term Goals Are Needed to Improve Taxpayer Compliance. GAO-06-208T. Washington, D.C.: October 26, 2005. Tax Compliance: Better Compliance Data and Long-term Goals Would Support a More Strategic IRS Approach to Reducing the Tax Gap. GAO-05-753. Washington, D.C.: July 18, 2005. Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies. GAO-05-527T. Washington, D.C.: April 14, 2005. IRS Audits: Weaknesses in Selecting and Conducting Correspondence Audits. GAO/GGD-99-48. Washington, D.C.: March 31, 1999. Tax Administration: Billions in Self-Employment Tax Are Owed. GAO/GGD-99-18. Washington, D.C.: February 18, 1999. Tax Administration: Issues Involving Worker Classification. GAO/T-GGD-95-224. Washington, D.C.: August 2, 1995. Tax Administration: Estimates of the Tax Gap for Service Providers. GAO/GGD-95-59. Washington, D.C.: December 28, 1994. Tax Administration: IRS Can Better Pursue Noncompliant Sole Proprietors. GAO/GGD-94-175. Washington, D.C.: August 2 1994. Tax Gap: Many Actions Taken, But a Cohesive Compliance Strategy Needed. GAO/GGD-94-123. Washington, D.C.: May 11, 1994. Tax Administration: Approaches for Improving Independent Contractor Compliance. GAO/GGD-92-108. Washington, D.C.: July 23, 1992.
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The Internal Revenue Service (IRS) estimates that $68 billion of the annual $345 billion gross tax gap for 2001 was due to sole proprietors, who own unincorporated businesses by themselves, underreporting their net income by 57 percent. A key reason for this underreporting is well known. Unlike wage and some investment income, sole proprietors' income is not subject to withholding and only a portion is subject to information reporting to IRS by third parties. GAO was asked to (1) describe the nature and extent of sole proprietor noncompliance, (2) how IRS's enforcement programs address it, and (3) options for reducing it. GAO analyzed IRS's recent random sample study of reporting compliance by individual taxpayers, including sole proprietors. Based on what IRS examiners could find, most sole proprietors, at least an estimated 61 percent, underreported net business income, but a small proportion of them accounted for the bulk of understated taxes. Both gross income and expenses were misreported. Most of the resulting understated taxes were in relatively small amounts. Half the understatements that IRS examiners could find were less than $903. However, 10 percent of the tax understatements, made by over 1 million sole proprietors, were above $6,200. In this top group, the mean understatement of tax was $18,000. IRS's two main sole proprietor enforcement programs--the Automated Underreporter Program, which computer matches information on a tax return with information submitted to IRS by third parties, and examinations (audits)--have limited reach. The two programs each annually contact less than 3 percent of estimated noncompliant sole proprietors. The limited reach exists for a variety of reasons. In 2001, about 25 percent of sole proprietor gross income was reported on information returns by third parties; expenses generally are not subject to such reporting. Even when required, various barriers make information reporting inconvenient. Examinations of sole proprietors yield less in additional tax assessed and cost more to conduct than examinations for other taxpayers. However, because of the extent of sole proprietor noncompliance, any effect that examinations have on voluntary compliance by other sole proprietors could result in significant revenue. The Treasury Department's recently released tax gap strategy discusses neither sole proprietor noncompliance specifically nor the many options that could address it. GAO has reported on the need for such a detailed strategy for years. Specific options that address issues including sole proprietor recordkeeping, underreporting of gross income, overreporting of expenses, information reporting, and IRS's enforcement programs are listed in appendix II.
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In 2000, about 3,900 nonfederal, general medical hospitals nationwide reported providing emergency care in emergency departments. Of these, just over half were located in MSAs. From 1997 through 2000, while the number of emergency department visits increased about 14 percent, the number of hospitals with emergency departments decreased by about 2 percent. The result was that the average number of visits per emergency department increased by 16 percent. Many hospitals expanded the physical space and number of treatment spaces in their emergency departments during that time. Recent reports have raised concern that many of the nation’s emergency departments are experiencing high demand and crowded conditions. An April 2002 report for the American Hospital Association, while limited in scope and the proportion of hospitals responding, found that officials at many hospitals in urban areas described their emergency departments as operating at or above capacity. While there are no comprehensive studies on the consequences of crowded conditions, health care researchers and clinicians report that crowding has multiple effects, including prolonged pain and suffering for some patients, long patient waits, increased transport times for ambulance patients, inconvenience and dissatisfaction for the patients and their families, and increased frustration among medical staff. In addition to delays in treatment, some emergency department directors have reported that patient care was compromised and patients experienced poor outcomes as a result of crowded conditions in emergency departments. Because the medical conditions of patients who come to the emergency department can range from mild injuries such as ankle sprains to serious traumas such as from automobile accidents—and can also include patients with chronic conditions such as asthma or diabetes—the space, equipment, and medical personnel resources required to treat patients vary. As a result, there are no specific criteria, such as a ratio of patients to staff, to define when an emergency department is too crowded and its providers are overloaded. Rather, emergency department administrators and physicians say “they know it when they see it.” In the absence of specific criteria to define when an emergency department is crowded, health care researchers suggest using several available indicators to point to crowded conditions. Based on our review of studies and discussions with experts, we chose three indicators of emergency department crowding. As shown in table 1, all three are useful indicators but all three also have limitations. One indicator of a crowded emergency department is the number of hours a hospital is on diversionary status. Under federal law, all hospitals that participate in Medicare are required to screen—and if an emergency medical condition is present, stabilize—any patient who comes to the emergency department, regardless of the individual’s ability to pay. Under certain circumstances where a hospital lacks staffing or facilities to accept additional emergency patients, the hospital may place itself on “diversionary status” and direct en route ambulances to divert to another hospital. In general, hospitals ask EMS providers to divert ambulances to other medical facilities because their emergency department staff are occupied and unable to promptly care for new arrivals or specific services within the hospitals, such as the intensive care units, are filled and unable to accommodate the specialized needs of new ambulance arrivals. While on diversion, hospitals must still treat any patients who arrive by ambulance, and in some cases, local community protocols allow ambulances to go to a hospital that is on diversion when the patient asks to go to that hospital or if the patient needs immediate medical treatment. In addition, even while on diversion, the emergency department is still required to screen and treat nonambulance patients—those patients who walk in or otherwise arrive at the hospital—and these patients make up the vast majority of visits to the emergency department. The Department of Health and Human Service’s (HHS) National Center for Health Statistics estimates that in 2000 about 14 percent of emergency department visits were made by patients who arrived by ambulance, while 78 percent of visits were made by patients who arrived at the emergency department by “walking in.” For the remaining visits, the patients were brought in by the police or social services (1.5 percent), or the mode of arrival was unknown (6.3 percent). As a measure of crowding, diversion has limitations in that some hospitals, even when crowded, do not have the option to divert ambulances due to state or local regulations, because there are no other medical facilities nearby, or because of individual hospital policies. Hospital practices may vary regarding the threshold at which a hospital goes on diversion. Local community or hospital policies may also differ regarding the length of time a hospital may remain on diversion. (See app. II for the local community policies for the six sites we visited). However, for those hospitals that can go on diversion, it is an indicator of how often these emergency departments believe they can no longer handle additional ambulance patients. A second indicator suggested by health care researchers is the number of patients who are “boarding” in the emergency department. These patients remain in the emergency department after the decision has been made to admit them to the hospital or transfer them to another facility. Many factors can contribute to the length of time a patient is boarded in the emergency department, such as inpatient bed availability, staffing levels, and the complexity of a patient’s condition. Regardless of the reason, while waiting for an inpatient bed or transfer, these patients still require care and take up treatment space, equipment, and staff time in the emergency department, shrinking the department’s resources available to treat other emergency patients. A limitation of using boarding as an indicator is that many hospitals do not collect this information regularly and can only estimate how often and how long patients board in their emergency departments. In addition, it is possible that emergency departments board patients while also having available treatment spaces to see additional patients. Finally, the proportion of patients who leave after triage but before receiving a medical evaluation is another indicator suggested by health care researchers that could indicate a crowded emergency department. Long waits in the emergency department can delay needed care and contribute to an increase in the number of people who choose to leave the emergency department before receiving a medical evaluation. A limitation to this indicator is that, because emergency department staff triage patients, those with nonemergent conditions generally wait the longest and may be most likely to tire of waiting and leave before a medical evaluation. However, relatively mild conditions could potentially become more serious if patients do not receive needed medical care because they leave the emergency department before being evaluated and treated. A study of the consequences of leaving the emergency department prior to a medical evaluation at one public hospital found that 46 percent of those who left were judged to need immediate medical attention, and 11 percent who left were hospitalized within the next week. Although most emergency departments across the country reported some degree of crowding on one or more of the three indicators, the problem is much more pronounced in some hospitals than in others. In addition, hospitals in the largest metropolitan areas (those with populations of 2.5 million or more), communities with high population growth, and communities with above average percentages of people without health insurance had higher levels of crowding. Analysis of responses to our nationwide survey showed substantial variation in the degree of crowding reported across all three indicators— diversion, boarding, and patients leaving before a medical evaluation. Hospitals ranged from little or no crowding to crowding that persisted for a substantial part of the time. Diversion. In total, we estimate that about 2 of every 3 of the hospitals in our survey universe went on diversion at least once during fiscal year 2001. We estimate that about 2 in every 10 of these hospitals were on diversion for more than 10 percent of the time, and about 1 in every 10 was on diversion for more than 20 percent of the time—or about 5 hours per day. Figure 1 shows the variation in the amount of diversion reported by hospitals in MSAs. Diversion varies greatly by MSA. Figure 2 shows each MSA and the share of hospitals within the MSA that reported being on diversion more than 10 percent of the time—or about 2.4 hours or more per day—in fiscal year 2001. Of the 248 MSAs for which data were available, 171 (69 percent) had no hospitals reporting being on diversion more than 10 percent of the time. By contrast, 53 MSAs (21 percent) had at least one-quarter of responding hospitals on diversion for more than 10 percent of the time. Boarding. Boarding patients for 2 hours or more in the emergency department while waiting for an inpatient bed or transfer occurred to some extent at an estimated 9 of every 10 hospitals. As part of our survey, we examined what percentage of emergency patients who boarded spent 2 hours or more in boarding status and the average number of hours patients boarded. As figure 3 shows, while many hospitals reported boarding less than 25 percent of boarded patients for 2 hours or more in the past 12 months, about one-third of them reported boarding 75 percent or more of their boarded patients for that long. About 1 in every 5 hospitals reported an average boarding time in their emergency departments of 8 hours or more. Boarding varies greatly by MSA. Figure 4 shows each MSA and the extent to which responding hospitals within the MSA reported that of those patients who boarded in the past 12 months, at least half spent 2 hours or more in boarding status, and the average boarding time was 8 hours or more. Of the 206 MSAs for which data were available on the percentage of patients boarded and the average number of hours boarded, 112 MSAs (54 percent) had no hospitals reporting that they met these criteria. In contrast, 52 of the 206 MSAs (25 percent) had at least one-fourth of responding hospitals reporting that they boarded at least half of their patients for 2 hours or more and had an average boarding time of at least 8 hours. Patients Leaving before a Medical Evaluation. From our nationwide survey of hospitals, we estimate that the median percentage of patients who left after triage but before a medical evaluation in fiscal year 2001 was 1.4 percent. We estimate that about 39 percent of hospitals had from 1 to 3 percent of patients who left before medical a evaluation in fiscal year 2001 while about 7 percent of hospitals reported that 5 percent or more of emergency department patients left before a medical evaluation (see fig. 5). Figure 6 shows each MSA and the extent to which hospitals within the MSA reported at least 5 percent of patients leaving before a medical evaluation. Of the 243 MSAs for which data were available on the percentage of patients who left before a medical evaluation, 183 MSAs (75 percent) had no hospitals reporting that they met these criteria. In contrast, 31 of the 243 MSAs (13 percent) had at least one-fourth of responding hospitals reporting that at least 5 percent of patients left before a medical evaluation in fiscal year 2001. We analyzed our three crowding indicators across different MSA characteristics, including population, population growth, and level of uninsurance. We found all three characteristics were associated with reported levels of crowding. Hospitals in MSAs of 2.5 million or more people reported higher levels of all three indicators—diversion, boarding, and patients leaving before a medical evaluation—than hospitals in MSAs of less than 1 million people (see table 2). In these larger areas, hospitals had a median of about 162 hours of diversion in 2001 compared with 9 hours for hospitals in areas with a population of less than 1 million. Similarly, the median percentage of patients boarding 2 hours or more was more than twice as high in large MSAs—48 percent versus 23 percent. The median percentage of patients who left before a medical evaluation was also higher, though not as dramatically as for the two other indicators. Our site visits show that crowding indicators vary not only across MSAs but also between hospitals within MSAs. Four of the six locations we visited (Atlanta, Los Angeles, Boston, and Phoenix) were in MSAs with populations of over 2.5 million and we found variation among hospitals within these communities. For example, the 10 major Boston hospitals were on diversion for an average of 322 hours in 2001. However, 2 of the 10 hospitals accounted for nearly half of the diversion hours for the 10 hospitals, averaging nearly 800 hours of diversion each. Hospitals in communities with high population growth from 1996 through 2000 reported higher levels of diversion and patients leaving before a medical evaluation compared to hospitals in communities with lower population growth (see table 3). The median number of hours of diversion in fiscal year 2001 for hospitals in MSAs with a high percentage population growth was about five times that for hospitals in MSAs with lower percentage population growth. Similarly, the median percentage of patients who left before a medical evaluation was significantly higher for hospitals in MSAs with high population growth—1.7 percent—than for those in MSAs with low population growth—1.0 percent. In addition, of hospitals that reported at least 5 percent of patients leaving before a medical evaluation in 2001, 31 percent were in communities with high population growth compared to 15 percent in communities with low population growth. Two of the six locations we visited, Atlanta and Phoenix, were in MSAs with high population growth from 1996 to 2000—16 percent and 18 percent growth, respectively. Diversion hours varied among hospitals in these communities. For example, in Phoenix, 5 of the 28 hospitals in the region made up about 42 percent of the region’s diversion hours in 2001. Two of these 5 hospitals with high rates of diversion were in the city’s central sector. Hospitals in this sector were on diversion an average of 10 percent of the time in 2001. By contrast, hospitals in the region’s northeast sector, a more suburban area, had the lowest average rate of diversion—an average of 3 percent of the time. Hospitals in communities with a higher percentage of people without health insurance reported higher levels of diversion and patients leaving before a medical evaluation (see table 4). For example, hospitals in MSAs where the percentage of uninsured people was above average reported having almost twice as many patients leave the emergency department prior to a medical evaluation than those in MSAs where the percentage of uninsured was below average. Our analysis of other national data indicate that waiting times, which are reported to be the primary reason patients leave the emergency department before a medical evaluation, were longer in communities with more uninsured people. For example, in 2000, waiting times for nonemergent visits averaged about 25 minutes longer in communities with high levels of uninsured people than in communities with low levels of uninsured people (90 minutes versus 65 minutes). Of the six sites we visited, three (Los Angeles, Phoenix, and Miami) were MSAs with significantly higher percentages of people without health insurance. The crowding indicators varied among hospitals in these MSAs with high levels of uninsurance. For example, the number of hours on diversion in 2001 for hospitals in the Los Angeles MSA ranged from no diversion at four hospitals to 6,186 hours—about 71 percent of the time— at another hospital. We also analyzed differences across a wide range of hospital characteristics, including the number of staffed beds; hospital ownership; teaching status; trauma center status; and the proportions of emergency department visits covered by Medicare, Medicaid or the State Children’s Health Insurance Program (SCHIP), or self-pay as the payer source. All three indicators of crowding were significantly higher in hospitals with more staffed beds and at teaching hospitals, while the median numbers of hours on diversion were higher at hospitals designated as certified trauma centers and at hospitals with fewer patients covered by Medicare. In addition, we found that the median proportion of patients who left before a medical evaluation was significantly higher in public hospitals than private, not-for-profit hospitals, and in hospitals with more emergency department visits covered by Medicaid and SCHIP or more patients who were self-pay patients. (See app. III for additional information on the indicators of crowding by select hospital characteristics). No single factor stands out as the reason why crowding occurs. Rather, a number of factors, including many outside the emergency department, are associated with crowding. In both the opinion of hospitals we surveyed and of hospital officials we interviewed, the factor most commonly associated with crowding was the inability to transfer emergency patients to inpatient beds once decisions had been made to admit them as hospital patients rather than to release them after treatment. In looking at why hospitals did not have the capacity to always meet the demand for inpatient beds from emergency patients, hospital officials, researchers, and others pointed to (1) financial pressures leading to limited hospital capacity to meet periodic spikes in demand for inpatient beds and (2) competition between admissions from the emergency department and scheduled admissions such as surgery patients, who are generally considered to be more profitable. Other factors cited as contributing to crowding include closures of nearby hospitals or availability of physicians and other providers in the community. The inability to transfer emergency patients to inpatient beds was the condition that surveyed hospitals reported most often as contributing to going on diversion and boarding patients. Even when treatment spaces are available in the emergency department, hospitals may go on diversion for patients who will likely need instrument-monitored beds or critical care beds because these types of beds are full. As figure 7 shows, the most common types of beds that were unavailable were intensive care unit (ICU) or critical care unit (CCU) beds, followed by instrument-monitored (telemetry) beds. More than three-fourths of hospitals that went on diversion reported that the lack of ICU/CCU beds contributed to diversion to a moderate, great, or very great extent. Similarly, lack of inpatient beds was the dominant reason given for the need to board patients in the emergency room (see fig. 8). Of hospitals that boarded patients for 2 hours or more in the past 12 months, about 80 percent cited the lack of telemetry or critical care beds as contributing to boarding to a moderate, great, or very great extent. Our analysis of data collected in our survey generally corroborates that a lack of inpatient beds plays a major role in contributing to emergency department crowding. We found that those hospitals in communities with higher demand for inpatient beds—as measured by admissions per inpatient bed—had higher indicators of crowding. As table 5 shows, hospitals that rank in the top 25 percent in terms of admissions per bed in the MSA had both significantly higher numbers of diversion hours and proportions of patients boarding 2 hours or more than hospitals in the bottom 25 percent of admissions per bed. For example, hospitals in the top 25 percent reported a median of 170 hours on diversion in fiscal year 2001, compared with a median of 12 hours for hospitals in the lowest 25 percent. Similarly, hospitals with more demand for inpatient beds from the emergency department—that is, a higher proportion of emergency visits resulting in hospital admission—also had higher indicators of crowding. As table 6 shows, the quarter of hospitals with the highest percentages— more than 19.7 percent—of emergency visits resulting in inpatient hospital admission reported more diversion and boarding than the quarter of hospitals with the smallest percentages—less than 11.8 percent—of emergency visits resulting in admission. Finally, our analysis found that hospitals with more patients per bed— measured by the average occupancy in fiscal year 2001 as a percentage of the total number of staffed inpatient beds on the last day of the fiscal year—also had higher indicators of crowding in the emergency department (see table 7). The conclusion that the availability of inpatient beds contributes to crowding in emergency departments was reiterated at the hospitals we visited on our site visits. At 19 of the 24 hospitals we visited, hospital officials reported that the lack of inpatient beds and subsequent boarding of emergency patients was a key factor contributing to crowding. In addition, a 1-week survey conducted in Massachusetts found that hospitals’ occupancy rates were higher when hospitals were on diversion. When we examined why hospitals did not always have the inpatient capacity to meet the demand for beds from emergency patients, hospital administrators, researchers, and clinicians cited several reasons, including (1) financial incentives to control costs and maximize revenue by staffing inpatient beds at a point where they will nearly always be full—a practice that limits a hospital’s ability to meet periodic spikes in demand, and (2) competition between emergency department admissions and scheduled admissions for available beds. One reason reported for the lack of inpatient beds was the financial pressures hospitals face to staff inpatient beds at a level where they will nearly always be full. This practice limits a hospital’s ability to meet periodic spikes in demand. Hospital administrators, clinicians, and health care researchers report that changes in the hospital economic climate have contributed to this decline in “surge capacity.” For example, in a report prepared for the Massachusetts Health Policy Forum, one health policy researcher noted that the lower occupancy rates of the 1970s and 1980s became unacceptable in the 1990s when hospitals were increasingly driven by market-based factors. In a market-based system, successful hospitals run full, attract both elective and emergency patients, and are staffed closer to average demand than to the peaks. Another factor sometimes cited that is related to insufficient bed capacity involves staffing. Officials at some hospitals we visited said that they did not staff more of the beds they already had or open new beds because they were concerned they would not be able to staff them or could not afford the cost of staffing them. These hospitals cited the costs and difficulties recruiting nurses, particularly the cost of hiring nurses from agencies that contract out nursing services. For example, officials at a Miami hospital we visited that staffed only about two-thirds of the beds for which it was licensed in 2001 said that they would lose money if they staffed more beds because of the cost of contract nurses. For the inpatient beds that are available, many researchers and hospital officials we interviewed reported that hospitals often balance admissions from emergency departments with scheduled admissions for surgical procedures, which are generally considered more profitable. One reason that admissions from the emergency department are considered to be less profitable is because these admissions tend to be for medical conditions, such as pneumonia, rather than for those procedures that are considered more profitable. Available data from the Agency for Healthcare Research and Quality’s (AHRQ) Healthcare Cost and Utilization Project, Nationwide Inpatient Sample, show that of hospital admissions from the emergency department in 2000, most were for medical conditions (such as pneumonia and heart failure). Further, 19 of the 20 most prevalent diagnosis related groups (DRG) for these admissions were for medical conditions. In contrast, half of the 20 most common DRGs for admissions that were not from the emergency department were for surgical procedures (such as orthopedic surgery and cardiac pacemaker implantation). Many hospital officials and researchers also said that emergency department patients are less profitable because a larger proportion of emergency admissions are patients for whom the primary payer source is self-pay, which includes the uninsured, or Medicaid, which is generally considered to provide lower reimbursement. As shown in figure 9, available data from AHRQ’s Healthcare Cost and Utilization Project show that the proportion of admissions for uninsured patients or patients with Medicaid as the primary payer source was higher for admissions from the emergency department than for routine admissions in 2000. At the same time, the proportion of admissions with private insurance as the primary payer source was higher for routine admissions than for patients admitted from the emergency department. Because self-pay patients and those covered by Medicaid are viewed as providing lower reimbursement, hospital officials and health care researchers said that hospitals have a financial incentive to fill the limited number of available beds with scheduled admissions rather than emergency department admissions. In addition, some hospital officials reported that surgeons bring in business that generates revenues for the hospital and that hospitals may not want to cancel or reschedule elective surgeries—and disrupt their surgeons and patients—in order to make beds available for emergency department patients. This point was supported by our survey results—less than one-third of hospitals that went on diversion in fiscal year 2001 (29 percent) reported that they had canceled any elective procedures to minimize going on diversion. Hospital officials reported in both our survey and during our site visits that other factors contributed to crowding as well, including increased demand due to the closure of other hospitals and difficulties in accessing physicians and other medical providers in the community. For example, officials at one hospital we visited said that when two neighboring hospitals closed in 1999 and 2000, their hospital experienced a significant increase in emergency department visits and subsequent crowding. In addition, officials at some of the hospitals we visited said they thought that the availability of physicians and other services, such as psychiatric services, in their communities affected crowding in one or more instances. For example, in Cleveland, the county psychiatric mobile health unit recently stopped taking patients in the late evening and on weekends, increasing the amount of time the emergency department had to care for psychiatric patients during those times. One Cleveland hospital we visited reported that boarding times for patients awaiting assessment by this unit had increased for patients who arrived late at night. At the six sites we visited, actions to address emergency department crowding had been taken at both the hospital and community levels. Steps taken by hospitals generally fell into two categories: (1) increasing capacity and (2) improving the efficiency with which patients are treated—and if necessary, moved to inpatient beds. At the community level, EMS agencies, health care associations, and public agencies were generally active to some degree in implementing communitywide policies and computerized diversion tracking systems to help direct the flow of ambulance traffic and keep hospital staff and EMS providers informed about which hospitals are on diversion. While hospital and community officials reported some positive results for their efforts, they generally described these efforts as attempts to manage crowding problems rather than to substantially reduce them. The effects of these efforts have not been widely studied, though several activities are now under way that may help facilitate future evaluations. Data from the National Center for Health Statistics for 1992 to 2000 also showed that the percentage of emergency department visits admitted to the hospital had not changed significantly—about 12 percent of visits resulted in admissions in 2000. However, the same data found that the percentages of emergency department visits referred to another physician or clinic or with no follow-up planned had increased significantly to about 47 percent and 10 percent of visits, respectively, in 2000. Although officials at several hospitals we visited reported that difficulty getting specialty coverage for the emergency department may contribute to longer patient stays in the emergency department while waiting for specialists to evaluate their condition, most hospitals we surveyed did not believe that this problem contributed to crowding to a great extent. While our survey found that 59 percent of hospitals reported problems with on-call specialty coverage, only about 5 percent of hospitals that went on diversion reported that lack of on-call specialty coverage contributed to diversion to a moderate, great, or very great extent, and only 7 percent of hospitals that boarded patients reported that problems with on-call coverage contributed to boarding to a moderate, great, or very great extent. department patients to building new, larger emergency departments. Some hospitals added a unit—often referred to as a fast-track unit—to the emergency department that is staffed with appropriate personnel, such as nurse practitioners and physician assistants, to quickly treat nonurgent cases. In addition, officials at 11 of the 24 hospitals we visited told us that their hospitals had expanded or would be expanding inpatient capacity or building new hospital facilities, a step that could make it easier to transfer patients who need to be admitted as inpatients. We found expansions or planned expansions at different types of hospitals, including not-for-profit, public, and for-profit hospitals. At some hospitals that had recently expanded their capacity, hospital officials reported that even though the expansion helped, they continue to experience very crowded conditions. Table 8 provides examples of the kinds of actions taken or planned at the hospitals we visited. While more than two-thirds of the hospitals we visited were expanding or reported having plans to expand their capacity, nearly all of the 24 hospitals we visited reported taking some type of action to increase the flow of patients through the emergency department and to reduce the time needed to place admitted emergency department patients into hospital beds. When patients cannot be moved efficiently through the emergency department and into inpatient hospital beds, they occupy emergency department space, staff, and services and reduce the capacity that might otherwise be available to treat other patients waiting to be seen in the emergency department. As shown in table 9, hospitals’ approaches to increase efficiency varied. For example, some hospitals focused on increasing the speed of the registration and triage process, while others were dependent on actions taken outside of the emergency department and on inpatient floors of the hospital, such as having coordinating committees or multidisciplinary teams that are directed to increase availability of inpatient beds and reduce boarding. At the community level, efforts focused on ways to better manage crowding, particularly diversion, through task forces and development of diversion policies and tracking systems. At three of the six sites we visited, task forces had been formed to address these issues. The task forces generally addressed crowding and diversion in three ways: assembling stakeholders to examine causes, bringing attention to the issue, and developing methods to manage the problem (see table 10). Five of the six sites we visited had developed standard policies or guidelines regarding diversion and operated or participated in electronic systems for tracking ambulance diversion. The sixth site we visited— Miami-Dade County—took a different approach. The largest EMS provider in the area, the Miami-Dade Fire Rescue Department EMS Division, no longer formally honors hospital requests for diversion. On March 31, 1999, this EMS agency implemented a new policy directing ambulances to bring patients to the nearest appropriate hospital, citing concerns over the increased number of hospital emergency room closures and a compromised ability to deliver quality patient care. For the five sites we visited that allowed diversion, each system improved communication among hospital and EMS providers by (1) allowing hospitals to request being put on diversion, (2) making hospitals aware of other hospitals’ diversion status, and (3) making ambulance dispatchers and ambulance drivers aware of which hospitals are on diversion. In these locations, diversion systems are used to provide a structure to systematically try to spread the ambulance volume during times of peak demand by redirecting ambulances to hospitals that are presumably less crowded. At three of these sites, EMS agencies produce reports on the number of hours each hospital was on diversion each month. EMS agencies, hospital associations, and government agencies use diversion reports to review policies and monitor hospitals’ diversion hours. While some sites we visited have experienced limited improvement, efforts under way have not made substantial reductions in the current extent of crowding. Some officials we interviewed described their efforts as attempts to manage the situation to keep it from getting worse rather than solving the problem. For example, in Boston, officials from the Massachusetts chapter of the American College of Emergency Physicians who participate in their state’s diversion task force said they see diversion as a Band-Aid for addressing what they believe is a crisis. They said that while the task force has taken steps to better manage diversion, increased demand for emergency department services due to events such as a bad flu season or disaster could still tax the system beyond its capacity. Community-level data tend to support the view that these efforts, while perhaps helping to mitigate crowding, are not reversing the recent trends in crowding. For example, from 2000 through 2001, the three sites we visited that produce regular reports on diversion all experienced increases in the percentage of time that their hospitals were on diversion. The increase in the hours of diversion in these three locations ranged from 39 percent in the Los Angeles region to 73 percent in the Boston region. Despite the number of steps that hospitals and communities have taken, few studies have been conducted on the effects of hospitals’ and communities’ efforts to address crowding. Only 1 of the 24 hospitals we visited reported having completed an evaluation of the impact of its activities. This hospital had implemented a program to increase efficiency by discharging patients by noon and reported that its efforts resulted in earlier placement of admitted emergency department patients in inpatient beds. At the community level, while several communities monitor the number of hours on diversion, they reported that no comprehensive evaluations have been completed on the impact of communitywide efforts to address crowding. Recent initiatives have been started by such organizations as the Joint Commission on Accreditation of Healthcare Organizations, AHRQ, and the Robert Wood Johnson Foundation that may help in future evaluations of crowding. These organizations have initiatives under way to further study crowding, develop hospital standards related to crowding, develop and test measures of crowding, provide technical assistance to hospitals, and evaluate potential steps to ease the problem. However, the results of these studies are not anticipated to be available until later in 2003 or 2004. Emergency department crowding is not an issue that can be solved in the emergency department alone. Rather, it is a complex issue that reflects the broader health care market. It is clear that, as a key part of the health care safety net, emergency departments in many of the nation’s largest communities are under strain. Our work suggests that some aspects of the problem are hospital-specific, such as high numbers of emergency patients, lack of space, and delays in obtaining test results. In addition, crowding appears to reflect the inability of individual hospitals to meet the demand for inpatient beds, particularly critical care and telemetry beds, both from emergency patients who need to be admitted to the hospital and patients admitted for elective procedures. When hospitals cannot accommodate peaks in demand, either because they lack space or because they choose to operate at levels that allow little excess capacity, the result is that emergency departments will often board patients who are waiting for inpatient beds. When they do, the capacity of the emergency department to treat additional patients is diminished. While such issues as concerns about staffing inpatient beds and availability of other providers in the community are similar across communities, the solutions may differ by community and local health care market. For example, one community may face crowding in the emergency department largely because people have problems accessing physicians and other providers in the community, and potential solutions could involve steps to improve access to these other providers or establishing fast-track systems to treat nonurgent conditions in the emergency department. Another community may face crowding primarily because facilities have closed or populations have increased and there are too few hospital beds staffed and operated in the area. In this situation, the solution could involve reopening beds in existing facilities that were not set up and staffed. To address communitywide factors contributing to crowding, hospitals may need to work collaboratively with other facilities in their communities. Communitywide efforts such as task forces and standardized procedures and diversion policies have improved communications between hospitals and EMS providers and provided some degree of sharing the load when multiple hospitals are crowded. However, these efforts appear to only manage the problem of crowded conditions in emergency departments, rather than eliminate it. Adding capacity, for both the emergency departments and for inpatient beds, has been suggested as a solution, but no one solution is likely to fit all circumstances. Crowding is clearly worse in some communities and hospitals than in others, and the specific reasons for crowding need to be better understood, particularly at the local level. Representatives from the American College of Emergency Physicians and American Hospital Association and an independent reviewer provided comments on a draft of this report. The American College of Emergency Physicians stated that our methodology was comprehensive and systematic and identified and documented the leading causes of emergency department crowding. It also stated that while the crowding problems may be more pervasive in large metropolitan areas, its members had provided recent anecdotal information that indicates that the crowding problem is now becoming a concern in rural areas. While it is possible that some rural areas are becoming concerned about crowding, our survey was limited to hospitals in MSAs because available information and contacts with rural health organizations indicated that emergency department crowding was not a major problem in these areas. An independent reviewer who has conducted research on emergency department crowding issues stated that the report was well done and informative. This reviewer and the American Hospital Association provided technical comments that we incorporated as appropriate. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 14 days from the date of this letter. We will then send copies to others who are interested and make copies available to others who request them. 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, please contact me at (202) 512- 7119. An additional GAO contact and the names of other staff members who made major contributions to this report are listed in app. IV. To accomplish our objectives, we surveyed over 2,000 short-term nonfederal, general medical and surgical hospitals with emergency departments located in metropolitan statistical areas (MSA). These hospitals are located in the 50 states and the District of Columbia. We obtained and analyzed data using three indicators of emergency department crowding: diversion, boarding, and patients who left before receiving a medical evaluation. We also used several hospital and community characteristics, including hospital ownership, admissions per bed, community population and growth, and the proportion of patients in the community without insurance. In addition, we visited six metropolitan areas—Atlanta, Boston, Cleveland, Los Angeles, Miami, and Phoenix. In these locations, we interviewed emergency medical services officials and officials at 4 hospitals in each area, for a total of 24 hospitals. We also interviewed (1) federal agency officials at the Department of Health and Human Services’ (HHS) National Center for Health Statistics, Health Resources and Services Administration, and Agency for Healthcare Research and Quality (AHRQ), (2) health care researchers at organizations such as the Council on Health Care Economics and Policy, the Robert Wood Johnson Foundation, and the Joint Commission on Accreditation of Healthcare Organizations, (3) representatives of national and local professional associations such as the American Ambulance Association, American Hospital Association, American College of Emergency Physicians, Emergency Nurses Association, National Association of Emergency Medical Services Physicians, and American Medical Association, and (4) hospital administrators and clinicians. In addition, we reviewed relevant studies and policy documents and analyzed information from national databases, including HHS’s National Center for Health Statistics’ National Hospital Ambulatory Medical Care Survey and AHRQ’s Healthcare Cost and Utilization Project, and the Health Resources and Services Administration’s Area Resource File. We conducted our work from July 2001 through February 2003 in accordance with generally accepted government auditing standards. To address questions about the extent of diversion, boarding, and patients leaving before a medical evaluation at hospitals in MSAs, we mailed a questionnaire to all 2,041 short-term, nonfederal, general medical and surgical care hospitals that reported they had emergency departments and were located in MSAs in the 50 states and the District of Columbia based on data from the American Hospital Association’s Annual Survey Database, Fiscal Year 2000. We mailed the questionnaires to the chief administrator of each hospital in May 2002. Each hospital was asked to report for the emergency department located at its main campus. The survey included questions on the emergency department, such as (1) whether the hospital went on diversion and, if so, the number of hours on diversion in the hospital’s fiscal year 2001, (2) whether the hospital boarded patients for 2 hours or more in the past 12 months and, if so, the percentage of boarded patients who boarded 2 hours or more and the average number of hours boarded, and (3) the number of emergency department visits and the number of patients who left after triage but before a medical evaluation in the hospital’s fiscal year 2001. It also included questions on the general hospital, including the number of staffed beds (excluding long-term care, labor and delivery, and postpartum beds) as of the last day of the hospital’s fiscal year 2001. In developing these questions, we reviewed the literature and prior surveys related to crowding issues and conducted discussions with expert researchers. We also pretested our questionnaire in person with officials at 10 hospitals and refined the questionnaire as appropriate. Of the initial universe of 2,041 hospitals, 18 had closed by 2002 and 2 did not have emergency departments in fiscal year 2001, resulting in a final universe of 2,021 hospitals. We conducted follow-up mailings and telephone follow-up calls to nonrespondents. We obtained responses from 1,489 hospitals, for an overall response rate of about 74 percent. We analyzed the response rates from various categories of hospitals and weighted responses to adjust for a lower response rate from investor- owned (for-profit) hospitals so that our results would reflect the nationwide mix of hospital types. We analyzed the information provided by hospitals for three indicators of emergency department crowding— diversion, boarding, and patients who left before a medical evaluation. In many cases, hospitals provided estimates for these indicators. Specifically, we estimate that (1) of hospitals that went on diversion, about 45 percent provided estimates for the number of hours on diversion in fiscal year 2001, (2) of hospitals that boarded patients for 2 hours or more in the past 12 months, about 74 percent provided estimates for the percentage of patients boarding 2 hours or more and about 74 percent provided estimates for the average number of hours patients boarded, and (3) about 34 percent of all hospitals provided estimates of the number of patients who left after triage but before a medical evaluation. For those hospitals that provided estimates, we used these estimates in our analyses. We examined the extent of crowding in hospitals in MSAs, by different MSA and hospital characteristics. We grouped MSAs by characteristics such as U.S. Census Bureau population in 2000, population growth from 1996 to 2000, and the percentage of the population without health insurance. We examined our indicators of crowding by hospital characteristics such as the number of staffed beds on the last day of fiscal year 2001; whether the hospital was public, private not-for-profit, or investor-owned (for-profit); the hospital’s teaching status; whether it was a certified trauma center; and the proportion of emergency department visits covered by Medicare, Medicaid and the State Children’s Health Insurance Program, and self-pay as the payer source. We compared the medians of our three indicators of crowding across these characteristics. In calculating the median number of hours on diversion and the median percentage of patients boarding 2 hours or more, we considered hospitals that did not go on diversion in fiscal year 2001 to have no hours of diversion and hospitals that did not board any patients 2 hours or more to have no percentage of patients boarding. We also conducted analyses to determine key factors associated with these indicators of crowding. We analyzed hospitals’ responses regarding which key factors contributed to our indicators of crowding and examined the medians for the crowding indicators grouped by admissions per bed in the MSA, percentage of emergency visits resulting in hospital inpatient admissions in fiscal year 2001, and the average daily census as a percentage of the number of staffed beds in the hospitals’ fiscal year 2001. In addition, we analyzed data from AHRQ’s Healthcare Cost and Utilization Project, Nationwide Inpatient Sample, 2000, on the payer source of admissions. We conducted site visits in six locations: Atlanta, Georgia; Boston, Massachusetts; Los Angeles, California; Cleveland, Ohio; Miami, Florida; and Phoenix, Arizona. We selected the six sites judgmentally to include locations that varied in geographic location, the proportion of people without health insurance, MSA population, and recent population growth (see table 11). In addition, media reports and other sources had indicated that all six sites had reported problems with crowded emergency departments. At the six locations, we visited four hospitals at each site (including public, for-profit, and not-for-profit hospitals), interviewed hospital administrators and emergency department clinicians, and observed operations in the emergency departments. We also interviewed officials from local EMS agencies, hospital associations, and other professional associations and experts knowledgeable about emergency department crowding. While all six locations we visited had local or regional regulations, policies, or guidelines on ambulance diversion, these policies varied among and within the locations. For example, the largest emergency medical services (EMS) provider in the Miami area, the Miami-Dade Fire Rescue Department EMS Division, stopped allowing hospitals to go on ambulance diversion as of March 31,1999, though the smaller City of Miami Fire-Rescue EMS agency did have policies for diversion. As shown in table 12, the locations we visited illustrate the differences between diversion policies of different communities and demonstrate how an episode of diversion in one place differs from an occurrence of diversion elsewhere. All six locations had defined types of diversion, including categories such as overall saturation in the emergency department, diversion for trauma cases only, diversion because a neurosurgeon was unavailable, diversion because a computed tomography (CT) scanner was unavailable, or diversion because of an internal disaster such as a power failure. Five of the locations had computer-based diversion systems in place at the time of our visit that allowed EMS dispatchers and hospital officials to check which hospitals, if any, in the EMS region were on diversion. All six locations had circumstances under which ambulances would take patients to the nearest appropriate hospital, regardless of whether the hospital was on diversion. For example, all six locations had policies to take patients with unstable or critical conditions to the nearest hospital, and four had policies that the patient’s request to go to a specific hospital could override diversion in certain circumstances. Most of the locations had a specific period after which a hospital would need to either reconfirm its diversion status or be automatically reopened to ambulances. However, the policies regarding the time limits varied. For example, 10 major Boston hospitals were automatically taken off diversion after 2 hours, while hospitals in Atlanta could go on diversion for up to 8 hours before they would automatically be reopened to all ambulances. In addition, hospitals in Boston, Phoenix, and Cleveland could be taken off of diversion status if too many hospitals in their immediate area wanted to go on diversion. For example, when two-thirds of hospitals in a given sector in Phoenix are on diversion, all of the hospitals are required to reopen. This appendix summarizes the results from questions we asked short-term nonfederal, general medical and surgical hospitals in metropolitan statistical areas (MSA) in the United States that had emergency departments in 2000. We sent the questionnaire to 2,041 hospitals that met these criteria—20 did not have emergency departments in fiscal year 2001 or were closed, for a total of 2,021 hospitals. We obtained responses from 1,489 hospitals, for an overall response rate of about 74 percent. We weighted responses to adjust for a lower response rate from investor- owned (for-profit) hospitals to provide estimates representative of the entire universe of 2,021 hospitals in MSAs. The following tables show select survey information on characteristics of the survey universe (table 13), emergency department visits and treatment spaces (tables 14 and 15), specialty on-call coverage (tables 16 and 17), diversion (tables 18 through 27), boarding (tables 28 through 31), patients who left before a medical evaluation (table 32), indicators of crowding by hospital characteristics (tables 33 through 40), hospitals applying for regulatory approval to increase licensed beds (tables 41 and 42), and payer sources for emergency department visits (table 43). Other major contributors to this report were Diana Birkett, Jennifer Cohen, Bruce Greenstein, Katherine Iritani, Susan Lawes, Lisa A. Lusk, Behn Miller, Dae Park, Tina Schwien, and Stan Stenersen.
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Hospital emergency departments are a major part of the nation's health care safety net. Emergency departments report being under increasing pressure, with the number of visits nationwide increasing from an estimated 95 million in 1997 to an estimated 108 million in 2000. GAO was asked to provide information on emergency department crowding, including the extent hospitals located in metropolitan areas are experiencing crowding, the factors contributing to crowding, and the actions hospitals and communities have taken to address crowding. To conduct this work, GAO surveyed over 2,000 hospitals and about 74 percent responded. The survey collected information on crowding, such as data on diversion--that is, the extent to which hospitals asked ambulances that would normally bring patients to their hospitals to go instead to other hospitals that were presumably less crowded. While many emergency departments across the country reported some degree of crowding, the problem is more pronounced in certain hospitals and communities. For example, while 2 of every 3 hospitals reported asking ambulances to be diverted to other hospitals at some point in fiscal year 2001, a smaller portion--about 1 of every 10--reported being on diversion status for more than 20 percent of the year. Hospitals in areas with larger populations, areas with high population growth in recent years, and areas with higher-than-average percentages of people without health insurance reported higher levels of crowding. While no single factor stands out as the reason why crowding occurs, GAO found the factor most commonly associated with crowding was the inability to transfer emergency patients to inpatient beds once a decision had been made to admit them as hospital patients rather than to treat and release them. When patients "board" in the emergency department due to the inability to transfer them elsewhere, the space, staff, and other resources available to treat new emergency patients are diminished. Hospitals and communities reported a variety of actions to address crowding, including expanding their emergency departments and developing ways to transfer emergency patients to inpatient beds more efficiently. For the most part, these actions have not been extensively evaluated, so their effect is unknown. However, the widely varying characteristics between hospitals mean that no one approach is likely to emerge as a way to address this ongoing concern. Representatives from the American College of Emergency Physicians and the American Hospital Association and an independent reviewer provided comments on a draft of this report, which we incorporated as appropriate.
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DOD initiated the Milstar program under Air Force management in the early 1980s. Milstar is intended to be DOD’s most robust communications satellite system. It is designed to operate in the extremely high frequency (EHF) radio spectrum, although it has super high frequency and ultra high frequency capabilities, and it was originally designed to transmit signals at low data rates (LDR). Milstar employs computer processing capabilities on the satellites and several different radio signal processing techniques that provide resistance to electronic jamming. Computer processing associated with other DOD communication satellite systems is primarily performed with ground-based equipment and is considered to be less resistant to electronic jamming. In 1990, as the Cold War subsided, the Congress directed DOD to either restructure the Milstar system or develop an alternative advanced communications system to (1) substantially reduce the cost of the Milstar program, (2) eliminate unnecessary capabilities for protracted nuclear war-fighting missions and operations, and (3) increase the usefulness of the program for tactical forces. DOD chose to restructure the system. As a result of the 1991 Gulf War experience, DOD established a basis for increased Milstar support to tactical forces by using a medium data rate (MDR) communications capability. Currently, there are two Milstar satellite designs—the LDR version, called Milstar I, and a combined LDR and MDR version, called Milstar II. A total of six satellites are included in the program—two Milstar I satellites were launched in 1994 and 1995, and four Milstar II satellites are being fabricated and are scheduled to be launched in fiscal years 1999 through 2002. As a follow-on effort, DOD has initiated an advanced EHF satellite communications program to replace the Milstar I and II designs, with plans to launch the first advanced satellite in fiscal year 2006. Since program inception, DOD has spent several billions of dollars to acquire the Milstar I and II satellites, a mission control capability, and a variety of user terminals. In total, DOD has procured, or plans to procure, over 3,500 terminals. In addition, it is planning to spend several more billions of dollars for the advanced EHF satellite system. The Milstar I system is expected to provide communication networks in support of designated strategic mission areas. For example, in regard to strategic ballistic missile threats to North America, the system is expected to (1) transmit missile warning data from sensor processing sites to command centers, (2) provide commanders a means of exchanging information about ballistic missile attack assessments, and (3) disseminate critical messages to forces on how to respond to missile attacks. However, a May 1998 draft operational test report, prepared by the Air Force Operational Test and Evaluation Center, concluded that although the Milstar system was found to be effective for communications during normal operations, numerous deficiencies would require corrective action before the full nuclear wartime strategic capabilities could be realized. Deficiencies in three areas were highlighted—(1) military commanders’ voice conference network, (2) missile warning teletype network, and (3) emergency action message dissemination and force direction network. The deficiencies were associated with system connectivity—a critical operational issue that addresses the primary mission of Milstar to provide minimum essential worldwide communications among all services at all levels of military conflict. The purpose of the operational test was to evaluate the effectiveness and suitability of the in-orbit Milstar I satellite system. According to operational test officials, testing was hampered because, in some instances, the evaluation criteria were based on ambiguous operational requirements. DOD has not yet completed efforts to validate updates to the Milstar 1992 operational requirements. In addition, more recent testing revealed that peripheral equipment and software to be used with Milstar has not been effectively controlled to ensure communications interoperability with other systems. DOD regulations require such interoperability. The purpose of the military commanders’ voice conference network is to enable commanders to discuss whether a ballistic missile launch threatens North America, and if so, to determine the appropriate retaliatory response. However, operational testing and subsequent military exercises relative to this network determined that the National Command Authorities and the chief military commanders would be unable to communicate by voice in a timely and intelligible manner. Program officials stated that communication signal delays and poor voice quality are inherent characteristics in Milstar LDR technology and associated peripheral equipment. However, they believe that voice conference quality can be improved by (1) assigning additional communication channels to the strategic commanders, thereby simplifying time consuming hand-over procedures and improving timeliness; (2) consolidating voice signals through communication switches to make conferencing more efficient and user friendly; and (3) upgrading software algorithms to improve voice intelligibility. According to Joint Staff representatives, requirements and funding issues must be resolved before a date can be established for making these corrections. The purpose of the missile warning teletype network is to provide alert messages of a pending ballistic missile attack. Transmitting accurate and timely messages from the North American Aerospace Defense Command to other strategic command centers is critical to ensuring a timely retaliatory response to an attack. However, operational testing of this network was not performed. In our attempt to determine the reason, we were provided with two viewpoints—(1) Milstar support to the missile warning and assessment mission area had not been approved for testing by Milstar program officials and (2) there was a conflict with another operational test being performed at the Cheyenne Mountain Complex. The result was that operational test officials could not verify that ballistic missile alert messages could be reliably transmitted by the Milstar system. The Air Force Space Command subsequently tested the missile warning teletype network and identified that a required redundancy check could not be performed to ensure data accuracy. The Command concluded that software modifications were necessary to ensure such accuracy before the network could be used without restrictions. A U.S. Space Command representative stated that a plan had been approved to make the necessary software modifications, but network certification is not expected until May 2000. The purpose of the emergency action message dissemination and force direction network is to provide a means for instructing the strategic forces on an appropriate retaliatory response to a ballistic missile attack on North America. Operational testing of this network revealed that the bomber force could not sustain ultra high frequency radio access to Milstar satellites because the radios’ batteries were not sufficiently reliable or endurable. Battery life is one of several Milstar endurance issues and is integrally linked with the Milstar system’s endurance requirement. This requirement is the length of time that the system needs to be operational during and after a nuclear conflict. Continuous communication capabilities with deployed bomber forces are required if it became necessary to recall or redirect these forces. The endurance deficiency may have resulted from a disagreement about the interpretation of operational requirements. Milstar program officials stated that the system satisfied the 1992 Milstar requirements for endurance and that additional requirements are being imposed on the system. However, U.S. Strategic Command officials stated that recent changes to Milstar operational requirements only clarify endurance requirements and that the system should have performed in a manner consistent with these requirements. DOD does not expect to resolve this endurance issue until 2002. Ongoing DOD actions include (1) the Joint Requirements Oversight Council’s approval of updated Milstar operational requirements (which are to clarify endurance requirements) by April 1999, (2) the Director of Operational Test and Evaluation’s directions for a full test of endurance requirements, and (3) addressing funding shortfalls associated with endurance solutions. The Milstar system supports multiple communication networks, and user access to these networks is through peripheral equipment such as telephone handsets, computers, facsimile machines, and teletypes (referred to as input-output communication devices). However, testing by the Joint Staff, completed in March 1998, revealed that the configuration of this equipment and its accompanying software had not been effectively controlled to ensure communications interoperability. For example, the test report stated that network command centers were using software, which had not been formally approved, to interface with the Milstar system. A test representative told us that unless this situation is corrected, the probability increases that Milstar’s effectiveness could be degraded. Ensuring interoperability of peripheral equipment and software supporting Milstar and associated networks is critical to system operational effectiveness. According to DOD representatives, 238 equipment and software configurations that are to interoperate with Milstar terminals have been identified, but only 5 configurations have been approved for use and none have been fully certified. DOD requires that all military command, control, communications, computers, and intelligence systems must be certified as interoperable with other systems with which they share information. However, DOD representatives stated that they were uncertain as to when the approval and certification process would be completed. In fiscal year 1999, the Air Force plans to initiate operational tests to determine the effectiveness and suitability of the Milstar II satellite system. In addition, the Army and the Navy plan to operationally test their tactical terminals’ capabilities to support tactical forces. However, schedule delays related to software development for a critical component of the Milstar II system could adversely affect these tests and plans for tactical forces to transition from older communication systems to the new Milstar II system. The component, called the automated communications management system (ACMS), is critical to efficient Milstar operations. ACMS is expected to allocate and apportion the system’s limited LDR and MDR communication capabilities among multiple system users while permitting decentralized execution of communications planning and management functions by these users. In 1989, the Milstar program office initiated efforts to develop communications planning and resource management software, called the Mission Planning Element. According to a program official, the effort was canceled in 1994 because of technical difficulties that the contractor could not overcome. In 1995, the program office signed an agreement with a Navy development organization for ACMS, which was to perform functions similar to the Mission Planning Element. Schedule delays since this ACMS agreement was signed have totaled about 7 months. ACMS is currently scheduled to be delivered in April 1999. This April 1999 delivery date will not provide sufficient time for ACMS to be integrated with the ground control station and allow for systems operational testing with the first Milstar II satellite, which is to be launched in January 1999. In addition, program officials stated that ACMS software development is on a compressed schedule—a reduction from 24 months to 12 months—increasing the risk that the April 1999 delivery date may not be met. This creates the potential for ACMS not being available to support operations with the second Milstar II satellite to be launched in December 1999, if an additional delay occurs. According to an Air Force official, an independent study team, chartered by the Joint Staff, is assessing the effect of possible delays in the ACMS schedule, including the feasibility of meeting the planned Milstar II launch schedule. According to Army representatives, ACMS will not be available to support operational testing of Army terminals, which is scheduled to start in September 1999. The Army’s intentions were to use these test results to decide on terminal deployment and on transitioning its tactical forces to Milstar II. Concerned that ACMS delivery will be further delayed, the Army is independently upgrading the less sophisticated, communications management system, which was developed for Milstar I. However, such an upgrade would only be able to support the small number of tactical terminals expected to be deployed for the first Milstar II satellite. The upgrade cannot support the increased number of tactical terminals that are expected to be deployed after the launch of the second Milstar II satellite in December 1999. At that time, the need for ACMS would be critical. When ACMS becomes available, the Army will have to reconfigure its equipment and software and retrain its forces. DOD predicts that MDR communication capabilities of the Milstar II constellation will begin degrading in 2003—3 years before the planned first launch of an advanced EHF satellite in fiscal year 2006. The year 2003 is also when the deployment of MDR terminals to tactical forces is to be completed and tactical forces will have become dependent on the Milstar II system. This situation, coupled with the degraded capabilities, could result in users not having the communications capacity they require or expect to execute their missions. Therefore, if a military conflict were to occur during this 3-year period, communications for the command and control of tactical forces, using Milstar, could be adversely affected. The House Committee on Appropriations expressed concern about DOD not giving adequate attention to operational risk during the transition period from the Milstar II system to an advanced system, including consideration that hundreds of Milstar terminals would be deployed by that time. The Committee directed the Secretary of Defense to provide a report by March 31, 1999, to the congressional defense committees on the effects of the communications degradation, including suggested alternatives to minimize any adverse operational effects. Although DOD is aware of this potential degradation in Milstar communications capabilities, it has not fully assessed the associated operational risks. In 1993, DOD performed a comprehensive assessment of U.S. defense needs in the post-Cold War international security environment—called the Secretary of Defense’s Report on the Bottom-Up Review. The issues of Milstar affordability and alternative satellite designs were included in the report. At that time, DOD decided to limit the total number of Milstar II satellites to four, launch them in 1-year intervals from fiscal years 1999 through 2002, and begin launching advanced EHF satellites in fiscal year 2006. In 1995, DOD predicted that Milstar II’s MDR communication capabilities could begin to degrade below a minimally acceptable level in 2003— 3 years before DOD plans to replace the system with an advanced EHF system. In the absence of a major failure, satellites usually degrade gradually while in orbit, and their useful lives can be estimated based on such factors as component reliability and fuel availability. DOD used a computer simulation model, known as the Generalized Availability Program, to predict a 70-percent probability that MDR capabilities would be maintained at a minimally acceptable operational level until 2003. This probability was predicted to decrease annually to about 35 percent in 2006. A 1998 degradation analysis confirmed the 1995 results. To describe the predicted degradation in more practical terms for Milstar users, the Air Force converted the probabilities into a predicted loss of MDR communication channels. Of the 128 planned MDR channels for the four Milstar II satellites (32 channels per satellite), 16 channels, or 12 percent, could fail by 2003, and 41 channels, or 32 percent, could fail by 2006. The Army and the Navy—the predominant planned users of Milstar II’s MDR capabilities—have expressed concern about the communications degradation during the 3-year period. In 1996, the Army Vice Chief of Staff stated that accepting the 70-percent prediction criterion placed protected EHF communications, provided by the Milstar system, at an unacceptable level of risk to the Army’s operational forces. Army representatives informed us that they remained concerned about the degradation adversely affecting tactical operations. Navy representatives informed us that Navy Milstar terminals would have to compete for fewer MDR resources during the 3-year period. However, they added that a concept of operations must be updated for using MDR terminals and that an analysis must be performed before the full operational effect of the degradation can be known. In 2003, when Milstar II satellite capacity is predicted to degrade below the minimum acceptable level, tactical forces (especially Army and Navy forces) are expected to complete their deployment of MDR terminals. By 2004, the Army and the Navy intend to complete their transition from older communications capabilities to Milstar II. Therefore, these forces will have become highly dependent on Milstar II for protected satellite communications. The Army has maintained that existing tactical communication systems were not mobile enough during the 1991 Gulf War to engage in rapid offensive operations. Thus, the Army intends to use Milstar’s unique capabilities to extend the range of protected battlefield communications, allowing forces to operate farther from command posts than is possible with existing communications systems. The Army plans to acquire 209 mobile terminals (called Secure Mobile Anti-jam Reliable Tactical Terminals) and deploy them by the end of 2003, replacing older, larger, and less mobile terminals that operate with the Defense Satellite Communications System at super high frequency. The Navy plans to upgrade about 90 percent of its 350 LDR terminals with the MDR capability for ships, submarines, and shore installations. The first Navy battle group is scheduled to be equipped with the MDR upgrades in fiscal year 1999, and the remaining battle groups are expected to transition to Milstar II through fiscal year 2003. Since 1993, DOD’s efforts to develop and refine its future military satellite communications architecture have reaffirmed the acquisition decision documented in the Secretary of Defense’s Report on the Bottom-Up Review. However, these efforts have also cited a need to analyze the operational effects of degradation in MDR satellite capacity on tactical forces. In 1995, a DOD satellite communications architecture study, led by the Defense Information Systems Agency, found that delaying the launch of follow-on Milstar satellites beyond 2003 would create a risk in satisfying a significant portion of DOD’s satellite communication requirements. Also in 1995, the Under Secretary of Defense for Acquisition and Technology directed the Deputy Assistant Secretary of Defense for Command, Control, Communications, and Intelligence and the DOD Space Architect to develop recommendations that would mitigate possible shortfalls in EHF service to be provided by Milstar II. The Deputy Assistant Secretary responded to that direction, in a draft program plan, by presenting degradation avoidance and mitigation measures but stated that more analyses was needed. He recommended that the DOD Space Architect conduct a thorough analysis of the operational effects of the degradation. In 1996, the DOD Space Architect stated that an acceptable approach to making the transition from Milstar II to an advanced EHF system was to plan military operations assuming less than a fully populated constellation of four Milstar II satellites. This apparent recognition of operational risk presumed that (1) because of the fiscal environment, the year 2005 would be the earliest that an advanced system could be developed and launched and (2) the Milstar II constellation would probably fall below its planned capability of four satellites before 2005 because of launch or in-orbit failures. In 1997, representatives of unified commands and military satellite acquisition organizations met to refine the future military satellite communications architecture and develop an affordable transition and implementation plan for that architecture. These representatives acknowledged the risk of the Milstar constellation capacity degradation. However, they stated that work remains to be done in modeling the effect of information flow on combat operations. Considering the importance of the Milstar system and the billions of dollars that have been invested in the program, it is essential for DOD to ensure that Milstar I and II capabilities will be operationally effective and able to adequately support strategic and tactical forces in a timely manner. Several actions could be taken to better substantiate the effectiveness of Milstar capabilities—clarifying operational requirements; modifying software to ensure network communications connectivity; certifying peripheral equipment and associated software to affirm communications interoperability; and ensuring timely development of the automated communications management system. Because the Milstar II satellite constellation’s communications capacity is predicted to degrade from fiscal years 2003 through 2006, when an advanced capability is to be available, the continuity of protected and mobile satellite communications capacity is a potentially significant issue. In addition, because the deployment of Milstar II terminals is expected to be completed by fiscal year 2003, such degradation in communications capacity could result in users not having the capabilities they require or expect to execute their missions. Until DOD assesses the potential operational risk to tactical military forces for this 2003 to 2006 satellite transition period, as directed by the House Committee on Appropriations, the seriousness of this matter will be unknown. In conjunction with the report that DOD is directed to provide by March 31, 1999, to the congressional defense committees on the effects of Milstar communications degradation, we recommend that the Secretary of Defense provide information on the status and progress of DOD’s efforts to resolve Milstar I operational issues and Milstar II developmental issues. This information should include technical, schedule, testing, and funding matters pertinent to (1) achieving user-to-user strategic communication network connectivity and (2) managing the development difficulties associated with the automated communications management system. In assessing the operational risks associated with the predicted degradation of Milstar communications, as directed by the House Committee on Appropriations, we recommend that the Secretary of Defense specifically address (1) the minimally acceptable level of extremely high frequency satellite communications needed to support tactical forces and (2) the capability of the Milstar system to provide this minimum level of communications until an advanced extremely high frequency communications capability is deployed. DOD disagreed with our recommendation in the draft report that the Secretary of Defense provide the necessary directions to the military services and commands for (1) resolving the disagreements over operational requirements, (2) ensuring the availability of necessary software, (3) completing the certification process for interoperable equipment and software, and (4) managing the difficulties in developing the automated communications management system. DOD stated that although our draft report was essentially correct in describing Milstar issues during the 1997 operational test period, additional Secretary of Defense directions to resolve these issues are unnecessary. DOD claimed that the issues were being resolved and corrective actions were being taken through standard DOD processes and procedures associated with developing and fielding new capabilities. For example, DOD mentioned general officer level forums that were (1) providing ongoing oversight of operational, programmatic, and management issues affecting Milstar and (2) tracking issues to fulfill Secretary of Defense guidance for the transition of strategic users to Milstar by 2003. In acknowledging the Milstar I issues identified during operational testing, DOD emphasized that the Milstar system passed 14 of 17 threshold parameters. However, according to operational test officials, these parameters were more representative of system specifications than operational requirements that would permit a judgment about Milstar’s support to strategic mission areas. DOD identified several matters that remain to be resolved for achieving an effective strategic and tactical communications system. The matters were (1) funding for voice conferencing network upgrades to improve timeliness and voice quality; (2) completing software upgrades, equipment installations, and certification of the missile warning teletype network; (3) performing operational testing of nuclear bomber force communications and endurance requirements; (4) implementing a new Chairman of the Joint Chiefs of Staff Instruction, that addresses the management of satellite communications, to ensure interoperability certification of input-output communication devices, which are critical for user-to-user communications connectivity; and (5) completing ACMS development and performing tests to demonstrate the complex function of allocating and apportioning the fixed amount of Milstar communications capabilities. Considering the number and variety of Milstar matters that still need attention, we believe DOD should provide status and progress information for resolving these matters to the congressional defense committees. Accordingly, we modified our recommendation to the Secretary from providing directions to the services to reporting on the status and progress of resolving operational and developmental issues. DOD also disagreed with our recommendation dealing with the minimum level of extremely high frequency satellite communications needed to support tactical forces and the extent that Milstar could provide that level of communications until an advanced extremely high frequency communications capability is deployed. DOD stated that (1) it previously addressed the operational risk to tactical forces associated with the planned transition from Milstar to the advanced extremely high frequency satellite system; (2) another satellite system could provide some, but less effective, protected communications during the transition period; and (3) an additional review of this issue by the Secretary of Defense is unnecessary. DOD cited (1) the Joint Space Management Board as having approved military satellite communications architecture goals, strategy, and milestones; (2) the Defense Resource Board as having funded military satellite communication systems consistent with the architecture; and (3) the Joint Requirements Oversight Council as having endorsed an architecture transition plan based on a general officer level forum’s evaluation of all future military satellite communication satellite requirements and capabilities through 2010. DOD has apparently given considerable high-level attention to the predicted degradation in Milstar communication capabilities for the 2003 to 2006 period. Also, there is evidence that the operational risk accepted for this time period was based on financial, and possibly technical, reasons as to when an advanced extremely high frequency capability could be made available. Although this decision was originally made in 1993, and subsequently reaffirmed by various DOD authorities, it does not overcome the potential condition of insufficient protected communications for tactical forces during the 3-year transition period. DOD did not specifically address our point regarding what minimum level of extremely high frequency communications would be needed during the period, other than to state that the tactical requirement for protected communications far exceeds Milstar capabilities and tactical forces are not totally dependent on Milstar for protected communications. Nor did DOD address whether Milstar could provide that minimum level until an advanced capability is deployed. Accordingly, we reaffirm our recommendation. DOD also provided technical comments on the draft report, which we have incorporated as appropriate. DOD’s comments on a draft of this report are reprinted in their entirety in appendix I. Our review focused on Milstar system effectiveness and DOD’s plans to provide continuing comparable EHF communications capabilities after the existing system degrades. Specifically, we evaluated the Milstar I system’s operational effectiveness in supporting DOD strategic missions by reviewing the results of operational testing and exercises and comparing the identified deficiencies with system operational requirements. We obtained explanations of these deficiencies through discussions with tester, user, and program representatives. Additionally, we evaluated the Milstar II system’s potential effectiveness to support DOD tactical missions by reviewing program schedules and comparing the status of critical development activities with the schedules. We obtained an explanation of delays from program and user representatives. Finally, we evaluated Air Force assessments of the Milstar satellite constellation’s expected availability by reviewing the results from a computer simulation model used to predict satellite replenishment needs. We discussed the interpretation of the model results with program analysts. We performed our work primarily at the Air Force Space and Missile Systems Center in El Segundo, California, and the U.S. and Air Force Space Commands in Colorado Springs, Colorado, which included acquiring and assessing information from acquisition and budget documents, management reports, and internal memoranda. To gain an additional understanding of these matters, we reviewed information provided by the Office of the Under Secretary of Defense for Acquisition and Technology; DOD’s Office of the Director, Operational Test and Evaluation; the Joint Staff; and the Departments of the Air Force, the Navy, and the Army in Washington, D.C. We also reviewed information provided by the U.S. Strategic Command at Offutt Air Force Base, Nebraska; the Air Force’s Operational Test and Evaluation Center at Peterson Air Force Base, Colorado; the Army’s Program Executive Office for Communications Systems at Fort Monmouth, New Jersey; the Army’s Signal Center at Fort Gordon, Georgia; the Navy’s Space and Naval Warfare Systems Command in San Diego, California; and the Air Force’s Electronic Systems Center at Hanscom Air Force Base, Massachusetts. We performed our review from August 1997 to August 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Ranking Minority Member, Subcommittee on National Security, House Committee on Appropriations; and to the Chairmen and Ranking Minority Members of the House Committee on National Security; the Senate Committee on Armed Services; and the Subcommittee on Defense, Senate Committee on Appropriations. We are also sending copies to the Secretary of Defense, the Secretary of the Air Force, and the Director, Office of Management and Budget. We will make copies available to others upon request. If you or your staff have any questions concerning this report, please call me at (202) 512-4841. Major contributors to this report are listed in appendix II. Dale M. Yuge Samuel L. Hinojosa The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) multiservice Milstar system, focusing on the: (1) Milstar system's capabilities to support strategic and tactical missions; and (2) extent to which DOD has provided assurance of continuing comparable satellite communications among the users after the Milstar satellites under development are launched. GAO noted that: (1) there are several limitations associated with the Milstar system's capabilities to support strategic missions; (2) although the Milstar I system has been deployed for over 2 years, a May 1998 draft operational test report revealed that system support could be limited in some critical strategic mission areas; (3) operational testing showed that military commanders could not communicate by voice in a timely and intelligible manner, when using the low data rate capabilities; (4) this limitation was attributable to inherent characteristics of Milstar's low data rate technology and associated peripheral equipment; (5) operational testing of the missile warning teletype network was planned, but not performed, to verify that accurate and timely ballistic missile alert messages could be transmitted from North American Aerospace Defense Command to other strategic command centers; (6) a subsequent Air Force test of this teletype network determined that a required redundancy check for data accuracy could not be performed without software modifications; (7) operational testing revealed a Milstar system endurance issue, associated with the nuclear bomber force, that must be resolved because of the requirement for continuous communication capabilities if the bomber force needed to be recalled or redirected; (8) testing showed that the configuration of peripheral equipment and its accompanying software has not been effectively controlled or fully certified to ensure communications interoperability with the Milstar system; (9) DOD has identified corrective actions for the limitations in these four areas; (10) final resolutions are dependent on approval of requirements, verification through testing, a certification process, or obtaining necessary funds; (11) DOD has not provided assurance that the continuity of protected medium data rate satellite communication capabilities will be maintained for tactical forces after the four Milstar II satellites are launched; (12) the satellite constellation's communication capabilities are predicted to degrade below a minimally acceptable level in fiscal year (FY) 2003, before the advanced satellite system is expected to be available in FY 2006; (13) the deployment of Milstar II tactical terminals is expected to be completed by 2003, and tactical forces will have become dependent on the Milstar II system; (14) this situation could result in users not having the communications capacity they require to execute their missions; and (15) DOD has not fully assessed the associated operational risks to tactical forces.
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Medicare helps the elderly and certain disabled people meet the costs of health care services. Medicare is primarily a federally financed and administered health insurance program, which reimburses fee-for-service providers for each covered service rendered. However, Medicare also offers beneficiaries the option of enrolling in managed care plans—mostly risk contract HMOs. While nearly two-thirds of beneficiaries have access to at least one Medicare HMO that provides service in their zip code areas, only about 10 percent of beneficiaries belong to a Medicare HMO. Most beneficiaries are still enrolled in the traditional fee-for-service program. Under Medicare’s initial authority for paying HMOs that provided care to beneficiaries, few HMOs contracted with Medicare. As enacted in 1972, the legislation limited a participating HMO’s profit potential while losses had to be fully absorbed. Consequently, most Medicare HMOs chose to be paid on a cost basis. Facing neither profit nor loss from serving Medicare beneficiaries, cost contract HMOs lacked a strong incentive to reduce unnecessary care and deliver care efficiently. Legislation changed Medicare’s payment mechanism in 1982. Since then, HMOs have been able to enter into more attractive risk contracts with HCFA. The HMO receives a fixed monthly capitation payment—the AAPCC rate—for each beneficiary enrolled in exchange for providing all Medicare part A and part B services. The risk to the HMO is that for any particular beneficiary, the cost of care may exceed the prepaid amount. Each year, a risk HMO must estimate what it would charge Medicare beneficiaries for Medicare-covered services if they were commercial enrollees. The estimate of the premiums it would charge to provide such services to non-Medicare enrollees is adjusted to reflect the differences in (1) the benefits provided to Medicare enrollees and (2) the use of services by Medicare beneficiaries. This estimate (which includes the normal profit of a for-profit HMO) is used to identify any excess profits the HMO will derive from the Medicare business. The HMO is permitted to retain all profits up to the level earned on its non-Medicare business. If the expected Medicare profit exceeds the estimated profit on its non-Medicare business, the HMO must either return the excess to Medicare or provide additional supplemental benefits or reduced copayments or deductibles to beneficiaries. Virtually all HMOs faced with this choice have opted to provide increased benefits, which Medicare beneficiaries can find very attractive. Before an HMO can enter into a risk contract, the law requires it to have at least 5,000 commercial enrollees. An HMO serving primarily rural areas must have at least 1,500 members. In addition, the Medicare law’s “50-50 rule” states that no more than 50 percent of an HMO’s enrollment may be Medicare beneficiaries and Medicaid recipients. Medicare beneficiaries enrolled in a risk HMO face a “lock-in” requirement. Once they enroll, they must receive virtually all their health care services through the HMO. If a beneficiary goes outside the HMO for any health care services, neither the HMO nor Medicare is required to pay the cost. Exceptions are made for emergency and similar type care, which can be obtained anywhere in the country, and for which the HMO should pay. A few risk HMOs now offer a “point of service” option through which beneficiaries can receive certain services outside the plan’s network of providers but must pay more than for “within-plan” services. Beneficiaries consider a number of factors when deciding whether to enroll in a Medicare risk HMO, including (1) their familiarity with managed care, (2) their attachment to current health care providers, (3) whether they travel out of the area or live part of the year in another state, and (4) likely out-of-pocket costs in a risk HMO versus the fee-for-service program (plus the cost of a Medigap policy). In a risk HMO, the beneficiary may be charged a fixed monthly premium and a copayment each time a service is used. Depending on the additional benefits a Medicare HMO provides, enrolling may be an alternative to buying Medigap insurance, often at a lower cost to the beneficiary. Many employers provide health benefits to retired employees who receive Medicare. Some employers, faced with rising retiree health care costs and new accounting rules, believe they can reduce costs when their Medicare-eligible retirees enroll in risk HMOs. As a result, some employers are providing retirees with incentives to join risk HMOs. They may limit their contribution to just cover the cost of a Medicare risk HMO, thereby causing retirees who do not join an HMO to face increased health care costs. To remain in Medicare’s fee-for-service plan these beneficiaries may have to buy a Medigap policy and pay the difference between the premium and the employer’s contribution. About 3.8 million Medicare beneficiaries were enrolled in risk HMOs in August 1996, but enrollment was concentrated primarily in urban areas in the West and in Florida. Only a handful of counties in the East, South, and Midwest had more than 5 percent of their Medicare population enrolled in risk HMOs. (See fig. 1.) In total, 242 of 3,141 counties had more than 5 percent enrollment in the Medicare risk HMO program—a level that for this study we classify as “higher enrollment.” In contrast, however, 2,663 of the counties—about 85 percent—had either no beneficiaries or fewer than 1 percent enrolled in risk HMOs. (We classify these areas as “lower enrollment.”) Our analysis of counties grouped by their AAPCC rates and risk HMO enrollment levels suggests that while AAPCC rates play a role, other factors also affect enrollment. (See table 1.) In addition to HMO presence in the health care market, such factors as population density, the number of Medicare beneficiaries, and employers’ policies on retiree health benefits can influence risk enrollment. The studies we reviewed all found that several factors—usually including AAPCC rates and HMO presence—help account for the differences in risk HMO enrollment from county to county.Moreover, a study using recent data found that the factor with the strongest influence was HMO presence. Greater HMO presence establishes more familiarity in an area for managed care in general and for a particular plan. HMOs can draw on that when trying to attract Medicare beneficiaries. Medicare risk HMO enrollment in 2,257 counties that had lower AAPCC rates was minimal or nonexistent, but the principal barrier to risk HMO enrollment was not the payment level. On average, the 2,257 counties with lower AAPCC rates and lower enrollment had fewer people per square mile, and only about 16 percent of these counties were urban in that they were included in an MSA. For the most part, the 2,257 counties were mainly rural or sparsely populated and consequently, most had few or no HMOs serving non-Medicare residents. Generally, HMOs thrive and exert a stronger presence in counties that are part of metropolitan areas. In the 10 states with the highest percentage of people enrolled in HMOs in 1994, about 92 percent of the population lived in an MSA. Markets need to be of sufficient size to generate an HMO presence in general and a risk HMO program in particular. According to one study, the most remote counties with the smallest populations are not likely to be included in HMO markets. Table 2 compares characteristics of the 10 states with the lowest level of total HMO market share (that is, commercial, Medicaid, and Medicare enrollment) and the 10 states with the highest total HMO market share. The 10 states with the lowest total HMO market shares averaged less than two HMOs each. Even if the counties that had lower payment rates and lower enrollments had an HMO present, most lacked a Medicare population of sufficient size to attract an HMO into the risk contract program. Table 3 shows these counties had an average of about 5,600 Medicare beneficiaries. According to officials at several multistate HMO chains we interviewed, one of the factors they consider most when selecting areas of the country in which to pursue the Medicare business is the size of the Medicare population. An official at one company estimated that no more than 20 to 30 percent of the beneficiaries in a new market will join a risk HMO, which suggests that only about 1,100 to 1,700 beneficiaries in each of these counties may join. In addition, officials at multistate HMOs said that they need to enroll at least 10,000 beneficiaries within a few years to spread the risk. In another study, HMO officials said that they do not enroll Medicare beneficiaries in rural areas because the Medicare population is not large enough to cover the fixed costs associated with this coverage. In a number of counties where AAPCC payments were relatively low, the rate of Medicare risk HMO enrollment was relatively high, our analysis showed. Risk HMO enrollment flourished because of other factors, including urban settings and stronger HMO presence. Most of these primarily urban counties were in the West, where HMOs have a longer history than in many other parts of the country. The counties in and around the Portland MSA and three other MSAs in Oregon illustrate how factors other than payment rates serve to raise risk HMO enrollment. A large number of Medicare beneficiaries were enrolled in risk HMOs that serve more urban, lower payment counties. About 400,000 beneficiaries—nearly 18 percent of those eligible—were enrolled in risk HMOs in 92 counties that had lower payment rates (less than $375) and higher enrollment (greater than 5 percent). Most of these 92 counties were urban—or closer to urban areas—rather than rural; about 62 percent were part of the 35 MSAs shown in figure 2. Another 33 percent bordered these or other MSAs. Some of the 35 MSAs were scattered throughout the country, but most were in the West. In many of the 35 MSAs, HMO presence was high, which is favorable to enrollment in risk HMOs. Table 4 illustrates the total HMO enrollment for 10 of the 35 MSAs. Every county included in 8 of these 10 MSAs had lower AAPCC payments and higher enrollment in risk HMOs—the two exceptions were the Santa Fe MSA (where one of two counties did not have lower AAPCC payments and higher enrollment) and the Denver MSA (where three of five counties did not have lower AAPCC payments and higher enrollment). While most of the 10 MSAs had a relatively high percentage of their total populations enrolled in HMOs, enrollment was particularly high in four Oregon MSAs. In the Oregon MSAs, total HMO enrollment ranged from about 42 percent in Portland-Vancouver to about 56 percent in Medford-Ashland. We took a closer look at Portland, an area where higher enrollment in risk HMOs coexisted with an equally strong total HMO presence and lower AAPCC payment rates. Portland’s risk HMO enrollment rate of about 41.3 percent was among the highest in the country, even though its payment rates were relatively low. As table 5 shows, Portland and the three other Oregon MSAs have had an active risk program. Four of the counties in the Portland market rank among the top seven counties nationwide in terms of the percentage of their Medicare beneficiaries enrolled in risk HMOs. Portland and Oregon’s three other MSAs are clustered along the Interstate 5 corridor in the western part of the state where risk HMO enrollment has concentrated. Figure 3 shows that the nine counties in the four Oregon MSAs—Portland-Vancouver, Salem, Eugene-Springfield, and Medford-Ashland—all had higher enrollment in risk HMOs. Where higher enrollment has occurred outside the MSAs, in every case it has been in a county bordering one of Oregon’s MSAs. A substantial share of the populations in the bordering counties has access to HMO providers in the neighboring MSAs. About 75 percent of Oregon’s Medicare beneficiaries live in the 13 counties. HMOs have thus far expressed no interest in expanding into the eastern parts of the state because the numbers of beneficiaries needed to induce an HMO to enter into a risk contract with HCFA appear to be absent. In the Portland area, enrollment of Medicare beneficiaries in risk HMOs seems to have been facilitated by consumer acceptance of HMOs. The Portland community’s familiarity with HMOs—Kaiser introduced the concept in Portland in the 1940s—is believed to have increased the willingness of beneficiaries to participate in the risk program. Officials of two Oregon risk HMOs with whom we spoke both cited beneficiaries’ familiarity with the HMO concept as the primary reason for the high enrollment rate. Consistent with consumers’ apparently favorable attitude toward HMOs, beneficiaries were willing to enroll in risk HMOs even though most charge a premium. Because Portland’s HMOs were well-established for many years, they could participate in the risk program when it began. This early participation has increased beneficiary acceptance of HMOs and allowed more time for enrollment to develop and grow, according to HMO officials we spoke with. Kaiser participated in a Medicare risk demonstration project in 1980 and has been enrolling beneficiaries ever since. Even before 1980, Kaiser enrolled beneficiaries through a cost contract with HCFA. Two other HMOs in the Portland area began to participate in the risk program in the mid-1980s. Employers have played a role in fostering Portland’s risk enrollment. About half of Kaiser’s risk HMO enrollees come from employer groups. As employees retire and age into Medicare, they are able to remain covered by Kaiser, the plan through which they may have been receiving their health care coverage for many years. In contrast, PacifiCare, which has about as many risk enrollees as Kaiser, receives only about 5 percent of its enrollment from employer groups. Its enrollment grew more than Kaiser’s between 1993 and 1995, however, primarily because of its marketing to the beneficiaries not enrolled through employers. Higher payment rates were no guarantee that risk HMO enrollment would also be higher. Our analysis showed that a third of the counties ranked among the highest AAPCC payment areas in the country had no, or virtually no, Medicare beneficiaries enrolled in risk HMOs. About 82 percent of these counties were in the South, where HMOs generally have not achieved the high levels of enrollment attained by those in the West. The lack of a strong HMO presence contributed to the lower enrollment in risk HMOs that occurred in these counties. Few Medicare beneficiaries were enrolled in risk HMOs in one-third of the counties that were among the highest payment areas. Our analysis showed that 1 percent or less of the eligible beneficiaries were enrolled in risk HMOs in 33 counties that numbered among the top 100 AAPCC payment areas in 1995. (See table 1 for our payment/enrollment analysis.) Twenty-seven of these counties were in the South; of these, 12 were located in 8 MSAs—Atlanta, Biloxi-Gulfport-Pascagoula, Birmingham, Chattanooga, Lubbock, Nashville, Savannah, and Stubenville-Weirton—and 9 bordered these or other MSAs. HMO presence, a factor facilitating risk HMO enrollment, was relatively low in most of the eight southern MSAs. Even larger southern metropolitan areas like Atlanta and Birmingham, with about 15 percent total HMO enrollment, had lower Medicare risk HMO enrollment in most of their areas. Atlanta, where 3 of the 20 counties in the MSA had higher payment rates, still had risk HMO enrollment below 1 percent. Only one of the four counties in the Birmingham MSA had a higher payment rate, but risk HMO enrollment in this county and two others was minimal. In southeastern Michigan, higher payment rates in the Detroit, Flint, and Ann Arbor MSAs have not been enough to stimulate risk HMO enrollment. However, this modest enrollment performance cannot be ascribed to weak HMO presence. Compared with HMOs in some southern MSAs, HMOs in Michigan have generated stronger total enrollment—as high as about 26 percent in Flint and Ann Arbor. While the combination of attractive payment rates, a large potential market, and an active HMO industry are all present, the Medicare risk program has been slow to take root. In these Michigan MSAs, the retiree benefits provided by the automobile industry reduces the attractiveness of risk HMOs and contributes to lower enrollment by Medicare beneficiaries. Six of the 33 counties that had lower enrollment in risk HMOs, despite being among the 100 highest payment areas, were in Michigan. All six of these counties were in three MSAs—Ann Arbor, Detroit, and Flint. In addition to being higher payment, urban areas, these three MSAs had a fairly strong HMO presence. Both Ann Arbor and Flint had total HMO enrollment of about 26 percent; in Detroit, enrollment approached 21 percent. While low compared with some areas in the West, this level of total HMO enrollment was considerably higher than in most of the eight southern MSAs that also had higher payment rates and lower enrollment in risk HMOs. Despite the presence of these factors, only about 0.5 percent of the eligible Medicare beneficiaries in the three Michigan MSAs were enrolled in risk HMOs. A key factor in the Michigan MSAs, according to HMO officials, is the benefit package available to retired autoworkers and retirees from other firms that patterned their benefit packages on the auto industry’s. These benefit packages provide employer-sponsored comprehensive coverage of health benefits with little or no out-of-pocket payments for the retiree. As officials at the HMOs we interviewed in Detroit confirmed, beneficiaries receiving these benefits have little incentive to switch to risk HMOs. Excluding beneficiaries covered by rich benefit packages, the Medicare population in the Michigan MSAs is still relatively large and hence attractive to risk HMOs. Two plans whose officials we spoke with had left the risk program in the late 1980s because they were losing money but now have risk contract applications pending with HCFA and hope to begin enrolling beneficiaries in 1997. The HMOs plan to target Medicare beneficiaries not covered by rich retiree health benefits. One HMO suggested that by the end of 1998 it expects about 30,000 Medicare beneficiaries to be enrolled. However, if the HMO could contract with one of the “big three” automakers, it expects that number to double. Several multistate HMOs have been pursuing the Medicare risk market. As the market for employer-sponsored health coverage has become more saturated, HMOs have realized that the Medicare market is large and potentially lucrative, that the demand for a Medicare risk product is increasing, and that competitors are ready to move into the market. In addition, HMOs have been encouraged by increases in the AAPCC payment rates in some areas. Finally, publicly traded HMO companies, which are especially concerned with short-term profits, are seeking new ways in which to expand and grow. Companies’ business strategies for expanding their involvement with the risk HMO program include enlarging existing risk HMO contracts through service area expansions, applying for new risk contracts, and acquiring other HMOs. Officials of one large multistate HMO articulated a strategy of expanding from existing service areas into contiguous areas and contiguous states. While acquisitions were for the most part made to obtain a share of the commercial managed care market, with the decision to start a risk program coming later, some acquisitions were made specifically with the Medicare risk market in mind. For example, PacifiCare Health Systems announced in August 1996 that it would buy FHP International in part to ensure its dominance in the Medicare risk market. According to the officials we interviewed at multistate HMOs, their risk HMO expansion efforts targeted markets with certain characteristics. Markets were more attractive if they had a concentrated number of beneficiaries and limited competition for them. To spread the risk, most said that an HMO must have the opportunity to enroll at least 10,000 beneficiaries in a few years. Also, officials at the HMOs said that the payment rate in a market must be high enough for a risk plan to be financially viable. Furthermore, markets must have a concentration of non-Medicare beneficiaries to be attractive because HMOs must have at least 5,000 commercial enrollees to apply for a risk contract. And the more people who are enrolled in the commercial sector of a local market, the easier it is to enroll beneficiaries because of the familiarity with managed care. Officials at multistate HMOs had different views of the role that payment rates play in their decisions to move into or out of a market. Officials at one multistate company said that while they consider the AAPCC payment rate when making a decision, a low payment would not automatically disqualify a market. For example, they said they were considering expanding into a low-payment market because an employer group had specifically expressed interest in the risk program in that area. Another company indicated that the payment rate needs to be high enough to adequately pay health care providers. Officials at a third multistate company believed that there were no parts of the country where the payment rate would be too low for them to enter if the large numbers of Medicare beneficiaries needed for the program to be successful were present. Officials at two multistate HMOs held divergent views on the AAPCC rate reduction that would induce their companies to leave the risk HMO program. While officials at one company, citing “slim margins,” thought a moderate rate reduction would induce them to switch to a Medicare cost contract, officials at another company stated that they would consider leaving the risk contract program only if the rate reduction was “drastic.” Expansion by dominant Medicare HMO companies can help fuel the growth of risk enrollment in locations where it has been slow. In Boston, for example, HMO and HCFA officials credit the entrance of a PacifiCare risk product with sparking the growth of Boston’s risk market. As the PacifiCare product began obtaining market share, local HMOs realized they needed to target the Medicare market more aggressively if they wanted to stay competitive. Their pursuit of the Boston market resulted in greatly increased risk enrollment. The Boston risk market is an attractive market because of the large base of Medicare beneficiaries, some of the highest AAPCC rates in the country, and a strong HMO presence. However, the number of risk HMOs pursuing the Boston market peaked during 1987 through 1988, then declined until 1993, when only three HMOs were left serving the market. According to HCFA officials, a number of HMOs dropped out of the risk program because they did not understand how to manage the senior population and did not control enrollee costs. The market started to turn around in Boston in 1994. According to HCFA and HMO officials, HMOs were returning to the risk market or entering for the first time because the industry was learning how to manage the Medicare business. However, it took a new entrant to the risk market, challenging the market share of the established HMOs, for risk enrollment in Boston to take off. Tufts Associated reentered Boston’s risk market in 1994, with a franchise of SecureHorizons, the Medicare HMO product of California-based PacifiCare. To attract beneficiaries, Tufts began offering a zero-premium risk product—Medicare beneficiaries could enroll without having to pay any additional premiums to the HMO. The introduction of a zero-premium product transformed the Boston market, according to HCFA and HMO officials. Tufts’ action created competition among HMOs for Medicare beneficiaries and spurred stronger beneficiary demand for risk products. As a result, enrollment in the MSA grew 158 percent between 1993 and 1995. Prior to the introduction of the zero-premium product, HMO risk premiums had ranged from $90 to $120 per month, and according to HCFA officials, were hardly distinguishable from premiums for Medigap insurance. Despite the considerable momentum of risk HMO enrollment growth, its uneven pattern across the country focuses attention on understanding why such disparities occur. Although the linkage of Medicare payment rates to risk HMO enrollment may be important in some areas, dramatic differences in enrollment are often associated with other factors. The presence of HMOs, the density of population, and the number of Medicare beneficiaries, especially those familiar with managed health care, all facilitate growth in enrollment—and their absence hinders it. In addition, the health care benefits provided by employers in a market area can affect beneficiaries’ willingness to enroll in risk HMOs. The rapid growth in risk HMO enrollment during the past several years, which has occurred without any major federal policy changes, is likely to continue as employers encourage retirees to join HMOs and as HMOs pursue varied strategies for expanding their Medicare business. We provided a draft of this report to officials in HCFA’s Office of Managed Care. These officials agreed with the information presented. We are sending copies of this report to the Secretary of Health and Human Services and other interested parties, and we will make copies available to others on request. If you or your staff have any questions, please call me at (202) 512-7114 or Michael F. Gutowski, Assistant Director, at (202) 512-7128. Other major contributors to this report include Howard Cott, Aleta Hancock, Joseph Petko, Wayne Turowski, and Joan Vogel. Health maintenance organizations (HMO) enter into risk contracts with the Health Care Financing Administration (HCFA) to provide Medicare-covered services to beneficiaries who enroll. Risk plans assume all the financial risk associated with providing Medicare-covered services to enrolled beneficiaries in return for a monthly per capita premium—the adjusted average per capita cost (AAPCC) payment—from HCFA for each Medicare beneficiary enrolled. The amount of these AAPCC-based payments varies by county. HCFA pays some HMOs on a cost-reimbursement basis, with these HMOs assuming no risk that fees will be insufficient to cover costs; our work focused only on managed care plans that had entered into risk contracts with HCFA. We first obtained data from the Office of Managed Care at HCFA headquarters. For each of 3,141 counties in the nation, these data showed the (1) number of eligible Medicare beneficiaries, (2) number of beneficiaries enrolled in managed care plans with a risk contract with HCFA, and (3) AAPCC rate paid by HCFA for each Medicare beneficiary enrolled in a risk plan. These data were as of December for 1993, 1994, and 1995, the latest data available at the time of our review. Data did not include Guam, Puerto Rico, or the Virgin Islands. To identify counties with similar risk enrollment and AAPCC rates, we determined the percentage of Medicare beneficiaries enrolled in Medicare risk plans in December 1995 and the AAPCC rates paid by HCFA in 1995 for each of the 3,141 counties. Using these data, we placed each county into one of nine categories based on whether it had a higher, intermediate, or lower AAPCC rate and higher, intermediate, or lower Medicare risk enrollment. We placed counties with the top 100 AAPCC rates in 1995 in the higher category. These rates ranged from $463.89 to $678.90. There were 2,474 counties with AAPCC rates under $375.00 that we considered as having lower payments (their rates ranged from $177.32 to $374.86). We defined the remaining 567 counties as having intermediate AAPCC rates. Again using December 1995 data, we placed the 2,663 counties with no Medicare risk enrollment or enrollment of 1 percent or less in the lower enrollment category. Of these 2,663 counties, 618 had no Medicare risk enrollment at all, and 2,045 had enrollments of 1 percent or less. For the purposes of our study, we placed the 242 counties that had enrollments of more than 5 percent in the higher enrollment category. Although 5 percent would not be considered high for private sector managed care enrollment, it is high for the Medicare risk program—only about 8 percent of the counties had Medicare risk enrollments of more than 5 percent. We placed the remaining 236 counties in the intermediate category (enrollments greater than 1 percent and less than or equal to 5 percent). For the distribution of the 3,141 counties in the nine categories, see table 1. We focused our study on the following three categories: counties that had (1) lower AAPCC rates and lower risk enrollment (2,257 counties), (2) lower AAPCC rates and higher risk enrollment (92 counties), and (3) higher AAPCC rates and lower risk enrollment (33 counties). Using HCFA data, we converted the county data into metropolitan statistical area (MSA) data for the three study categories. In addition to analyzing data for the three study categories, we selected three markets in which to perform more detailed work: (1) Portland, Oregon—a market in the lower AAPCC rate and higher enrollment category; (2) Detroit—a market in the higher AAPCC rate and lower enrollment category; and (3) Boston—a market in which risk enrollment grew considerably in a relatively short time. In these markets, we interviewed officials at the applicable HCFA regional offices and at selected HMOs that had entered into or were planning to enter into Medicare risk contracts. Finally, we interviewed officials at all 10 HCFA regional offices, 6 national HMO chains, and 12 regional HMOs to obtain more information and get opinions on (1) the Medicare risk program in general, (2) enrollment trends in particular, (3) reasons managed care plans and beneficiaries participate in Medicare risk programs, (4) factors that made the risk market attractive, and (5) factors affecting risk program enrollment. All of the 18 HMOs had risk contracts or were planning to enter into contracts with HCFA. Also, we interviewed representatives from five management consulting firms involved in bringing employers and Medicare risk plans together to cover Medicare-eligible retirees and five employers regarding their efforts to enroll a portion of their retirees in Medicare risk plans. Table I.1 shows the HMOs, employers, and management consultants we interviewed. FHP, Inc. Kaiser Foundation Health Plan, Inc. U.S. Healthcare, New England Region Sears, Roebuck and Company Foster Higgins and Company, Inc. William Mercer, Inc. We performed our work between February 1996 and February 1997 in accordance with generally accepted government auditing standards. Counties in Oregon were not the only counties where risk HMOs had enrolled substantial numbers of Medicare beneficiaries despite having lower payment rates. Other counties in or bordering several western MSAs also followed this pattern. As in Oregon, these more urban counties were located in or bordered MSAs that usually had a strong total HMO presence—an important factor that can affect risk enrollment. The Albuquerque and Santa Fe MSAs in New Mexico and the Denver, Boulder-Longmont, Colorado Springs, and Pueblo MSAs in Colorado most closely followed the pattern exhibited in Oregon. Clearly, factors other than payment rates affected risk HMO enrollment in these MSAs. Risk HMO enrollment patterns for lower payment/higher enrollment counties in Washington and Arizona were not nearly as clear as for those in Oregon. In Washington, where HMOs generally had a strong presence, counties exhibited the lower payment/higher risk enrollment mix, but that enrollment was not as clearly concentrated. Higher risk enrollment extended beyond the counties located in MSAs and bordering MSAs with higher enrollment in risk HMOs to counties not directly adjacent to these MSAs. Counties in two Arizona MSAs—Tucson and Phoenix-Mesa—had higher risk HMO enrollment and, in Tucson in particular, had a strong HMO presence. Their payment rates were in the intermediate category. Counties bordering the MSAs, however, had the higher enrollment/lower payment pattern. The higher enrollment/lower payment pattern also appeared in counties located in MSAs in seven other states in different parts of the country. Counties in both New Mexico and Colorado exhibited the pattern described previously for Oregon. HMO presence was generally strong and higher levels of risk HMO enrollment were coupled with lower payment rates in several of the more urban counties in MSAs with a few adjoining counties also having higher enrollments in risk HMOs. Elsewhere in the two states, enrollment rates were considerably lower. In New Mexico, the counties with higher enrollments in Medicare risk HMOs were in and around the Albuquerque and Santa Fe MSAs and had lower AAPCC rates. (See fig. II.1.) About 48 percent of New Mexico’s Medicare beneficiaries lived in the six counties in and around the two MSAs, but about 98 percent of the risk HMO enrollees in the state lived there. Risk HMO enrollment was particularly high in the Albuquerque MSA—about 34 percent of the Medicare beneficiaries in the MSA’s three counties were enrolled. In Colorado, about two-thirds of the Medicare beneficiaries and about 99 percent of the Medicare risk HMO enrollees lived in and around four MSAs—Boulder-Longmont, Colorado Springs, Denver, and Pueblo. (See fig. II.2.) Risk enrollment was highest in the Denver MSA—about 30 percent of the Medicare beneficiaries were enrolled in December 1995. Table II.1 shows risk HMO enrollment figures for counties in and around selected New Mexico and Colorado MSAs. Of the six New Mexico and Colorado MSAs shown in table II.2, the two with the highest enrollment in risk HMOs—Albuquerque and Denver—also had a strong HMO presence. As in Oregon, New Mexico, and Colorado, higher enrollment in risk HMOs in Washington was primarily concentrated in counties with lower AAPCC rates that were also in and around MSAs—Seattle-Bellevue-Everett,Tacoma, Olympia, and Bremerton in the western part of the state and Spokane in the eastern part. But as figure II.3 shows, in Washington higher enrollment in risk HMOs also exists in counties that are neither in nor adjacent to MSAs with higher enrollment. Table II.3 shows that HMO presence was relatively strong in several of the six Washington MSAs. Overall, total HMO enrollment ranged from about 50 percent in Olympia to about 11 percent in Tacoma. In Arizona, higher enrollment in risk HMOs was primarily concentrated in two MSAs—Tucson and Phoenix-Mesa. The counties in the MSAs all had higher AAPCC rates than those in such MSAs as Albuquerque and Portland. The payment rates in Tucson and Phoenix-Mesa fell in the intermediate category. But for the counties outside Arizona’s MSAs where enrollment was higher for risk HMOs, the payment rates were usually lower. Figure II.4 shows the Arizona counties with higher enrollments in risk HMOs. Tucson, which had an especially high enrollment for risk HMOs—nearly 42 percent—also had a strong HMO presence as table II.4 shows. Borders neither Tucson nor Phoenix-Mesa Not applicable. Counties in MSAs in California, Florida, Hawaii, Minnesota, Oklahoma, Pennsylvania, and Texas had lower AAPCC rates but higher percentages of beneficiaries enrolled in risk HMOs. Minneapolis-St. Paul had a large number of Medicare beneficiaries enrolled in risk HMOs. Risk enrollment in several southern California and Florida MSAs was also higher despite lower AAPCC payment rates. Even parts of several MSAs in Pennsylvania had higher enrollments in risk HMOs despite lower payment rates. Table II.5 shows the risk HMO enrollment rates for the counties in the Minneapolis-St. Paul MSA. Risk enrollment was higher—about 19 percent—compared with many areas of the country but not nearly as high as in several western MSAs even though total HMO enrollment in the Minneapolis-St. Paul MSA was close to 40 percent. Risk enrollment patterns were less clear in the remaining six states. Table II.6 compares the total HMO enrollment and risk HMO enrollment where at least one county in an MSA had more than 5 percent of its Medicare beneficiaries enrolled in a risk HMO and where the AAPCC rate was in the lower payment category. These MSAs had varying degrees of risk enrollment ranging from being higher in Florida to lower in Pennsylvania. Santa Barbara-Santa Maria-Lompoc, CA San Luis Obispo-Atascadero-Paso Robles, CA (Table notes on next page) Data not available. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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.
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Pursuant to a congressional request, GAO reviewed the factors affecting Medicare risk health maintenance organization (HMO) enrollment, focusing on: (1) the patterns in HMO enrollment and Medicare payment rates; (2) selected geographical areas with higher enrollment, lower payment rates and areas with lower enrollment, higher payment rates; and (3) how the presence or absence of certain factors could affect enrollment. GAO noted that: (1) Medicare payment rates to HMOs are often considered to be the primary influence on Medicare HMO enrollment; (2) however, GAO's analysis suggest that several other factors also play a key, and sometimes, dominant role; (3) these factors include HMO presence, number of Medicare beneficiaries, and employers' policies toward retiree health benefits, and their relative importance varies across the country; (4) moreover, in markets such as Detroit and Portland, the influence of Medicare payment rates is not decisive; (5) enrollment in risk HMOs was virtually nonexistent in most counties with lower Medicare payment rates, but these lower rates were one of a constellation of factors that make such counties unattractive business propositions for Medicare HMOs; (6) GAO's analysis showed that these counties typically had few or no HMOs in their health care markets; (7) lower enrollment counties were primarily rural, only 16 percent fell within a metropolitan statistical area (MSA), and had fewer people overall and, in particular, averaged a small number of Medicare beneficiaries; (8) lower enrollment in risk HMOs did not occur in every county with lower payment rates; (9) risk HMOs enrolled large numbers of beneficiaries in 92 lower payment counties in which factors other than payment rates were more favorable; (10) these counties were mostly in the West, where HMOs are more prevalent and many consumers have embraced this form of health care delivery; (11) in contrast, higher payment rates were no guarantee that risk HMO enrollment would also be high; (12) about one-third of the 100 counties with the highest Medicare HMO payment rates in 1995 had risk HMO enrollments that were slight or nonexistent; (13) most of these higher payment/lower enrollment counties were in the South, where the presence of HMOs was limited; (14) however, several of these counties were in three Michigan urban areas; (15) although the presence of HMOs in the health care market was generally greater in the Michigan MSAs than in the South, employers' provision of richer retiree health benefits made the risk HMO option less attractive to Medicare beneficiaries in Michigan; (16) in addition to population density and other factors external to HMOs, HMOs' individual business strategies for the Medicare market are likely to affect the future direction of risk HMO enrollment; and (17) all these strategies are likely to boost risk enrollment and, sometimes, to change the market dynamics in certain areas.
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Established in 1956, DI is an insurance program funded by Social Security payroll taxes. There are a number of criteria an individual must meet to be eligible for DI benefits, including a sufficient work history and a lost capacity to work due to a disability. Medicare coverage is provided to DI beneficiaries after they have received cash benefits for 24 months (individuals do not have the option to purchase Medicare during this waiting period). To be considered disabled for DI benefits, an adult must be unable to engage in any substantial gainful activity because of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last at least 1 year. Moreover, the impairment must be of such severity that a person not only is unable to do his or her previous work but—considering age, education, and work experience—is unable to do any other kind of substantial work that exists in the national economy. The Social Security Act states that SSA is required to promptly refer people applying for disability benefits to state vocational rehabilitation agencies for services in order to maximize the number of such individuals who can return to productive activity. To reduce the risk a beneficiary faces in trading guaranteed monthly income and subsidized health coverage for the uncertainties of employment, the Congress established various work incentives—including a trial work period, an extended period of eligibility, and Medicare coverage buy-in. These incentives are intended to safeguard cash and health benefits while a beneficiary tries to return to work. The trial work period allows DI beneficiaries to work for a limited time without their earnings affecting their disability benefits. Each month in which earnings are more than $200 is counted as a month of the trial work period. When the beneficiary has accumulated 9 such months (not necessarily consecutive) within a 60-month rolling period, the trial work period is completed. The extended period of eligibility begins the month following the end of the trial work period. The extended period is defined as a consecutive 36-month period during which cash benefits will be reinstated for any month the beneficiary’s earnings are less than the substantial gainful activity level (in 1997, $500 for people with disabilities; $1,000 for people who are blind). Cash benefits may be paid for an even longer period of time if a person is unable to perform any substantial gainful activity. Another work incentive allows for continued Medicare coverage for at least 39 months following a trial work period, as long as the individual continues to be medically disabled. When this premium-free period ends, medically disabled individuals may elect to purchase Medicare coverage at the same monthly premium—over $300 for full coverage in 1996—paid by individuals age 65 or older who are not insured for Social Security retirement benefits. Most working DI beneficiaries we interviewed reported that financial need and enhancing self-esteem were the main reasons for attempting work. They reported a number of factors as helpful to becoming employed (see table 1). The two most frequently reported factors—health interventions and encouragement—appear to have been the most critical in helping beneficiaries become employed. First, health interventions—such as medical procedures, medications, physical therapy, and psychotherapy—reportedly helped beneficiaries by stabilizing their conditions and, consequently, improving functioning. Not only were health interventions perceived as important precursors to work, but they were also seen as important to maintaining ongoing work attempts. Encouragement to work was also critical. Respondents told us they received encouragement from family, friends, health professionals, and coworkers. Social Security Disability Insurance: Factors Affecting Beneficiaries’ Return to Work My family members. . . .encourag me to go to work and not rely on disability income. They were helpful to me in assessing the merits and benefits of potential job offers. . . . I am using a combination of Prozac and lithium medications to control my condition and Social Security Disability Insurance: Factors Affecting Beneficiaries’ Return to Work me to work regularly where I don’t use my sick days. Therapy with my counselor for over 4 years has really allowed me to work and function in a work environment. Medication for epilepsy help keep condition under control, which minimizes seizures and the risk of getting fired. . . . check from time to time to make sure everything is okay even suggests taking days off. infectious disease doctor encouraging and is very supportive. He wrote a letter to employer explaining condition and my capabilities. parents are very supportive medications have made me physically able to work. providing emotional support. All my treatments—chemo, radiation, and my eye surgery—helped me to get well and become physically able to work. If I did not have treatments, I would be dead. [The ADA] keeps employers aware that employees cannot be dismissed because of . . . .disabilities. Psychotherapy and group therapy been helpful. Also, medication has been helpful. . . . My psychotherapist has gone out of his way to help me. I can call him at any time. The pastor of my church has also counseled me. At the college I attended, a director of the disabled talks to my professors and tells them about my condition so that they can take this into account when assigning work and evaluating my performance. . . . ADA has helped because I believe that they would not have hired me because of my problems. equipment, and ADA provisions were useful. In general, similar proportions of respondents with physical impairments and those with psychiatric impairments cited these factors as helpful to being employed. However, people with physical impairments found coworkers and the trial work period more helpful than did those with psychiatric impairments. Our study results are generally consistent with published research regarding factors associated with employment for people with disabilities. For instance, many of the respondents we talked to reported a high motivation to work, were educated beyond high school, or were in their thirties or forties. For many, work seemed to be economically advantageous because they were earning at least moderate-level wages and receiving very few program benefits—such as housing assistance and food stamps—that are contingent upon low earnings. Consistent with other research, medical interventions, technology, accommodations, and social support were found to facilitate return to work. Unlike other studies, transportation appears to be neither a strong facilitator for nor an impediment to employment. However, this may be due to the fact that our respondents were selected from major metropolitan areas. Based on our discussions with beneficiaries, DI program incentives for reducing risks associated with attempting work appear to have played a limited role in beneficiaries’ efforts to become employed. Although the trial work period was considered helpful by 31 respondents, several indicated it had shortcomings. For instance, they indicated the amount signifying a “successful” month of earnings ($200) was too low, an all-or-nothing cutoff of benefits after 9 months was too abrupt, and having only one trial period did not recognize the cyclical nature of some disabilities. Respondents’ mixed views of the design of the trial work period suggest that while they value a transitional period between receiving full cash benefits and losing some benefits because of work, they might be more satisfied with a different design. Finally, over one-fifth were unaware of the trial work period and therefore may have unknowingly been at risk of losing cash benefits. threshold for determining continued eligibility. Using the deduction could make it easier for a beneficiary to continue working while on the rolls without losing benefits. Moreover, 42 respondents were unaware of the option to purchase Medicare upon leaving the rolls. As a result, some of these beneficiaries may decide to limit their employment for fear of losing health care coverage, while others, planning to leave the rolls, may think they are putting themselves at risk of foregoing health care coverage entirely upon program termination. Generally, respondents told us SSA staff with whom they interacted provided neither much help in nor much of a hindrance to return-to-work efforts. Fifty-nine respondents answered “no” when asked if people from SSA assisted them in becoming employed. However, 52 respondents told us that they did not have experiences with SSA that made it difficult to become employed. For the 17 people reporting difficulties, the most common examples cited were the limited assistance offered and poor information provided by SSA. Also, some beneficiaries noted that the $500 monthly earnings threshold used in the formula to determine if a person with a disability other than blindness is working at a gainful activity level (and therefore no longer eligible for benefits) is set too low. When examining respondents’ comments indirectly related to our questions, we found that about one-third indicated frustration or dissatisfaction with some aspect of SSA or the DI program. For example, some respondents told us they felt that the program was humiliating and lost sight of people’s needs. Moreover, some respondents indicated that SSA suddenly informed them that they needed to repay cash benefits mistakenly paid to them in the past. SSA has funded (in conjunction with the Department of Education’s Rehabilitation Service Agency) a research project that developed models for training private sector disability case managers about Social Security DI provisions and work incentives. Moreover, SSA expects that private vocational rehabilitation providers, participating under its experimental Alternate Provider Program and other proposed initiatives, will provide beneficiaries information and encourage them to work. Not surprisingly, personal health appears to be an overriding issue as beneficiaries consider their future status in the DI program and at the worksite. Among the 44 respondents without employer-based health insurance coverage, 29 plan to stay on the DI rolls into the foreseeable future or are unsure of their future plans. In contrast, 15 of 24 respondents with such coverage plan to exit the rolls. Moreover, when asked if anything would make it harder to work, about one-half of the 46 respondents who responded affirmatively said that poorer health would inhibit employment. Similarly, some said that improved health would facilitate work. Again, we found little difference in future work and program plans between people with physical and psychiatric impairments. As noted earlier, some work incentives were perceived to be more helpful than others. However, changes to work incentives may help some individual beneficiaries or groups of beneficiaries more than others. Data from Virginia Commonwealth University’s Employment Support Institute illustrate this point. For example, figure 1 shows that under current law, a DI beneficiary’s net income may drop at two points, even as gross earnings increase. The first “income cliff” occurs when a person loses all of his or her cash benefits because countable earnings are above $500 a month and the trial work and grace periods have ended. A second income cliff may occur if Medicare is purchased when premium-free Medicare benefits are exhausted. Allowing people to keep more of their earnings would make the program more generous and could cause people who are currently not in the program to enter it. Such an effect could reduce overall work effort because those individuals not in the program could reduce their work effort to become eligible for benefits. Moreover, improving the work incentives could also keep some in the program who might otherwise have left. Allowing people to keep more of their earnings would also mean that they would not leave the program, as they once did, for a given level of earnings. Such a decrease in this exit rate could reduce overall work effort because people on the disability rolls tend to work less than people off the rolls. The extent to which increased entry occurs and decreased exit occurs will affect how expensive these changes could be in terms of program costs. The costs of proposed reforms are difficult to estimate with certainty because of the lack of information on entry and exit effects. Moreover, determining the effectiveness of any of these proposed policies in increasing work effort and reducing caseloads would require that major gaps in existing research be filled. Mr. Chairman, this concludes my formal remarks. I will be happy to answer any questions you or other Members of the Subcommittee may have. Social Security Disability Insurance: Multiple Factors Affect Beneficiaries’ Ability to Return to Work (GAO/HEHS-98-39, Jan. 12, 1998). Social Security Disability: Improving Return-to-Work Outcomes Important, but Trade-offs and Challenges Exist (GAO/T-HEHS-97-186, July 23, 1997). Social Security: Disability Programs Lag in Promoting Return to Work (GAO/HEHS-97-46, Mar. 17, 1997). People With Disabilities: Federal Programs Could Work Together More Efficiently to Promote Employment (GAO/HEHS-96-126, Sept. 3, 1996). SSA Disability: Return-to-Work Strategies From Other Systems May Improve Federal Programs (GAO/HEHS-96-133, July 11, 1996). Social Security: Disability Programs Lag in Promoting Return to Work (GAO/T-HEHS-96-147, June 5, 1996). SSA Disability: Program Redesign Necessary to Encourage Return to Work (GAO/HEHS-96-62, Apr. 24, 1996). PASS Program: SSA Work Incentive for Disabled Beneficiaries Poorly Managed (GAO/HEHS-96-51, Feb. 28, 1996). Social Security Disability: Management Action and Program Redesign Needed to Address Long-Standing Problems (GAO/T-HEHS-95-233, Aug. 3, 1995). Supplemental Security Income: Growth and Changes in Recipient Population Call for Reexamining Program (GAO/HEHS-95-137, July 7, 1995). Disability Insurance: Broader Management Focus Needed to Better Control Caseload (GAO/T-HEHS-95-164, May 23, 1995). Social Security: Federal Disability Programs Face Major Issues (GAO/T-HEHS-95-97, Mar. 2, 1995). Social Security: Disability Rolls Keep Growing, While Explanations Remain Elusive (GAO/HEHS-94-34, Feb. 8, 1994). Vocational Rehabilitation: Evidence for Federal Program’s Effectiveness Is Mixed (GAO/PEMD-93-19, Aug. 27, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the factors affecting the return to work of the beneficiaries in the Social Security Disability Insurance (DI) program, focusing on: (1) factors that working beneficiaries believe are helpful in becoming and staying employed; and (2) tradeoffs and challenges that exist in improving work incentives. GAO noted that: (1) the group of DI beneficiaries interviewed identified a range of factors that enabled them to return to work; (2) factors most prominently cited were an improved ability to function in the workplace as a result of successful health care and encouragement from family, friends, health care providers, and coworkers; (3) on the other hand, DI work incentives--such as purchasing Medicare upon exit from the rolls--and assistance from Social Security Administration staff appeared to play a limited role in helping beneficiaries become employed; (4) a number of respondents said, however, that the provisions that allow them to work for a period of time without losing cash and medical benefits and to retain health care coverage for a limited time period after cash assistance ends were helpful; (5) availability of worksite-based health insurance appears to differentiate respondents who plan to leave the rolls in the future from respondents who plan to stay; (6) in addition, GAO's analysis of some of the proposed changes to work incentives--such as gradually reducing the DI cash benefit level as earnings increase--indicates that there will be difficult tradeoffs in any attempt to change the work incentives; and (7) although GAO's work sheds additional light on this issue, the lack of empirical analysis with which to accurately predict outcomes of possible interventions reinforces the value of testing and evaluating alternatives to determine what strategies can best tap the work potential of beneficiaries without jeopardizing the availability of benefits for those who cannot work.
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In 1972, after receiving inconsistent data on DOD headquarters from the military services, the House Appropriations Committee directed DOD to define headquarters functions, list headquarters activities, and develop a common method of accounting for headquarters personnel and costs. In response, in 1973 the Deputy Secretary of Defense issued DOD Directive 5100.73. Over the years, the directive has been revised and is now titled “Department of Defense Management Headquarters and Headquarters Support Activities.” The directive defines management as exercising oversight, direction, and control of subordinate organizations or units by (1) developing and issuing policies and providing policy guidance; (2) reviewing and evaluating program performance; (3) allocating and distributing resources; or (4) conducting mid- and long-range planning, programming, and budgeting. It defines headquarters support as professional, technical, administrative, or logistic support that is performed in, or provided directly to, a management headquarters. The definition includes both staff support and operating support (such as secretarial or computer support). It excludes specific products or technical and operating-type services that are provided on a DOD- or componentwide basis (such as payroll services) and base operating support functions provided by a host to all tenants. The directive includes a list of organizations that DOD classifies as management headquarters and headquarters support activities. This list includes the Office of the Secretary of Defense (OSD); the Joint Staff; defense agency headquarters; unified command headquarters; international military headquarters; and military department headquarters, including the headquarters of acquisition centers, major commands, and similar Navy organizations. In addition to the listed entities, the directive establishes criteria for DOD components to use in identifying other personnel and organizations that perform management headquarters and headquarters support functions. The directive, as implemented in DOD, requires that DOD annually report to Congress all military and civilian personnel and all budgeted funds for organizations identified under the directive. OSD and the military departments report this data to Congress on four separate budget documents, called PB-22 exhibits. Many DOD management headquarters listed in the directive have numerous subordinate noncombat organizations that perform a wide variety of functions, from direct staff support to their parent headquarters to operating military academies. In the Army and Air Force, these types of organizations are called field operating agencies/activities, staff support agencies, or direct reporting units. The Navy has no specific term for these noncombat support activities—at the Department of the Navy level, they are a subset of “Echelon 2” organizations, a generic term for Navy organizations that report to the Secretary of the Navy or the Chief of Naval Operations (OPNAV). In the past, we reported that DOD had an incentive to respond to pressures to reduce its management headquarters by transferring personnel to nonmanagement headquarters organizations. We also reported that past efforts to reduce headquarters personnel in OSD and military department headquarters were achieved primarily through transfers of functions and personnel to other organizations. Concerned that DOD’s efforts to reduce its infrastructure, including headquarters, have lagged behind the cuts made in operational forces, Congress has taken several actions to reduce headquarters personnel. For example, in 1990, Congress ordered DOD to reduce total personnel assigned to DOD management headquarters and headquarters support activities by 20 percent over 5 years in order to bring the size of headquarters “into line with” legislated force structure and budgetary reductions. Also, in the National Defense Authorization Act for Fiscal Year 1997, Congress directed DOD to reduce OSD, its DOD support activities, and the Washington Headquarters Services (WHS) by 25 percent over 5 years. The total number of personnel associated with DOD’s management headquarters and headquarters support activities are significantly higher than DOD has reported to Congress. DOD reported steady decreases in its management headquarters and headquarters support personnel from about 77,000 to 53,000 during fiscal years 1985-96, a 31-percent decrease. However, DOD does not report personnel at most of its noncombat organizations that are directly subordinate to management headquarters. In our review of selected subordinate noncombat organizations, we found that almost three-fourths of the organizations were primarily performing management or management support functions and should have been reported to Congress by DOD, using the criteria in DOD Directive 5100.73. Some personnel in these subordinate organizations had been part of headquarters, but they were transferred out of headquarters, or reclassified as nonheadquarters, during periods when Congress mandated that DOD reduce its management headquarters personnel. For example, in 1992 the Air Force removed about 2,000 personnel in its numbered air forces headquarters from reporting under DOD’s management headquarters program. We also found situations in which the military services use unusual accounting devices that distort the true size of organizations; in addition, the size of OSD is unclear because of definitional issues. DOD reported steady decreases in its management headquarters and headquarters support personnel from about 77,000 to 53,000 during fiscal years 1985-96, a 31-percent decrease. These reported decreases were, to some extent, in response to reductions directed by Congress. This rate of decrease is somewhat less than the 36-percent decrease in combat forces over the same time period. Figure 1 shows reported personnel levels for management headquarters and headquarters support for past and future fiscal years. Although DOD showed a steady decline in management headquarters and headquarters support personnel overall, the Defense-wide category increased 34 percent, from 7,089 in fiscal year 1985 to 9,533 in fiscal year 1996. The increase in OSD alone was 23 percent—from 1,691 to 2,078 during this time. (See app. I for a discussion of OSD personnel.) The increase in Defense-wide personnel was especially high from fiscal year 1988 to 1990—from 7,599 to 10,347, an increase of 36 percent. During that time, an additional 1,500 personnel in the Defense Logistics Agency’s management support activities (now called DOD support activities) were included in DOD’s report, according to agency officials. Also, in fiscal year 1990, DOD’s report included for the first time headquarters personnel from the U.S. Special Operations Command. DOD projects smaller annual decreases in management headquarters and headquarters support personnel for fiscal years 1997-99 than those reportedly made during the last 10 years. Beyond 1999, DOD’s estimates for these personnel are contained only in the Future Years Defense Program (FYDP), which shows a slight decrease, from 49,699 to 49,270 during fiscal years 2000-03. However, these projections do not include any changes that may occur as a result of implementing recommendations based on the Quadrennial Defense Review (QDR). Based on our review of 40 noncombat organizations subordinate to the 10 management headquarters we audited, we concluded that DOD had not included 29 organizations and 2,853 personnel in its reports to Congress on management headquarters and headquarters support (see table 1). We selected organizations to review based on a variety of factors, including conditions that OSD/DA&M officials agreed may indicate that an organization is providing management support. These indicators, also called “red flags” by OSD/DA&M, are headquarters officials serving additional duty as senior officials in the subordinate organization (called “dual hatting”), transfer of personnel from headquarters to create or augment subordinate organizations, diverse functions that mirror headquarters functions, and collocation of the subordinate organization with its headquarters. Although the presence of one or more of these indicators is not conclusive, it led us to perform the analysis called for in DOD Directive 5100.73. Many different types of organizations should have been reported to Congress because they perform management or management support functions covered by DOD’s directive: The Army’s Congressional Inquiry Division, a field operating activity with 41 personnel, augments 46 personnel that are designated as headquarters personnel. The division is one of seven in the Office of the Chief of Legislative Liaison in the Pentagon. The Navy’s International Programs Office, an Echelon 2 command with 169 personnel, manages foreign assistance programs for the Navy and reports to the Assistant Secretary of the Navy (Research, Development, and Acquisition). The Air Intelligence Agency’s 497th Intelligence Group, a direct reporting unit with 305 personnel located in Washington, D.C., primarily supports the Air Staff. The U.S. Army’s Forces Command’s Field Support Activity, with 293 personnel, is merely an accounting device for personnel integrated throughout Forces Command headquarters. The U.S. Atlantic Command’s Information Systems Support Group, a support activity with 117 personnel that was previously considered part of headquarters, provides computer support to the Command’s headquarters. The Air Combat Command’s Studies and Analyses Squadron, a field operating activity with 71 personnel, studies issues for its headquarters. Appendix II contains details on these and other noncombat organizations we reviewed. In addition to these organizations that we found, OSD/DA&M agreed that other organizations should have been reported in DOD’s annual PB-22 exhibits. For example, OSD’s fiscal year 1998 PB-22 exhibit on Defense-wide activities omitted the management headquarters personnel and costs for five defense agencies—the Ballistic Missile Defense Organization, the Defense Advanced Research Projects Agency, the Defense Commissary Agency, the Defense Finance and Accounting Service, and the Defense Security Assistance Agency. In total, these agencies had about 1,300 management headquarters personnel and $150 million in related operations and maintenance costs for fiscal year 1997. The fiscal year 1998 PB-22 exhibit did include, however, the management headquarters personnel and costs of the National Security Agency, a defense agency explicitly covered by DOD Directive 5100.73 that had not been reported on the exhibit since fiscal year 1993. An unknown portion of DOD’s reported personnel decreases in management headquarters and headquarters support activities were due to transferring personnel to nonheadquarters organizations or to reclassifying personnel and their functions as nonheadquarters, rather than actually reducing DOD personnel. In April 1997, in response to questions from the House Committee on National Security, DOD stated that a “good number” of its reported decrease in management headquarters personnel since 1985 were due to transfers of personnel from headquarters activities to operational activities and that a “minimal number” of the decrease was due to reclassification of positions. DOD emphasized that it had achieved real reductions in management headquarters personnel, but it could not quantify the number. In the past, we have reported that headquarters personnel reductions in OSD and the military department headquarters in Washington were achieved primarily through transfers of functions and personnel to other organizations. For example, although OSD, the Army, and the Navy had reduced personnel by about 2,900 during 1977-78, only 62 employees had been removed from DOD’s payroll through retirement, resignation, and involuntary separation. We could not determine whether these transfers had any adverse impact, primarily because few functional changes or physical relocations were involved. Most transferred functions and personnel remained in the Washington area; for example, in October 1977, OSD created WHS and transferred 265 OSD personnel to it. In 1988, DOD’s Deputy Inspector General studied the headquarters of the unified and specified commands. Among other things, he found many cases where integral headquarters support functions and personnel had been transferred from headquarters to support organizations. The primary purpose of many of these transfers was to avoid the headquarters connotation and/or personnel limitations placed on headquarters in legislation and congressional committee reports, according to his report. As the Air Force began to restructure its numbered air forces in the early 1990s, it requested to stop reporting as management headquarters about 2,000 personnel in the headquarters of numbered air forces. The Air Force’s request came as Congress mandated reductions in DOD management headquarters during fiscal years 1991-95. OSD/DA&M approved the Air Force’s request subject to its review in fiscal year 1993. However, the review never took place. Our review of 2 of the 16 numbered air forces indicated that the Air Force had not fully implemented its restructuring plans. Both headquarters continue to perform some management headquarters and headquarters support functions, such as inspections and readiness oversight, which are covered by DOD Directive 5100.73. Since the Air Force and OSD/DA&M have not analyzed the numbered air forces since they began restructuring, they cannot be sure that the Air Force’s exemption for these organizations is in compliance with DOD’s directive. (See app. III for our discussion of numbered air forces.) In some instances, the military services have used accounting devices that have masked the number of personnel in certain headquarters organizations. However, DOD Directive 5100.73 prohibits “special personnel accounting devices” to mask or distort the true size or structure of headquarters. The Air Force has accounted for 242 personnel that directly support the Secretary and the Chief of Staff of the Air Force in a “non-unit”—an accounting device. Air Force leaders do not know which of their personnel are accounted for as headquarters and which are accounted for in the non-unit, according to Air Force officials. The Air Force does not report these personnel as part of the Secretariat or the Air Staff but instead reports them on a separate line on its PB-22 exhibit. If the Air Force added these 242 personnel to its reported fiscal year 1997 total of 2,460 for the Secretariat and the Air Staff, it would exceed its statutory limit of 2,639 personnel by 63. According to an Air Staff official, the 242 personnel would have been accounted for as a part of the Secretariat and the Air Staff, if Congress had not legislated a personnel ceiling. Nonetheless, in an April 1997 meeting, Air Force officials stated that the Air Force was not circumventing the ceiling and they pointed out that OSD/DA&M had approved of this reporting arrangement. An OSD/DA&M official stated that he did not know whether the office had formally approved the arrangement but that it would not be viewed as a problem since the Air Force had reported the personnel on its PB-22 exhibit. Two Navy organizations appear to be accounting devices to hold headquarters personnel. The OPNAV Support Activity’s 168 personnel and the Field Support Activity’s 34 personnel are not reported as part of the 1,023 OPNAV personnel but rather are reported separately as part of the Navy’s departmentwide total. However, the two organizations are each commanded by OPNAV officials who are “dual-hatted.” Furthermore, OPNAV Support Activity personnel are intermingled and fully integrated with OPNAV staff. A cognizant Navy official could not explain the distinction between support personnel that are accounted for as part of OPNAV proper and those accounted for as part of the OPNAV Support Activity. Navy documents show that the OPNAV Support Activity’s mission is to provide administrative, technical, and office services support to OPNAV, while the Field Support Activity’s mission is to assist the Vice Chief of Naval Operations in budgeting, evaluating resource execution, and providing manpower and facilities for assigned organizations. At the Army’s Forces Command, Fort McPherson, Georgia, the Command’s Field Support Activity is merely an accounting device for 293 personnel integrated throughout Forces Command headquarters. The size of OSD is unclear because of definitional issues. OSD does not report, as part of OSD, certain headquarters personnel that are a part of OSD or are integral to its operation. OSD defines its personnel to include about 2,000 civilian and military personnel assigned to various OSD offices and certain OSD-administered temporary commissions. However, OSD does not include any of the approximately 1,400 DOD Inspector General personnel in its total, even though by law the Inspector General is part of OSD and appears on OSD organization charts. OSD also excludes direct support provided by DOD support activities, WHS, and the Air Force Pentagon Communications Agency. DOD does separately report these activities as well as 56 Inspector General personnel on its Defense-wide PB-22 exhibit, and it provides further information to Congress on them in annual budget justification materials. Our review, however, disclosed that OSD underreported WHS support to OSD by 82 personnel. Also, OSD did not report 26 personnel in the Defense Airborne Reconnaissance Office as management headquarters personnel, even though they are, in effect, part of OSD. (See app. I.) I Integration Support Activity and the Plans and Program Analysis Support Center) and WHS are under the direction, authority, and control of OSD officials. In 1994, the DOD Inspector General recommended that DOD abolish DOD support activities and transfer their personnel to OSD because the structure of the activities was not conducive to effective accountability and management and actually hindered effective mission accomplishment by OSD managers. While OSD has not eliminated the DOD support activity organizational category, it has abolished some activities. In the National Defense Authorization Act for Fiscal Year 1997, Congress directed OSD, its DOD support activities, and WHS to reduce their combined personnel by 25 percent by October 1, 1999, with interim reductions in 1997 and 1998. The baseline for the reductions is the number of personnel in these organizations as of October 1, 1994. The baseline is 4,815 and the ceiling for October 1, 1997, is 4,093, a reduction of 722. OSD plans to meet the 1997 ceiling primarily by contracting out WHS custodians and by reclassifying nearly 300 personnel at the Defense Manpower Data Center. The Center was considered a DOD support activity, but in December 1996 the Deputy Secretary of Defense merged it with the Defense Civilian Personnel Management Service to form the DOD Human Resources Activity, which is headed by the Under Secretary of Defense (Personnel and Readiness). OSD will take credit for the reduction but achieve no near-term savings from the merger and reclassification of the Center’s personnel. OSD has not determined how it will reduce personnel to meet the 1998 and 1999 ceilings; an ongoing study will provide the Secretary of Defense with advice on this matter. DOD should rebaseline the composition of OSD, according to a May 1997 contractor study commissioned by the Deputy Secretary of Defense in response to congressional guidance that DOD review the organization and functions of OSD. The study concluded that DOD had in the past purposefully redefined certain activities outside of OSD, thus making OSD appear smaller while increasing personnel in less visible organizations. The study recommended that the Secretary of Defense include as part of OSD the headquarters element of the DOD Inspector General, elements of WHS that support OSD, and the DOD support activities. The study also recommended that OSD’s role focus on top leadership and management tasks and that OSD be divested of program management, execution, and lower priority tasks. Regarding the congressionally directed cuts, the study concluded that DOD and Congress should not decide on an optimal personnel ceiling for OSD until they agree on OSD’s composition and roles. DOD has significantly understated the costs of its management headquarters and headquarters support activities. DOD reported a 19-percent decrease in costs—from $5.3 billion to $4.3 billion—during fiscal years 1985-96 and projects that costs will be about $5 billion through fiscal year 2003. However, DOD’s cost data are unreliable. Some of DOD’s PB-22 exhibits have only reflected partial headquarters costs, contrary to a DOD financial management regulation that calls for the reporting of all budgeted funds. Other PB-22 cost estimates made by military service officials in Washington, and reported to Congress, were significantly less than the estimates made by the military commands. As previously discussed, our review found 29 organizations with nearly 2,900 personnel that should be reported by DOD as management headquarters or headquarters support. DOD has understated headquarters costs by about $215 million by not reporting these personnel, using an average cost per headquarters person of $75,000 based on DOD data. DOD reported a 19-percent decrease in management headquarters and headquarters support costs—from $5.3 billion to $4.3 billion—during fiscal years 1985-96, using constant 1997 dollars and PB-22 data. These costs were primarily composed of operations and maintenance costs and military personnel costs. In general, within operations and maintenance accounts, civilian pay/benefits and “other contractual services” were the largest cost categories. PB-22 data are unreliable. The Navy’s annual PB-22 exhibit includes only estimated personnel costs for military and civilian positions, contrary to DOD Financial Management Regulation 7000.14-R that calls for reporting of all budgeted funds to support an activity. For example, the Navy reported $11.6 million in operations and maintenance costs for fiscal year 1996 for the Commander in Chief, U.S. Atlantic Fleet headquarters. This amount understated actual costs by $17.6 million, an error of over 150 percent. At the U.S. Atlantic Command, a unified command administered by the Navy, officials documented $43.4 million in actual operations and maintenance costs during fiscal year 1996, $39.1 million (or 9 times) more than the Navy reported to Congress on its PB-22 exhibit. Navy officials told us they had issued guidance to correct this problem. Furthermore, on the latest Defense-wide PB-22 exhibit prepared by the DOD Comptroller, no military personnel costs or other costs funded outside of the operations and maintenance appropriation were reported. DOD projects that management headquarters and headquarters support costs will be about $5 billion through fiscal year 2003, using constant 1997 dollars and FYDP data (see table 2). According to these estimates, DOD will not free up funds in its management headquarters accounts to help fund modernization efforts or other initiatives. These projections, based on the completed 1998-2003 FYDP, do not reflect cost reductions in management headquarters being sought by the Secretary of Defense that could arise from ongoing DOD studies. The FYDP’s estimates of management headquarters and headquarters support costs are also unreliable. Program elements in the FYDP reserved for these costs also contain other costs. For example, the Army’s estimated management headquarters costs include $2.3 billion during fiscal years 2000-2003 in one program element for military construction projects. After the Army decides which projects to fund, it will disperse the funds to separate program elements that are not counted as part of the cost of management headquarters. Also, according to a DOD Comptroller official, the Navy’s management headquarters cost data in the FYDP are inaccurate because of the Navy’s method of estimating the costs. DOD’s management headquarters and headquarters support personnel and cost data are understated for several reasons. Sustained criticism from Congress about the size of DOD’s headquarters has been a disincentive for DOD to accurately report the number of such personnel and their related costs. Thus, DOD has “played games” to “hide” management headquarters personnel from Congress, according to several OSD and military service officials. Second, many DOD officials believe that they are required to report only personnel that make policy, allocate resources, or plan for the future, even though DOD Directive 5100.73 requires that headquarters support personnel be reported. Third, the directive’s criteria for analyzing organizations to determine whether they should be included in budget exhibits on management headquarters are complicated. Finally, oversight by OSD and the military services has been limited. Many DOD officials believe that being counted as a management headquarters or headquarters support activity increases the chance of personnel reductions, given the history of congressional reductions to management headquarters personnel. Therefore, DOD organizations have incentives to avoid inclusion in DOD’s management headquarters program, according to an OSD/DA&M official, the Vice Commander of the Air Combat Command, and our analysis. Officials from OSD and each of the military departments told us that DOD components have organized themselves in such a way as to “hide” personnel performing headquarters or headquarters support functions. According to an OSD personnel official, the military service chiefs and others know that DOD’s reported numbers of management headquarters personnel are too low. He referred to DOD’s actions over the years as a game of “hiding the ball.” Separately, Army and Navy officials told us that their departments “play games” by not designating personnel as management headquarters or headquarters support when, under DOD Directive 5100.73, they should. Instead, management and support functions are placed in field operating agencies or staff support groups that report to management headquarters but are not reported to Congress on DOD’s PB-22 exhibits, according to the officials. As far back as 1984, the Secretary of Defense wrote of DOD being criticized for “hiding” headquarters by labeling them as operational instead of management organizations. A senior Navy official explained that bureaucracies find ways to “live with” directives and laws that impose constraints. Likewise, Air Force actions have led to a “strange organizational structure,” according to an Air Staff official. An official in the office of the Secretary of the Army noted that this “game goes on” because headquarters work does not diminish when Congress mandates reductions in numbers of headquarters personnel. According to a former DOD Deputy Inspector General, DOD has a long history of redefining management headquarters to reduce their apparent size, ignoring the rules for counting personnel assigned to management headquarters, and renaming organizations to remove them from the headquarters tracking system. In a 1988 study of unified and specified commands, the Deputy found that the definition of headquarters in DOD Directive 5100.73 led to a significant understatement of the number of personnel that directly supported headquarters. Many personnel were transferred from headquarters to support organizations to avoid the headquarters connotation and/or legislated personnel limits, but they continued to function as part of headquarters, according to the study. The study recommended that DOD revise the definition of headquarters personnel to more completely identify the number of personnel directly supporting management headquarters. However, DOD did not implement this recommendation because it was based on a lack of understanding of the purpose of the management headquarters program, according to OSD/DA&M. According to officials at several subordinate noncombat organizations, their organizations, costs, and personnel do not have to be reported under DOD Directive 5100.73 because they do not “make policy.” However, Washington, D.C., officials that manage their departments’ compliance with the directive are aware that the directive’s scope includes headquarters support functions and in fact lists and defines 33 such functions. While the directive does not preclude DOD components from establishing subordinate units to carry out support functions, it does require components to account for all management headquarters and headquarters support activities, however organized, using specific criteria. DOD Directive 5100.73 has complicated criteria for analyzing whether organizations, particularly headquarters support organizations, should be counted and reported to Congress. Under the directive, each DOD component is to analyze the percentage of “work” or “effort” devoted to 4 management functions and 33 headquarters support functions at each of its organizations. Different rules for reporting personnel and costs are applied depending on whether the percentage of management-related work exceeds 25 or 50 percent of an organization’s total work/effort. In specific cases, there is ambiguity as to whether an organization qualifies as a management headquarters or headquarters support activity under the directive, but OSD/DA&M is charged with making the final determination. For example, the Third Army asked to have all of its headquarters personnel removed from DOD’s management headquarters reporting system. However, after a review by OSD/DA&M and others, OSD/DA&M excluded only a portion of Third Army headquarters personnel from reporting under DOD’s directive. DOD’s oversight of its management headquarters and headquarters support accounting system has been limited, which has not facilitated compliance with DOD Directive 5100.73. The directive requires OSD/DA&M to determine the composition of, maintain, and monitor the official list of DOD management headquarters and headquarters support functions and organizations and to conduct periodic reviews to ensure DOD components accurately identify and account for management headquarters and headquarters support activities. In addition, the directive requires the DOD components to designate a single office to implement the directive, maintain an information system that identifies the number and size of their management headquarters and headquarters support activities, ensure that their list of such activities is accurate, and conduct surveys or studies and establish administrative controls to comply with the directive. OSD/DA&M has one person that spends part of his time monitoring compliance with the directive; in the past 3 years, the office has reviewed five cases for compliance. The Navy’s primary office for monitoring the management headquarters program is the Office of the Assistant Secretary of the Navy (Financial Management and Comptroller), according to officials who work there. However, our questions to this office on the management headquarters program typically had to be referred to other Navy offices. The Office of the Assistant Secretary for Manpower and Reserve Affairs controls the Army’s management headquarters program and is the approval authority for any changes requested by Army commanders. According to an Office official, the Army’s Manpower Analysis Agency, a field operating activity that reports to the Assistant Secretary, conducts manpower surveys of commands and, among other things, determines whether commands have properly accounted for their management headquarters personnel. However, Manpower Analysis Agency officials said “no one is checking” the Army’s management headquarters program. Until 1992, this Agency reviewed Army organizations to determine compliance with the program, but it stopped doing so routinely when the Army gave its commanders more authority with less oversight, according to Agency officials. In response to our inquiries, representatives from the offices of the inspector generals and auditors of the Army, the Navy, and the Air Force said they had not audited or inspected this area. In addition to its 1994 study discussed earlier, in 1989, the DOD Inspector General reviewed DOD support activities, formerly called management support activities/agencies. DOD faces challenges in reducing the size of its management headquarters and headquarters support activities. While DOD wants to reduce the size and cost of its management headquarters to reallocate funds to other areas, it has not determined the scope of future reductions or developed a detailed plan for making the reductions. Also, DOD has different definitions of management headquarters and headquarters support—when analyzing their headquarters internally, DOD officials include more activities than are reported on DOD’s PB-22 exhibits. Determining whether and how much to reduce management headquarters is difficult because DOD has no generally accepted staffing standards to objectively size a management headquarters. Furthermore, DOD officials have a range of views on whether and how to reduce management headquarters further—some advocate significant reductions while others have no plans to reduce. The QDR report concluded that significant cuts in DOD headquarters are feasible and desirable. However, it did not recommend a detailed plan for reducing headquarters, in part, because senior DOD officials lacked a reliable database to serve as a baseline for analysis. A subsequent study, ordered by the QDR and led by OSD, examined the effects of reducing DOD headquarters and headquarters support personnel by 15 percent during fiscal years 1998-2003—a total cut of about 12,550 positions, or about 7,650 more than reductions currently programmed in DOD’s 1998-2003 FYDP. This number was based on the plan to reduce the percentage of headquarters personnel, relative to total DOD personnel, to the 1989 level of 3.3 percent. The estimated 1998 level without further reductions is 3.7 percent, according to the study. In implementing this reduction, DOD does not want to make equal across-the-board percentage reductions for each component; it will instead analyze major structural changes, such as consolidating organizations and eliminating entire organizational echelons, according to the leader of DOD’s study. In addition, the Defense Reform Task Force, established by the Secretary of Defense, is to report in November 1997 on the size and functions of OSD, defense agencies, DOD field activities, and the military departments. DOD has different definitions of management headquarters and headquarters support—when analyzing their headquarters internally, DOD officials include more activities than are reported on DOD’s PB-22 exhibits. For example, on its PB-22 budget exhibit for fiscal year 1998, the Army estimated a total of 2,784 personnel for Headquarters, Department of the Army. However, as part of its analysis for redesigning this Headquarters, the Army included 19,502 personnel because it counted all personnel in its 58 field operating agencies that report to the Army Secretariat or to the Army Staff. Also, when the Navy studied its Secretariat, the study team included the numerous subordinate activities/offices that are not part of, but report to, the Navy Secretariat. Only two of these activities—the Office of Civilian Personnel Management and the Chief of Naval Research—are included on the Navy’s PB-22 budget exhibit and reported to Congress. In a follow-on study to the QDR, the study group created a new definition of management headquarters and headquarters support activities because senior DOD officials had concluded that the numbers reported under DOD Directive 5100.73 were unreliable. The group’s expanded definition included the DOD Inspector General, selected personnel at DOD field activities, military service field operating agencies, and headquarters subordinate to headquarters currently reported under the directive. Using this new definition, the group concluded that DOD had about 81,000 management headquarters and headquarters support personnel, or 30,000 more than were reported to Congress in the President’s budget for fiscal year 1998. However, OSD/DA&M and military service officials have criticized this definition and DOD has not adopted this revised definition. According to military service officials, there are no overall staffing standards to objectively quantify the number of personnel required for headquarters functions. The Air Force at one time sized its headquarters staff at major commands at between 1.7 and 2.0 percent of the total personnel under each command’s headquarters, but no longer does so, according to Air Force officials. Without quantifiable standards for headquarters staff work, which may not be feasible given the nature of the work, DOD and Congress are left to rely on judgment for sizing headquarters. In the past, this has led OSD and the military services to apportion percentage cuts across-the-board to their components, although some organizations have reengineered. Our work has shown that successful businesses have effectively tied personnel reductions to reengineering business processes. For example, one company began reductions to control costs and increase efficiency by using across-the-board cuts but found that because the cuts were not tied to a larger strategy, they only exacerbated the company’s problems. The company’s more recent restructuring efforts involved analyses of the distribution of employees and resources to determine where to cut and where to consolidate—a strategy that proved successful. These lessons are applicable to DOD as it develops a strategy for reducing its activities. DOD officials have a range of views on whether and how to further reduce management headquarters. Senior DOD officials and some military commanders have publicly advocated reductions, while others have no plans to reduce. The Commander in Chief, U.S. Atlantic Command, stated in March 1996 that it is time to review the number and size of headquarters as well as the size of the defense agencies. Likewise, the Air Combat Commander concluded that a pervasive “inattention to the cost of doing business, from the flight line on up” was wasting resources and that headquarters specifically were “bloated,” according to the Vice Commander. The Commander has instructed his staff to analyze, as a preliminary goal, reducing the Command’s 2,284 headquarters personnel by 400 and reducing the Command’s subordinate activities by 600 personnel, according to the Vice Commander. At the time of our review, this study was in its initial stages. In contrast to the Air Combat Command’s numerical goals, the Deputy Under Secretary of the Navy (Institutional and Strategic Planning) has led a headquarters reengineering study without setting numerical goals. In his view, headquarters personnel should not be reduced by the same percentage as operational forces because a minimum level of headquarters personnel is always required, whatever the size of the operating forces. He further believes that a comprehensive understanding of the requirements placed on headquarters is necessary to determine the number of personnel needed. Thus, he said that management reforms in Navy headquarters should come from within the Navy and should not be mandated by outsiders. The Deputy Assistant Secretary of the Army (Force Management, Manpower and Resources) said that the need to save money drives many of the Army’s organizational changes and that the Army is studying options to reduce the number of its major commands. Various factors complicate headquarters reductions, including demands by certain OSD and Joint Staff officials to protect Army personnel levels in their functional areas and political pressures not to cut personnel in congressional districts. The Air Education and Training Command has no plans to reengineer or reduce its headquarters. Command officials and the Air Force’s PB-22 exhibit indicate no change in the number of personnel projected during fiscal years 1997-99. Similarly, an OPNAV official told us that the Navy does not plan to reduce OPNAV personnel. Some OPNAV directorates are restructuring to more efficiently do their work, not to reduce personnel, according to this official. DOD needs to change its directive for reporting management headquarters and headquarters support personnel and costs to Congress because overall the data are inaccurate and incomplete—total personnel and costs are significantly higher than reported. DOD and Congress cannot rely on the data to determine trends in headquarters and help them make informed decisions about whether headquarters are appropriately sized. One approach would be for DOD to increase enforcement of its existing directive. However, this is not the best alternative because DOD, in an era of downsizing, would require additional personnel for enforcement. Also, the directive’s complicated criteria for determining which organizations to report to Congress is a problem. A simpler definition that would include more organizations could lead to the collection of more meaningful data and eliminate the need for complicated analyses of organizational work efforts. DOD’s current definition can be expanded without counting the headquarters of operational or combat organizations, which should be analyzed separately. Also, DOD’s estimated costs for its management headquarters and headquarters support are scattered among several budget documents. Having the total cost in one document would facilitate DOD and congressional reviews. DOD has already placed a summary of its total personnel in one document. To generate accurate information needed by Congress and the Secretary of Defense to carry out their oversight and management responsibilities, we recommend that the Secretary of Defense revise DOD Directive 5100.73 to expand its coverage and simplify its criteria. The revised directive should require the inclusion of all personnel assigned to all noncombat organizations that are subordinate to DOD management headquarters, including those at the major command level, such as field operating activities, direct reporting units, and other similar organizations that support their parent headquarters. The revised definition should permit common sense exemptions, such as the students and faculty of military academies and componentwide operating-type services, such as payroll services. To provide Congress with a cost summary, we also recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to report the total cost, including all appropriations, of DOD’s management headquarters and headquarters support in one document. DOD provided written comments on a draft of this report. These comments are reprinted in appendix V. DOD partially concurred with our first recommendation and concurred with our second recommendation. DOD acknowledged that, in some cases, the process for analyzing DOD organizations to determine whether they should be included in management headquarters budget exhibits can be complicated, labor-intensive, and subjective in nature. However, DOD believes it is impossible to develop a single fair definition of management headquarters and headquarters support activities that can be universally applied, given the large size and complexity of the Department. DOD has established a Management Headquarters Working Group to recommend to the Secretary of Defense whether DOD Directive 5100.73 should be revised, replaced, or augmented. DOD stated that it would summarize the total costs for its management headquarters and headquarters support, beginning with the fiscal year 1999 President’s budget submission. DOD also provided us with technical corrections and clarifying comments that we incorporated into our final report, as appropriate. To determine the accuracy and reliability of PB-22 data, we selected 10 headquarters and their subordinate noncombat organizations to review. We also reviewed two numbered air forces. To determine reported trends in DOD’s management headquarters personnel and costs, we obtained annual PB-22 exhibits and DOD’s 1998-2003 FYDP. To obtain information on plans to reduce the size of DOD’s management headquarters, we interviewed officials in the 10 headquarters organizations we audited and officials involved with studies of management headquarters. (See app. IV.) We are providing copies of this report to appropriate Senate and House committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; and the Director of the Office of Management and Budget. We will also provide copies to other interested parties upon request. Please contact me at (202) 512-3504 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VI. The Secretary of Defense is the principal defense policy adviser to the President and is responsible for the formulation of general defense policy and policy related to all matters of direct and primary concern to the Department of Defense (DOD) and for the execution of approved policy. The Office of the Secretary of Defense (OSD) is the Secretary’s principal staff element for policy development, planning, resource management, fiscal, and program evaluation responsibilities. Two DOD support activities, 15 defense agencies, 9 DOD field activities (including the Washington Headquarters Services (WHS)), and the Defense Airborne Reconnaissance Office (DARO) are subordinate to OSD. DOD support activities provide OSD with technical and/or analytical support. Defense agencies perform selected support and service functions on a departmentwide basis. DOD field activities also perform selected support and service functions but with a more limited scope than defense agencies. DARO is a unique organizational type, because it is not a DOD support activity, defense agency, or DOD field activity. Each of these agencies/activities is under the authority, direction, and control of an OSD official. (See fig. I.1.) Agency (DA) and Mapping Agency (DA) Headquarters Services (FA) Services (FA) Readiness) (Comptroller) (Policy) Comms. & Intel) (DSA) (FA) Center (DSA) (FA) (DA) (FA) (DA) (FA) (DA) (FA) (DA) (DA) (DA) (FA) (DA) The size of OSD is unclear because of definitional issues. OSD does not report, as part of OSD, certain headquarters personnel that are a part of OSD or are integral to its operation. OSD defines its personnel to include about 2,000 civilian and military personnel assigned to various OSD offices and certain OSD-administered temporary commissions. However, OSD does not include any of the approximately 1,400 DOD Inspector General personnel in its total, although by law the Inspector General is part of OSD and appears on OSD organizational charts. OSD also excludes direct support provided by DOD support activities, WHS and the Air Force Pentagon Communications Agency. DOD separately reports these activities as well as 56 Inspector General personnel on its Defense-wide PB-22 exhibit and provides further information to Congress on them in annual budget justification materials. As defined by OSD, during fiscal years 1985-96, OSD personnel increased from 1,691 to 2,078, or 23 percent. For fiscal years 1997-99, OSD projects a 3- to 6-percent annual decrease in OSD personnel, to 1,823 personnel in fiscal year 1999, according to the Defense-wide PB-22 exhibit in the fiscal year 1998 President’s budget. These levels were determined, in part, by a December 1994 decision by the Deputy Secretary of Defense to reduce OSD civilian personnel by 5 percent per year during fiscal years 1996-2001. During fiscal years 1985-96, OSD support personnel increased by 90 percent, from 662 to 1,260 personnel. The largest annual increase was 752 in fiscal year 1991, due to the reporting of DOD support activities, a new category. In fiscal year 1997, OSD estimates that its support will decrease by 379 personnel, primarily due to a reclassification and reorganization involving 300 personnel at the Defense Manpower Data Center, formerly a DOD support activity. (See fig. I.2.) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 We reviewed DARO and WHS for compliance with DOD Directive 5100.73. DARO is not reported on DOD’s PB-22 budget exhibits, but it is clearly a management headquarters organization under DOD Directive 5100.73 because it allocates resources and conducts mid- and long-range planning, programming, and budgeting. Essentially, DARO is part of OSD, but it is not counted as such because of OSD’s personnel ceilings, according to a DARO official. Of DARO’s 28 government personnel, only 2 are on OSD’s manning document; the remaining 26 personnel are not reported by DOD as management headquarters. DOD created DARO in 1993 to increase senior management attention and oversight of airborne reconnaissance systems. DARO develops and manages the $2 billion per year Defense Airborne Reconnaissance Program. DARO is under the authority, direction, and control of the Under Secretary of Defense (Acquisition and Technology). Although DARO is not officially part of OSD—and is neither a defense agency nor a DOD field activity—it is listed in the DOD telephone directory in the Office of the Under Secretary of Defense (Acquisition and Technology), and DARO’s message address is SECDEF WASHINGTON DC//USDA&T/DARO//. We also reviewed WHS for compliance with DOD Directive 5100.73. We agreed with OSD/DA&M as to which WHS directorates were primarily performing headquarters support functions and which were primarily performing nonheadquarters functions under the definitions in DOD Directive 5100.73. However, OSD underreported WHS headquarters support personnel by 82 on the Defense-wide PB-22 exhibit. According to our analysis of its manning document, 466 WHS personnel should have been reported as headquarters support, but OSD reported 384 personnel for fiscal year 1997. WHS is a DOD field activity created in 1977 by the Secretary of Defense, primarily by transferring personnel from OSD. The Director of WHS is dual-hatted as an OSD official, the Director of Administration and Management. WHS’ mission is to support specified DOD activities in the National Capital Region. For OSD, DOD field activities, and other specified defense activities, WHS provides services, such as budgeting and accounting, civilian and military personnel management, office services, correspondence and cables management, directives and records management, housekeeping, security, and computer and graphics support. OSD/DA&M officials could not explain why some WHS personnel were not part of OSD. That is, given the nature of some of the positions, such as receptionists for the Secretary of Defense, they could not explain the basis for deciding whether these personnel would be accounted for in OSD or WHS. They said that since WHS’ mission included support to OSD, this condition was not a problem. They also observed that the total number assigned to OSD “is a politically sensitive number.” At the 10 headquarters organizations we audited, we judgmentally selected 40 subordinate noncombat organizations to review. Specifically, we reviewed mission and functions documents, organizational manning documents, and organizational history. We also discussed the organization’s activities, products, services, customers, and relationship with headquarters with cognizant officials in the subordinate organization and in its headquarters. We determined that 29 of the 40 subordinate noncombat organizations should have been reported by DOD as management headquarters or headquarters support activities, using the criteria in DOD Directive 5100.73. One of these organizations was previously discussed in appendix I; the remaining 28 organizations are discussed in this appendix. For fiscal year 1997, the Army had 2,491 personnel in the Army Secretariat and the Army Staff and 21,703 personnel in 77 field operating activities and staff support activities subordinate to the Army Secretariat and the Army Staff. We reviewed five of these activities, using the criteria in DOD Directive 5100.73, and found that all five—the Congressional Inquiry Division, the Cost and Economic Analysis Center, the Information Management Support Center, the Army National Guard Readiness Center, and the Installation Support Management Activity—with a total of 546 personnel, should have been reported to Congress by the Army as management headquarters or headquarters support activities but were not. Army officials raised no objections to our assessment of their field activities and concurred with our facts. The Congressional Inquiry Division, a field operating activity with 41 personnel, is one division within the Army’s Office of the Chief of Legislative Liaison. Its primary function is to reply to all letters written to DOD by members of Congress that raise Army issues. The Division gathers information from installations and Army commands and prepares a coordinated response. In addition, the Division provides computer support and mailroom services for the entire office and educates new congressional staff on the Army. The Division’s 41 personnel are collocated with its sister divisions’ 46 management headquarters personnel in the Pentagon. The Cost and Economic Analysis Center, with 76 personnel, conducts cost and economic analyses of weapons, automated information systems, force structure, operations and support, and installations to support Army planning, programming, and budgeting. In addition, it manages the Army’s cost review board and cost position for selected major programs. The Center’s data and analyses are used by the Army Secretariat, including its program executive offices, the Army Staff, OSD, Forces Command, the Training and Doctrine Command, and the Army Materiel Command. Organizationally, the Center is imbedded as one of four divisions in the Office of the Assistant Secretary of the Army (Financial Management & Comptroller). The Center’s director is dual-hatted as the Deputy for Cost Analysis, a management headquarters position. The Center is the only division in the Assistant Secretary’s office classified as a field operating activity and not reported as part of Army Secretariat personnel on the Army’s PB-22 exhibit. The Center’s personnel—66 of whom are operations research or systems analysts—are located in Falls Church, Virginia, near the Pentagon. Both operations analysis and cost analysis are headquarters support functions listed in DOD Directive 5100.73. The Information Management Support Center, with 139 personnel, provides all information management support and services for the Army Secretariat, the Army Staff, and their assigned agencies and activities. The Center reports to the Secretary of the Army’s Administrative Assistant and is located in the Pentagon. The Army established the Center in 1994 based in part on an internal study recommendation on information management. The study recommended, among other things, that the Army consolidate its headquarters positions in information management. The creation of the Center resulted in the transfer of 109 personnel from management headquarters to the Center. The Army National Guard Readiness Center has 195 civilian and active military personnel who support the Army Directorate of the National Guard Bureau. These personnel work in the same directorates as the headquarters personnel of the Army Directorate. We believe that the Army Directorate’s 279 active military and civilian personnel function as one staff, though 195 personnel (70 percent) are accounted for as part of the Readiness Center, while 84 are accounted for as part of the Army Staff, a management headquarters. Organizationally, the Center is a field operating agency that reports to the National Guard Bureau. In the DOD telephone directory, the Center is one of several subdivisions listed under the Director, Army National Guard Bureau. Furthermore, the Bureau’s organization chart shows it is located both in the Pentagon and at the Center’s building, nearby in Arlington, Virginia. The Center’s mission is the same as that of the Army Directorate: to provide functional support to the 54 states and territories of the Army National Guard; to serve as the National Guard Bureau Chief’s intermediate channel of communications between the Army and the states and territories; and to manage the Army National Guard’s functional areas that is, personnel, operations, training and readiness, logistics, force management, aviation and safety, engineering, information systems, environmental programs, and comptroller. The Center’s major functions include both Army Staff-level functions and major command-level functions, such as developing policy and assisting Headquarters, Department of the Army, in developing resource requirements and allocating resources. The Installation Support Management Activity, with 95 personnel, is a field operating activity under the Army’s Assistant Chief of Staff for Installation Management. The activity provides policy recommendations, program management, oversight, and analysis for installation facilities, housing, and public works. Facility management is a headquarters support function listed in DOD Directive 5100.73. Organizationally, the activity’s divisions and personnel are interspersed within the Assistant Chief of Staff’s headquarters organization or collocated in the Pentagon with headquarters personnel. The Deputy Assistant Chief of Staff for Installation Management is dual-hatted as the Director of this activity. Most of the activity’s personnel are housing management specialists/analysts and general engineers. The distinction, or lack thereof, between this activity and its headquarters is such that when we requested a concept plan for the activity, we received a concept plan for the headquarters organization. However, an analysis prepared by activity officials at our request concluded that less than 21 percent of the activity’s personnel perform management headquarters or headquarters support functions, below the 25-percent threshold in DOD Directive 5100.73. Given all of the above, we believe that more than 50 percent of the activity’s effort is for management and headquarters support functions. For fiscal year 1997, the Department of the Navy had 2,267 total personnel in the Navy Secretariat, the Office of the Chief of Naval Operations (OPNAV), and Headquarters, Marine Corps and 13,863 personnel in 64 organizations subordinate to these three organizations. We reviewed four of these subordinate organizations, using the criteria in DOD Directive 5100.73, and found that all personnel in three organizations—the Naval Center for Cost Analysis, the Legal Services Support Group, and the Navy International Programs Office—with a total of 312 personnel, should have been reported to Congress by the Navy as management headquarters or headquarters support but were not. In addition, the Navy should have reported a portion of the Naval Information Systems Management Center (67 personnel, or 48 percent) as headquarters support. The Naval Center for Cost Analysis, with 52 personnel, prepares cost estimates of the resources required to develop, procure, and operate systems and forces in support of Navy planning, programming, budgeting, and acquisition management. Most personnel are operation research analysts. Operations analysis and cost analysis are headquarters support functions listed in DOD Directive 5100.73. The Center’s customers include the Assistant Secretary of the Navy (Research, Development, and Acquisition), the Assistant Secretary of the Navy (Financial Management and Comptroller), OPNAV, and the Navy’s Chief Information Officer, all management headquarters officials/organizations. The Center is located in Arlington, Virginia, near the Pentagon, and it reports to the Assistant Secretary of the Navy (Financial Management and Comptroller). It was created in 1985 to implement legislation mandating the Navy to create a cost-estimating organization independent of the Navy’s research, development, and acquisition organization. The Legal Services Support Group, with 91 personnel, provides legal services throughout the Navy, including all Offices of Counsel and their client headquarters and field activities, in the areas of litigation, environmental law, and the Freedom of Information Act. It handles significant cases of interest to the General Counsel, including contract claims litigation over $400,000, civil personnel litigation, and federal environmental litigation. The Group reports to the Navy’s General Counsel. Although a document establishing the Group in 1989 stated that it is a “nonmanagement headquarters shore activity,” there are indicators that the organization exists only on paper and is, in fact, not distinct from the General Counsel office. For example, the Group’s Director is also an Associate General Counsel—a dual-hat relationship in which he is counted as management headquarters (as part of the Secretariat) while his staff are not counted as management headquarters or headquarters support. In a hand-drawn organization chart prepared by the Group’s Director—no official chart exists—the Group’s personnel, all of whom are civilian attorneys, are interspersed within components of the General Counsel’s office. Most personnel are located in Arlington, Virginia, near the Pentagon. Furthermore, the Naval Litigation Office, the forerunner of the Legal Services Support Group, was transferred from a management headquarters activity to a nonmanagement activity without any apparent change in its duties, missions, or functions, according to Navy documents. The Navy International Programs Office, with 169 personnel, implements departmental policies and manages international efforts concerning research, development, and acquisition for the Navy, according to its mission statement. In our view, this office should have reported all of its personnel as management headquarters or headquarters support because most of the effort in four of its five directorates was for functions covered by DOD Directive 5100.73, such as security, data automation, facilities, financial management, and policy-making. The Naval Information Systems Management Center had 139 personnel at the time of our review. The Center will be disestablished by September 1997, according to Navy officials, because the Navy is creating a chief information officer organization as required by the fiscal year 1996 DOD Authorization Act. According to its purpose and mission statement, the Center performs shore activities assigned by the Assistant Secretary of the Navy (Research, Development, and Acquisition). The Assistant Secretary is the Center’s primary customer, according to officials. Created in 1991 and described as a “management support activity,” the Center consolidated information technology functions centering on acquisition, management oversight, software development, policy-making, and information security. The Center’s efforts, with the exception of the Contracting Directorate, met the criteria of the data automation headquarters support function defined in DOD Directive 5100.73. The Contracting Directorate, with 72 personnel, supported the Navy Department as a whole and not just management headquarters. Contracting is not a headquarters support function listed in DOD’s directive. However, under the methodology in DOD’s directive, the 67 personnel outside of the Contracting Directorate that performed headquarters support functions should have been reported on the Navy’s PB-22 exhibit. For fiscal year 1997, the Air Force had 2,460 personnel in the Air Force Secretariat and the Air Staff and 20,592 personnel in 40 direct reporting units and field operating activities that are subordinate to the Secretariat and the Air Staff. We reviewed five activities, using the criteria in DOD Directive 5100.73, and found that three activities—the Air Force Studies and Analysis Agency, the Air Force Medical Operations Agency, and the 497th Intelligence Group—with a total of 510 personnel, should have been reported by the Air Force to Congress as management headquarters or headquarters support activities but were not. The 11th Wing and the Air Force Frequency Management Agency are properly classified as a nonmanagement headquarters under the DOD directive. The 11th Wing administers the Air Force Band, the Air Force Honor Guard, and the Arlington National Cemetery Chaplaincy; operates Bolling Air Force Base; and supports the Air Force Secretariat, the Air Staff, designated Air Force field operating activities, and other organizations. We found that 415 personnel are located in the Pentagon primarily to support the Air Staff and the Secretariat with the following functions: chaplain, security police, supply, transportation, civil engineering, inspection/audit, communications/computer, contracting, medical, comptroller, operations, plans, programming, personnel, manpower, and legal. Because the Wing has 2,195 personnel, this level of headquarters support is less than 25 percent of the Wing’s work and under DOD Directive 5100.73, the Air Force is not required to report these personnel on its PB-22 exhibit. customers are management headquarters. A 1997 study plan for the Agency indicated that 35 of its 40 studies had DOD management headquarters as its customers, for example, OSD, the Joint Staff, and the Air Staff. The Air Force redesignated the Agency in 1991. In 1984, its predecessor—a direct reporting unit to the Chief of Staff of the Air Force—was created in an apparent response to mandated reductions in management headquarters personnel. According to an Air Force document, the unit was created to “draw down” the size of the Air Staff by 162 personnel, but it stated “there will be no changes in administrative, manpower, personnel, and budget support as currently provided” and “there will be no ‘real change’ in the Air Staff status for the .” The Air Force’s reclassification of these positions from management headquarters to nonmanagement headquarters became effective in September 1984, the deadline for a congressional provision to reduce DOD management headquarters by 5 percent. The Air Force Medical Operations Agency has 73 personnel who are classified as medical services management, according to its unit manning document. The Agency develops policies and programs to improve aerospace medicine, preventive medicine, and clinical health services for the Air Force. The Agency’s divisions perform many management headquarters or headquarters support functions included under medical services, a headquarters support function defined in DOD Directive 5100.73. The Agency’s primary customers are the Surgeon General of the Air Force (to whom its director reports), the Chief of Staff of the Air Force, the Air Staff, and the Office of the Assistant Secretary of Defense for Health Affairs—all of which are headquarters officials or organizations. The Air Force created the Agency in July 1992 by transferring a directorate from the Surgeon General’s office to the new Agency. The 497th Intelligence Group, headquartered at Bolling Air Force Base, Washington, D.C., has 305 personnel. According to its master plan, its mission is “intelligence infrastructure and services (security, weapons system support, automation, and information operations) to defense community users worldwide.” The unit’s history states that the Group has a unique role of providing planning, policy implementation, and functional management support to the Air Staff and other DOD customers in Washington, D.C., and around the world. Our analysis shows that over 50 percent of the Group’s effort is for headquarters support functions, such as security, acquisition, and data automation support, as defined in DOD Directive 5100.73; therefore, under the directive, all of its personnel should have been reported on the Air Force’s PB-22 exhibit. For fiscal year 1997, the U.S. Atlantic Command (USACOM) had 501 personnel in its headquarters and 1,097 personnel in 13 noncombat activities subordinate to USACOM headquarters. We reviewed three of these activities, using the criteria in DOD Directive 5100.73, and found the Information Systems Support Group, with 117 personnel, and a portion of the Atlantic Intelligence Command, with 152 personnel, should be reported to Congress by DOD as headquarters support but were not. The Cruise Missile Support Activity is properly classified as a nonmanagement headquarters activity under the DOD directive. USACOM officials agreed that the Information Systems Support Group should be reported as a headquarters support activity, and one official noted that the Joint Staff had removed the Group from reporting under DOD’s headquarters tracking program. An Atlantic Intelligence Command official said that the Intelligence Command is not a management headquarters because it does not create policy, review and evaluate programs, or conduct long-range planning. However, he agreed that the Intelligence Command provides intelligence services directly to management headquarters, which is a headquarters support function covered by DOD Directive 5100.73. All of the 117 personnel in the Information Systems Support Group should be reported as headquarters support because more than 50 percent of the group’s effort is to provide automated data processing support to a management headquarters, a support function covered by DOD Directive 5100.73. The Group provides analysis, programming, installation, and other technical support services to satisfy information system requirements of USACOM staff and subordinate commands; 24-hour operations and management of various computer systems, including the local area network at USACOM headquarters; and an inventory of automated data processing equipment under USACOM’s Command, Control, Communication, and Computer System Directorate at headquarters. According to a Group official, USACOM could not function without the computer support provided by the Group. The Group’s personnel are collocated with headquarters personnel, and a USACOM headquarters official is “dual-hatted” as the Group’s commander. Furthermore, these personnel were previously classified as management headquarters until 1992. All of these conditions are indicators of possible headquarters support activity, according to OSD/DA&M officials. At least 152, or 27 percent, of the Atlantic Intelligence Command’s 572 personnel for fiscal year 1997 should be reported by DOD as management headquarters and/or headquarters support because they provide integral support to USACOM’s Directorate of Intelligence by working there. In some Directorate of Intelligence divisions, the Atlantic Intelligence Command provides all of the personnel. For example, 78 personnel from the Atlantic Intelligence Command work in the Current Intelligence and Current Analysis Divisions in USACOM’s Directorate of Intelligence. The Atlantic Intelligence Command serves as USACOM’s Joint Intelligence Center and, as such, provides tailored, on-demand, integrated intelligence products, services, and training for USACOM and manages its theater intelligence production program in support of national and theater requirements. The Intelligence Center’s primary customers are USACOM and other unified commands, which are management headquarters, and the service component commands and their units, such as the Air Combat Command, a management headquarters. Under DOD Directive 5100.73, management of intelligence collection, analysis, production, and evaluation programs, and intelligence services provided directly to a management headquarters activity are covered functions. For fiscal year 1997, the U.S. Army Training and Doctrine Command (TRADOC) had 919 personnel in its headquarters and 1,393 personnel in 13 field operating activities subordinate to TRADOC headquarters. We reviewed four of these activities, using the criteria in DOD Directive 5100.73, and found that all personnel in three activities—the Training Operations Management Activity, the Training Development and Analysis Activity, and the Internal Review and Audit Compliance Activity—with a total of 112 personnel, should have been reported to Congress by the Army as management headquarters or headquarters support but were not. In addition, the Army should have reported a portion of the Combat Developments Field Operating Activity (52 personnel, or 26 percent) as headquarters support. TRADOC officials believe these field operating activities were properly classified as nonmanagement headquarters, although they stated that the definition of management and headquarters support in DOD Directive 5100.73 needs to be clarified because it is open to interpretation. The Training Operations Management Activity has 42 personnel collocated with TRADOC headquarters personnel. It plans, coordinates, and oversees all of the Army’s training courses conducted by centers and schools in the Total Army School System and is involved in curriculum development and review, a headquarters support function under DOD Directive 5100.73. The Activity oversees the documenting, programming, scheduling, equipment management, ammunition management, support systems management, and training for courses; according to a TRADOC official, it is the link between TRADOC headquarters and subordinate centers and schools. The Activity supports TRADOC headquarters and the Army by assessing the schools’ capabilities to meet training requirements and by working within TRADOC headquarters to resolve problems at centers and schools. The Training Development and Analysis Activity, with 59 personnel, develops concepts, strategies, and guidance for current and future training; develops and reviews curricula; researches technology and initiatives for future training concepts; focuses on TRADOC-identified training problems; and develops technology-based solutions for TRADOC’s Training Directorate. This Activity is collocated with TRADOC’s headquarters, and part of it was previously reported as management headquarters. In addition, DOD Directive 5100.73 cites training and education as headquarters support functions. The Internal Review and Audit Compliance Activity, with 11 personnel, provides internal review and audit compliance services to TRADOC headquarters, the Reserve Officer Training Command Cadet Command, and the Army Training Support Center. Personnel from these offices were combined to create this field operating activity; previously, 9 of the 11 personnel were counted as part of TRADOC’s headquarters. The inspection and evaluation of management headquarters activities and subordinate units is a headquarters support function, as is the management of audit programs, under the criteria in DOD Directive 5100.73. The Combat Developments Field Operating Activity, with 201 personnel, is responsible for coordinating and integrating delivery for approved combat development requirement documents that support the development and fielding of materiel systems; conducting special experiments and studies; and managing the changes to current force designs used across the Army. The Activity’s primary customer is TRADOC’s Combat Developments Directorate, and in fiscal year 1994, over 100 personnel were transferred from this headquarters Directorate to the Activity. Today, most personnel assigned to the Activity are collocated with TRADOC headquarters personnel. Both collocation with headquarters and transfers of personnel from headquarters are indicators of possible headquarters support activity, according to OSD/DA&M officials. According to DOD Directive 5100.73, the development and analysis of strategic, defensive, and tactical operations—including planning and requirements—provided directly to a management headquarters is a headquarters support function. Also, if an organization devotes more than 25 percent, but less than 50 percent, of its efforts to management headquarters support, then this portion of the organization’s personnel should be included in the program. The Activity’s records show 52 personnel within four divisions performing some management headquarters functions directly for management headquarters activities. These personnel accounted for 26 percent of the total personnel assigned to the Activity. For fiscal year 1997, the U.S. Army Forces Command (FORSCOM) had 1,582 personnel in its headquarters and 293 personnel in one field operating activity. A recent headquarters restructuring led FORSCOM to eliminate all but one of its field operating activities; the remaining organization is the FORSCOM Field Support Activity. This Activity should have been reported by the Army to Congress as a headquarters support activity but was not. FORSCOM officials did not dispute our evidence concerning the Activity, and they took no position on our conclusion that the Activity is merely an extension of FORSCOM headquarters and should be reported to Congress under the criteria in DOD Directive 5100.73. However, they did say that perhaps they were interpreting the directive incorrectly. We also reviewed the Army Signal Command, a new organization under FORSCOM created when the Army abolished the Information Systems Command. Although the Army previously reported the Information Systems Command, a major command, as a management headquarters, the Army Signal Command is not reported on the Army’s PB-22 exhibit. Since 1973, FORSCOM headquarters has had multiple field operating activities that have totaled more than 200 military and civilian personnel annually. However, a recent headquarters restructuring led FORSCOM to eliminate all but one of its field operating activities. The remaining organization is the FORSCOM Field Support Activity, with 293 military and civilian personnel in fiscal year 1997. None of these personnel are reported to the Congress as management headquarters or headquarters support personnel. This Activity is not a discrete organization separate from headquarters. Activity personnel work in the headquarters building and are assigned to the same directorates, and many possess the same job series and grade levels as personnel designated as FORSCOM headquarters staff. For example, the Activity has 46 personnel identified as management analysts and 20 as logistics management specialists within its various work centers. Individual headquarters directors decided which positions were categorized as headquarters and which were counted in the Activity for each functional area. Furthermore, the head of the Activity is FORSCOM’s Chief of Staff—a headquarters official; other managers in the Activity (two-star generals) are also dual-hatted as headquarters directors. According to OSD/DA&M officials, these conditions are indicators that an organization is performing management support functions. During our audit, FORSCOM requested that the Army increase its management headquarters personnel ceiling by 100 to allow it to count some, but not all, Field Support Activity personnel as management headquarters. FORSCOM based its request on a recent FORSCOM headquarters restructuring that combined tasks, functions, and missions in a way that may have “clouded” the distinction between management headquarters and nonmanagement headquarters work, according to officials. The Army has not approved FORSCOM’s request because of pending legislation that would reduce DOD management headquarters personnel, according to a FORSCOM official. On September 16, 1996, the Army eliminated a major command when it transitioned its Information Systems Command to the Army Signal Command, a new subordinate command. The Army Signal Command operates several signal brigades and battalions worldwide. The Army does not report the Army Signal Command as a management headquarters, unlike its predecessor, because it is not a major command and all previous management headquarters functions were transferred to FORSCOM and other Army commands, according to an Army official. The Army’s restructuring reduced the size of the Command’s headquarters from 554 to 393 personnel by transferring several functions, such as publications and printing, engineering, acquisition, software development, and data processing, to other Army commands. While the new Command is more operationally oriented, more than two-thirds of its headquarters personnel are civilians. According to FORSCOM officials, civilians typically do not deploy; moreover, the Command has yet to determine the number that would. The Command continues to perform some headquarters support functions described in DOD Directive 5100.73. For example, it inspects and audits subordinate units, assesses training, and evaluates and monitors unit readiness. Moreover, neither the Army nor OSD have done a detailed analysis to determine the percentage of personnel that perform either management or management support functions. Without such an analysis, we believe it is questionable to exclude the Army Signal Command headquarters from the Army’s PB-22 exhibit. Command officials agree that the Command continues to perform many of the same activities as when the Army reported it as a management headquarters, but they did not agree that the Command should be reported to Congress as a management headquarters or headquarters support activity. For fiscal year 1997, the Commander in Chief, U.S. Atlantic Fleet (CINCLANTFLT) staff had 542 personnel in its headquarters and an additional 5,902 personnel in 25 direct reporting units subordinate to CINCLANTFLT. We reviewed two of these activities, using the criteria in DOD Directive 5100.73, and found that one of them—the Naval Shores Activities—with seven personnel, should have been reported by the Navy to Congress as a headquarters support activity but was not. CINCLANTFLT’s Manpower Analysis Team was properly classified as a nonmanagement headquarters because its primary customers are nonmanagement headquarters shore activities. Some officials involved with the Naval Shore Activities believed it was not management headquarters because it does not control any resources and provides direct support to nonmanagement headquarters activities. However, other CINCLANTFLT officials involved with DOD’s management headquarters program agreed that an error had occurred in classifying the activity as nonmanagement headquarters. They did not know why these personnel were not included in CINCLANTFLT’s headquarters totals, but they believe that they should have been. The Naval Shore Activities organization has seven personnel, some of which are dual-hatted in positions at CINCLANTFLT headquarters. All personnel are collocated with headquarters personnel and the Activities’ funding is contained in a line item in DOD’s Future Years Defense Program (FYDP) reserved for management headquarters activities. The Chief of Naval Operations notice establishing this organization in 1994 specifically created it as a management headquarters activity to coordinate shore activity support to operating forces, other naval activities, and tenant commands; command assigned shore installations; and perform other functions as directed by higher authority. This organization is being disestablished as of October 1, 1997. For fiscal year 1997, the Air Combat Command had 2,284 personnel in its headquarters and 1,829 personnel in 16 field operating activities subordinate to Command headquarters. We reviewed five of the activities, using the criteria in DOD Directive 5100.73, and found that two—the Studies and Analyses Squadron and the Quality and Management Innovation Squadron—with 121 personnel, should have been reported by the Air Force to Congress as headquarters support organizations but were not. Three activities—the Logistics Support Group/Maintenance Support Office, the Civil Engineering Squadron, and the Intelligence Squadron—were properly classified as nonmanagement headquarters activities because their primary efforts were not headquarters support and/or their customers are mainly nonheadquarters organizations. Command officials agreed that the Studies and Analyses Squadron performed headquarters support functions as defined by DOD Directive 5100.73; thus, it should have been reported by the Air Force on its PB-22 exhibit. They did not agree that the Quality and Management Innovation Squadron provided headquarters support under the criteria in the DOD directive because they said that most of its effort was for bases and wings, not the headquarters. The Studies and Analyses Squadron, with 71 personnel, provides the Air Combat Command and Air Force senior leaders with analyses to support their decision-making. The Squadron uses simulation, modeling, and other analytical tools to provide specialized technical information to its customers—80 percent of whom are at the Command’s headquarters, according to the Squadron’s statistics. The Air Force activated the Squadron in 1994 as a result of the Air Force’s reengineering efforts; previously, this function had been classified as a management headquarters activity. Furthermore, the Squadron is collocated with the Command’s headquarters. Both reclassification and collocation are indicators of possible headquarters support activity, according to OSD/DA&M officials. In October 1996, the Air Force merged the Air Combat Command’s Management Engineering Flight, a field operating activity, with the Directorate of Quality Improvement, a headquarters unit that provided quality assurance evaluations for the Command. The Quality and Management Innovation Squadron, which resulted from the merger, has 50 personnel to provide quality innovation and manpower engineering services to improve the Command’s processes and achieve efficiencies. The Squadron’s primary customers are the Command’s headquarters, wings, and units. Like the Studies and Analyses Squadron, this Squadron is collocated with Command headquarters; furthermore, 40 percent of its personnel were part of the headquarters until October 1996. According to DOD Directive 5100.73, management analysis and management engineering functions, including the analysis of systems, procedures, organizations, methods, and techniques and the development or maintenance of work measurement systems, are headquarters support functions. And although “quality management” is not specifically listed among the 33 headquarters support functions in DOD Directive 5100.73, OSD/DA&M officials told us that the list is not exclusive; that is, as new disciplines are developed, such as information management or quality management, these disciplines can be considered in analyzing organizations for compliance with the directive. For fiscal year 1997, the Air Force’s Air Education and Training Command had 1,206 personnel in its headquarters and 692 personnel in nine field operating activities subordinate to its headquarters. We reviewed all nine of these activities, using the criteria in DOD Directive 5100.73, and found that six—the Studies and Analysis Squadron, the Quality Management and Innovation Flight, the Computer Systems Support Squadron, the Training Support Squadron, the Air Operations Squadron, and the Civil Engineering Flight—with a total of 456 personnel, should have been reported to Congress by the Air Force as management headquarters or headquarters support but were not. Three activities—the Occupational Measurement Squadron, the Contracting Squadron, and the Program Management Flight—were properly classified as nonmanagement headquarters because these activities have significant Air Force or DOD-wide missions that are not considered management headquarters or headquarters support under DOD Directive 5100.73. Command officials do not believe that any of the personnel assigned to their field operating activities should be reported as management headquarters or headquarters support because they do not develop policy, prepare plans, or allocate resources. However, Command officials acknowledged that the Command’s field operating activities do perform some of the management support functions listed in DOD Directive 5100.73. The Studies and Analysis Squadron, with 56 personnel, conducts studies and tests at the direction of Air Education and Training Command headquarters to support decisionmaking at headquarters. The Squadron plans, executes, and reports on the tests of new and modified training systems. Previous projects included a study of basic military training and an economic analysis of the costs and benefits of an advanced training system for the Command’s technical training. The Squadron’s staff includes specialists in regression analysis, modeling and simulation, and electrical engineering analysis. As defined by DOD Directive 5100.73, professional, technical, or logistical support to a headquarters is a headquarters support function. The Quality Management and Innovation Flight, with 21 personnel, provides Air Education and Training Command headquarters with quality management principles, management engineering activities, and productivity programs to improve the Command’s mission performance, planning, and resource use. The Flight’s specific responsibilities include facilitating the Command’s strategic planning for quality, conducting unit self assessments, training quality management trainers at the subordinate units, and managing the Command’s suggestion program. Moreover, the Flight commander said that, until January 1997, the eight personnel with quality management duties were attached to the Command Group within the headquarters. The remaining 13 personnel perform management engineering functions. The DOD directive identifies strategic planning and management engineering and analysis as management support functions, and OSD/DA&M officials said that quality management is also a management support function. Further, the transfer of personnel and functions from a headquarters to a subordinate organization is an indicator of possible management support activity, according to OSD/DA&M officials. The Computer Systems Support Squadron, with 148 personnel, is the central design activity for the Command’s computer systems, and it operates the headquarters computer network. This Squadron establishes the Command’s software policy and standards and manages its radio frequency spectrum, land mobile radios, and cellular telephones. Furthermore, the Squadron conducts business process analyses to support the Command’s current and future automation requirements. Computer support to headquarters, including data standardization and computer systems policy development, is considered a management support function, according to the DOD directive. The Training Support Squadron, with 89 personnel, develops training syllabi and courseware for both Command aircraft and undergraduate flight training and manages the Command’s Graduate Evaluation Program. DOD Directive 5100.73 identifies the management of training and educational programs and curriculum development and review as management headquarters or headquarters support functions. The Air Operations Squadron, with 77 personnel, is under the Operations Directorate and provides operational and readiness support, including crisis response, unit/individual deployments, contingency operations, and intelligence support to its headquarters, functions covered under DOD’s directive. For example, the Squadron provides policy and procedures for conducting and evaluating headquarters deployment exercises, and its personnel collect and analyze readiness data on the Command’s subordinate units. The Civil Engineering Flight, with 65 personnel, manages the Command’s military construction, base realignment and closure programs, military family housing, and environmental projects, and it has specialized engineering and technical capabilities not found at base-level engineering squadrons. The Flight has design and construction management responsibilities and must approve all minor construction projects over $450,000. The management of engineering programs, including design development and review and technical review of construction, is a headquarters support function according to DOD’s directive. Furthermore, Flight officials have determined that six personnel are performing headquarters support functions and should be transferred to Command headquarters. Although officials said the headquarters does not currently have the positions to allow this transfer, it would merely be a paper change because the Flight is collocated and fully integrated with the Engineering Directorate branches it supports in headquarters. According to Command officials, the Flight is integrated with headquarters to save management overhead and to promote efficiency and effectiveness. The Air Force has 16 active duty numbered air forces assigned to 6 of its 8 major commands. The Air Combat Command and the Pacific Air Forces have four numbered air forces each, while the Air Education and Training Command, the Air Force Space Command, the Air Mobility Command, and U.S. Air Forces Europe have two each. The Air Force Materiel Command and the Air Force Special Operations Command do not have any numbered air forces. The 12th Air Force is the Air Force component command for the U.S. Southern Command, a unified command; as such, its principal mission is to ensure that its units can fulfill their military missions, including antidrug missions in the Southern Command’s area of responsibility. However, the organizing, training, and equipping of assigned active wings is the responsibility of the Air Combat Command—the parent organization of the 12th Air Force. The 19th Air Force was reactivated in 1993 when the Air Education and Training Command was established. The 19th Air Force is responsible for almost all Air Force flight instruction, both general undergraduate, and specialized flight training for fighter, airlift, and tanker aircraft. It only has a training mission; its headquarters does not deploy for military operations. The 12th and 19th Air Forces are organized differently because of their different missions and functions. The 12th Air Force headquarters contains a command group and four divisions. In addition, the 12th Air Force has 850 personnel in two squadrons and two groups that are designated as the Air Force’s air component to the Southern Command. These 850 personnel are not considered part of the 12th Air Force headquarters. The 19th Air Force does not have this type of structure because it does not support a unified command. These two numbered air forces also have other organizational differences. For example, unlike the 12th Air Force headquarters, the 19th Air Force headquarters does not have an inspector general division, a manpower office, a Latin American Affairs office, a command historian, or protocol or public affairs officials. In 1992, the Secretary of the Air Force asked OSD/DA&M to exclude about 2,000 personnel in the numbered air force headquarters from the Air Force’s management headquarters total. The Air Force provided documentation to OSD/DA&M concerning its plans to reorganize and reorient these headquarters into operational organizations. Management and administration functions that had been mixed among combat-oriented functions would be eliminated or realigned, according to the Air Force. The Air Force’s planned actions came as Congress mandated reductions in DOD management headquarters during fiscal years 1991-95. In 1992, OSD/DA&M approved the exclusion of numbered air forces from reporting under DOD’s management headquarters program, subject to a review by OSD/DA&M in fiscal year 1993. However, OSD/DA&M did not review the numbered air forces. Starting with fiscal year 1993, the Air Force no longer reported numbered air forces headquarters personnel on its PB-22 exhibits sent to Congress. Yet, our review of the 12th and 19th Air Forces showed that the Air Force did not fully implement its planned reorganization and that numbered air forces continue to perform some management headquarters and headquarters support functions covered by DOD Directive 5100.73. The 12th Air Force headquarters, with 110 personnel, performs some management functions that, according to the Air Force’s restructuring plan, were to be transferred to major commands or wings. For example, the plan said that numbered air force inspection functions were to be transferred to major commands. Yet, 12th Air Force headquarters has a 30-person inspector general office with responsibilities that include monitoring the operational readiness of subordinate guard and reserve units—a headquarters support function specifically listed in DOD Directive 5100.73. Additionally, the 12th Air Force headquarters has a two-person history office, a three-person manpower office, a protocol official, and a public affairs official. The proposed reorganization plan said that these functions would be transferred in their entirety to wings or major commands. Furthermore, the 12th Air Force headquarters has a Latin American Affairs office with 11 personnel responsible for managing an exchange program with Latin air forces. In sum, 48 of 110 headquarters personnel perform management or headquarters support functions. The 19th Air Force headquarters, with 99 personnel, oversees the Air Education and Training Command’s flying training program and assesses compliance with the Command’s training policies and directives. Headquarters support functions listed in DOD Directive 5100.73 and performed by the 19th Air Force include analyzing training results and overseeing unit readiness. In addition, its logistics branch, with seven personnel, manages the munitions and weapons program for the entire Command. This branch’s responsibilities include providing guidance and written direction to all munitions and weapons elements within the Command, consolidating and estimating munitions requirements, and representing the Command. The Command’s Logistics Directorate is discussing the transfer of this function from the 19th Air Force to the Command’s headquarters, according to a 19th Air Force official. Our objectives were to determine (1) the accuracy and reliability of DOD’s reported data on management headquarters and headquarters support personnel and costs, (2) reasons that data on personnel and costs could be inaccurate, and (3) DOD’s plans to reduce the size of its management headquarters and headquarters support activities. To determine the accuracy and reliability of certain PB-22 cost data and the completeness of personnel data reported under DOD Directive 5100.73, we selected 10 headquarters to review. We chose organizations from the following categories: Defense-wide headquarters, military department headquarters, and unified command headquarters. Given congressional interest in headquarters in the Washington, D.C., area, we included four of these organizations in our review. To minimize travel costs, we also selected DOD organizations near our available GAO staff in Norfolk, Virginia, and Atlanta, Georgia. The headquarters we reviewed were Office of the Secretary of Defense, Pentagon, Arlington, Virginia; Army Secretariat and Army Staff, Pentagon, Arlington, Virginia; Navy Secretariat and OPNAV, Pentagon, Arlington, Virginia; Air Force Secretariat and Air Staff, Pentagon, Arlington, Virginia; U.S. Atlantic Command, Norfolk, Virginia; Navy’s Commander in Chief, Atlantic Fleet, Norfolk, Virginia; U.S. Army Training and Doctrine Command, Fort Monroe, Virginia; Air Combat Command, Langley Air Force Base, Virginia; U.S. Army Forces Command, Fort McPherson, Georgia; and Air Education and Training Command, Randolph Air Force Base, Texas In addition to these headquarters, we visited two numbered air forces because our review of DOD records indicated these organizations had been reported as management headquarters, and after a reorganization in the early 1990s, questions remained about the extent of management and headquarters support functions continuing at these organizations. We visited the 12th Air Force, Davis-Monthan Air Force Base, Arizona, and the 19th Air Force, collocated with the Air Education and Training Command. As part of our FORSCOM review, we visited one of its subordinate commands, the Army Signal Command, Fort Huachuca, Arizona. This Command had been reported as a management headquarters when it was an independent major command, the Information Systems Command. At each of the 10 headquarters organizations we audited, we judgmentally selected subordinate noncombat organizations to review. We selected organizations based on a variety of factors, including the organizations’ names, missions, and functions, and conditions that OSD/DA&M officials agreed may indicate that an organization is providing management support. These indicators, also called “red flags” by OSD/DA&M, are headquarters officials serving additional duty as senior officials in the subordinate organization (called “dual hatting”), transfer of personnel from headquarters to create or augment subordinate organizations, diverse functions that mirror headquarters functions, and collocation of the subordinate organization with its headquarters. Although the presence of one or more of these indicators is not conclusive, it led us to perform the analysis called for in DOD Directive 5100.73. In general, our analysis involved reviewing mission and functions documents, organizational manning documents, and organizational history. We also discussed the organization’s activities, products, services, customers, and relationship with headquarters with cognizant officials in the subordinate organization and in its headquarters. The primary disadvantage to this approach is that our findings cannot be generalized to DOD as a whole or to entire types of DOD organizations because we did not randomly sample the organizations we reviewed. The primary advantage is that we obtained an in-depth understanding of each organization reviewed, which gave us adequate information to judge compliance with DOD Directive 5100.73. Both the FYDP and PB-22 exhibits contain errors that make them unreliable for assessing the resources expended by DOD for management headquarters and headquarters support activities. According to DOD Directive 5100.73, program elements (or line items) in the FYDP that end in “98” are reserved exclusively to account for personnel and costs of DOD’s management headquarters and headquarters support activities. In the FYDP, we found costs in “98” program elements that were not related to management headquarters. An official in the Office of the Under Secretary of Defense (Comptroller), who performed her own analysis of these program elements, also found costs unrelated to management headquarters, particularly in Navy and Defense-wide program elements. For PB-22 cost data, we performed a limited check of the data’s accuracy for one fiscal year by comparing the PB-22 data with financial records at the headquarters spending the money. As discussed previously, at many headquarters we found significant discrepancies between costs reported on the PB-22 exhibits and costs incurred by headquarters. With respect to PB-22 personnel data, OSD/DA&M acknowledged that these exhibits contain errors. For example, in the Defense-wide PB-22 exhibit prepared for the President’s budget for fiscal year 1998, OSD did not report the headquarters of five defense agencies that it agrees should have been reported. For the personnel numbers that were reported on the PB-22 exhibits, we did not independently verify their accuracy. To determine past and projected trends in DOD’s management headquarters personnel and costs, as reported by DOD, we used annual PB-22 exhibits prepared by OSD and the military departments and submitted to Congress. For management headquarters data beyond fiscal year 1999, we used DOD’s 1998-2003 FYDP. To obtain information on plans to reduce the size of DOD’s management headquarters, we interviewed officials in the 10 headquarters organizations we audited and OSD and military service officials who are involved with studies of management headquarters, such as the study called for by the Quadrennial Defense Review report. We performed our review from October 1996 to August 1997 in accordance with generally accepted government auditing standards. Joseph A. Rutecki, Senior Evaluator Carleen C. Bennett, Senior Evaluator The first copy of each GAO report and testimony is free. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) program to account for its management headquarters and headquarters support activities, focusing on: (1) the accuracy and reliability of DOD's reported data on management headquarters and headquarters support personnel and costs; (2) reasons that data on personnel and costs could be inaccurate; and (3) DOD's plans to reduce the size of its management headquarters and headquarters support activities. GAO noted that: (1) DOD's annual budget exhibits to Congress on management headquarters and headquarters support are unreliable because the number of personnel and costs are significantly higher than reported; (2) neither DOD nor Congress can determine trends in headquarters personnel and costs to help them make informed decisions about the appropriate size of headquarters; (3) during fiscal years (FY) 1985-86, DOD reported steady decreases in its management headquarters and headquarters support personnel, however, these data did not include personnel at most of DOD's noncombat organizations that are subordinate to management headquarters; (4) in a review of selected subordinate organizations, GAO found that almost three-fourths were primarily performing management or headquarters support functions and should have been reported to Congress by DOD; (5) DOD's headquarters costs are also significantly higher than reported to Congress; (6) DOD's data indicate that management headquarters and headquarters support costs decreased from $5.3 billion to $4.3 billion in constant 1997 dollars during FY 1985-86, however, DOD's reported data did not include all costs; (7) DOD's reported headquarters personnel and cost data are understated for several reasons: (a) sustained criticism from Congress about the size of DOD's headquarters has been a disincentive; (b) many DOD officials believe that they are required to report only personnel that make policy, allocate resources, or plan for the future; (c) the criteria for determining whether organizations should be included in management headquarters are complicated; and (d) oversight has been limited; (8) DOD faces challenges in reducing the size of its headquarters; (9) DOD has not determined the scope of future reductions or developed a detailed plan for making the reductions; (10) DOD is examining the effects of a possible 15-percent reduction in management headquarters and support personnel during FY 1998-2003; (11) a Defense Reform Task Force is assessing the missions, functions, and size of the Office of the Secretary of Defense and other headquarters; (12) determining whether and how much to reduce management headquarters is difficult because DOD has no generally accepted staffing standards; and (13) DOD officials have a range of views on whether and how to reduce management headquarters, some advocating reduction while others have no plans for reduction.
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The benefits of using purchase cards versus traditional contracting and payment processes are lower transaction processing costs and less red tape for both the government and the vendor community. We support the use of a well-controlled purchase card program to streamline the governments acquisition processes. However, it is important that agencies have adequate internal controls in place to protect the government from fraud, waste, and abuse. We found that both HUD and Education lacked fundamental internal controls over their purchase card programs that would have minimized the risk of improper purchases. For example, both agencies had inconsistent and inadequate pre-approval and review processes for purchase card transactions key preventive and detective controls. Combined with a lack of monitoring, environments were created at HUD and Education where improper purchases could be made with little risk of detection. Inadequate controls over these expenditures, along with the inherent risk of fraud and abuse associated with purchase cards, likely contributed to the $4.0 million of fraudulent, improper, and questionable purchases we identified at HUD and Education through our data mining efforts. According to our Standards for Internal Control in the Federal Government,transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. Although pre-approval and review of transactions by persons in authority is the principal means of assuring that transactions are valid, we found that the pre-approval and review process for purchase card purchases was inadequate at both HUD and Education. During our review of HUD and Educations purchase card programs, we found that department personnel did not consistently obtain pre-approval prior to making some or all purchases, as required by the departments policies. According to HUDs October 30, 1995, purchase card policy, the approving official is required to establish a pre-approval process for each cardholder to ensure that purchases have the necessary technical approval or clearance before purchases are made and that all transactions are appropriate and for official use only. However, during our review we found that only the Information Technology Office routinely obtained authorization prior to purchasing items with the purchase card. Similarly, at the Department of Education, we found that 10 of its 14 offices did not require cardholders to obtain authorization prior to making some or all purchases, although Educations policy required that all requests to purchase items over $1,000 be made in writing to the applicable department executive officer. One of the most important internal controls in the purchase card process is the review of supporting documentation and approval of each purchase by the approving official. Approving officials at both HUD and Education are required to review each monthly statement of purchases along with the applicable supporting documentation and certify that these purchases were appropriate, in accordance with department regulations, and a valid use of government funds. Based on our testing of both HUD and Educations approving officials review of monthly purchase card statements, we found that this key control was not an effective means of detecting improper purchases. At HUD, we selected a stratified random sample of 222 purchase card transactions made during fiscal year 2001, and found that $1.4 million, or about 77 percent, of the $1.8 million of sampled purchases lacked adequate support for the approving official to determine what was purchased, whether the purchase was previously authorized, and if there was a legitimate government need for the items purchased. We found similar problems at Education. To test the effectiveness of Educations approving officials review, we analyzed 5 months of cardholder statements and found that 37 percent of the 903 monthly cardholder statements we reviewed were not approved by the appropriate official. These 338 unapproved statements totaled about $1.8 million. Another control that is effective in helping to prevent improper purchases is the blocking of certain merchant category codes (MCC). This control, available as part of the agencies purchase card contracts with the card issuing financial institutions, allows agencies to prohibit certain types of purchases that are clearly not business related, such as purchases from jewelry stores or entertainment establishments. During our reviews, we noted that, initially, neither HUD nor Education was effectively using the MCCs as a preventive control. HUD was not blocking any MCCs and Education blocked only four MCCs. As a result, there were almost no restrictions on the types of purchases employees could make during the period of our audit. Both agencies took action to block more of the MCCs after we began our reviews of their purchase card programs. Our Standards for Internal Control in the Federal Government state that internal control should generally be designed to assure that ongoing monitoring occurs in the course of normal operations. Internal control monitoring should assess the quality of performance over time and ensure that findings of audits and other reviews are promptly resolved. Program and operational managers should monitor the effectiveness of control activities as part of their regular duties. HUDs purchase card policy requires the department to perform annual program reviews and report the results, including findings and recommendations, to the purchase card program administrator. However, HUD officials could locate only one such report. This November 2001 report, prepared by a consultant, identified problems that were similar to the findings previously reported by the Office of Inspector General (OIG) in February 1999. Both reports documented problems with weak internal controls and insufficient supporting documentation. The consultants report also noted that HUD was not performing the periodic program reviews required by its policies and that employees were making improper split purchases. HUD management agreed with the findings in the OIG report and developed and implemented an action plan to address the identified weaknesses. According to HUD OIG staff, its recommendations were implemented and have been closed. However, based on our findings, corrective actions taken at that time were not fully effective. At the time of our review, Education did not have a monitoring system for purchase card activity to determine whether its staff was complying with key aspects of the purchase card program. We also found that approving officials at Education did not use monitoring reports that were available from its purchase card contractor to identify unusual or unauthorized purchases. However, as I will discuss later, the department subsequently issued new policies and procedures that, among other things, establish a quarterly quality review of a sample of purchase card transactions to ensure compliance with key aspects of the departments policy. The types of internal control weaknesses that I have just described created environments where improper purchases could be made with little risk of detection and likely contributed to the $4 million of fraudulent, improper, and questionable purchases we identified through our data mining efforts at both HUD and Education. We also found that property purchased with purchase cards was not always recorded in Educations property records, which likely contributed to missing or stolen property. This could also be an issue at HUD based on our preliminary inquiries into its property management system. I will now provide a few examples of how employees used their purchase cards to make fraudulent, improper, and questionable purchases. We considered fraudulent purchases to be those that were unauthorized and intended for personal use. Improper payments include errors, such as duplicate payments and miscalculations; payments for services not rendered; multiple payments to the same vendor for a single purchase to circumvent existing single purchase limits known as split purchases; and payments resulting from fraud and abuse. We defined questionable transactions as those that, while authorized, were for items purchased at excessive costs, for questionable government need, or both, as well as transactions for which the departments could not provide adequate supporting documentation to enable us to determine whether the purchases were valid. In May 2002, we provided HUD with 5,459 transactions, totaling about $3.8 million in which the (1) payee appeared to be an unusual vendor to be engaging in commerce with the agency, (2) purchase was made on either a holiday or weekend, or (3) purchase appeared to be a split purchase. As of September 2002, HUD was able to provide adequate support for 3,428 of these questionable transactions, totaling about $1.5 million. HUD could not provide adequate supporting documentation to enable us to assess the propriety of the remaining 2,031 transactions totaling about $2.3 million, or 38 percent of the total questionable transactions and 61 percent of the total dollars requested. For these transactions, HUD could not provide support to determine what was purchased, whether it was authorized, and whether there was a legitimate government need for the item purchased. These purchases included (1) 1,183 questionable vendor transactions totaling about $869,000, (2) 31 purchases made on holidays totaling about $10,000, (3) 264 weekend purchases totaling about $354,000; and (4) 541 potential improper split transactions totaling about $1 million. Some examples of questionable vendor transactions for which we did not receive adequate support included (1) over $27,000 to various department stores, such as Best Buy, Circuit City, Dillards, JC Penny, Lord & Taylor, Macys, and Sears, (2) over $8,900 to several music and audio stores, including Sound Craft Systems, J&Rs Music Store, Guitar Source, and Clean Cuts Music, and (3) over $9,700 to various restaurants, such as Legal Sea Foods, Levis Restaurant, The Cheesecake Factory, and TGI Fridays. Additional examples of questionable or improper purchases we found included $25,400 of no show hotel charges for HUD employees who did not attend scheduled training and $21,400 of purchases from vendors where it appears the vendors were out of business prior to the purchases. Because HUD was unable to provide adequate documentation for these purchases, we consider them to be questionable uses of government funds and therefore potentially improper purchases. In order to identify potential improper payments in Educations purchase card program, we requested supporting documentation for (1) 338 monthly statements totaling $1.8 million that our testing of the approval function identified as not properly approved, and (2) other transactions, identified using data mining techniques, that appeared unusual. Education was unable to provide adequate supporting documentation to enable us to determine the validity of purchases totaling over $218,000. Education could not provide any support for more than $152,000 of these purchases nor could it specify what was purchased, why it was purchased, or whether these purchases were appropriate. For the remaining $66,000, Education was able to provide only limited supporting documentation. As a result, we were unable to assess the validity of these payments, and we consider these purchases to be potentially improper. These inadequately supported or unsupported purchases included charges to various hotels for more than $3,000, purchases of computer equipment and software totaling more than $22,000, and charges for various college and other training courses totaling about $51,000. Numerous other purchases were made from home electronics and appliance stores as well as toy, book, and furniture stores. In our review of the documentation Education did provide, we identified some fraudulent, improper, and questionable purchases. Examples of these include the following: In one instance, a cardholder made several fraudulent purchases from two Internet sites for pornographic services. As a result, Education management issued a termination letter, prompting the employee to resign. Over several years, an Education employee made improper charges totaling $11,700 for herself and a coworker to attend college classes that were unrelated to Educations mission, such as biology, music, and theology.This same individual also had numerous questionable charges for other college classes totaling $24,060. There were restaurant charges totaling $4,427 from a Year 2000 focus group meeting in San Juan, Puerto Rico, for meals for nonfederal employees. We referred additional charges of this same nature totaling approximately $45,000 to Educations OIG. Another type of improper purchase we identified is the split purchase, which we defined as purchases made on the same day from the same vendor that appear to circumvent single purchase limits. Federal Acquisition Regulation prohibits splitting a transaction into more than one segment to avoid the requirement to obtain competitive bids for purchases over the $2,500 micro-purchase limit. At HUD, we identified 88 improper purchases totaling about $112,000 where employees made multiple purchases from a single vendor on the same day in excess of the $2,500 micro-purchase threshold. For example, one cardholder purchased nine personal digital assistants and the related accessories from a single vendor on the same day in two separate transactions just 5 minutes apart. Because the total purchase price of $3,788 exceeded the cardholders single purchase limit of $2,500, the purchase was split into two transactions of $2,388 and $1,400, respectively. We identified 451 additional purchases totaling $893,000 where HUD employees made multiple purchases from a vendor on the same day in excess of $2,500. Although we were unable to determine whether these purchases were improper, based on the available supporting documentation, these transactions share similar characteristics with the 88 split purchases we identified. We also found improper split purchases at Education. For example, one cardholder from Education purchased two computers from the same vendor at essentially the same time. Because the total cost of these computers exceeded the cardholders $2,500 single purchase limit, the total of $4,184.90 was split into two purchases of $2,092.45 each. We found 27 additional purchases totaling almost $120,000 where Education employees improperly made multiple purchases from a vendor on the same day. In addition to poor internal controls over the purchase card program, we found that Education lacked appropriate physical controls and segregation of duties over computer equipment purchased with purchase cards and third party drafts. According to the Education Inspector General, the department had not taken a comprehensive physical inventory for at least 2 years before our review. Further, one office lacked appropriate segregation of duties where responsibility for receiving, bar coding, securing the equipment, and delivering computers to the end users was done by only two individuals. According to our Standards for Internal Control in the Federal Government, an agency must establish physical control to secure and safeguard vulnerable assets. Such assets should be periodically counted and compared to control records. Recording the items purchased in property records is an important step to ensuring accountability and financial control over these assets and, along with periodic inventory counts, to preventing theft or improper use of government property. At Education, we found that employees regularly purchased computers using their purchase cards, which was a violation of the departments policy prohibiting the use of purchase cards for this purpose. From May 1998 through September 2000, the period covered by our audit, Education made purchases totaling more than $2.9 million from personal computer and computer-related equipment vendors. To determine whether this computer equipment was appropriately recorded in the departments inventory, we compared serial numbers obtained from the departments largest computer vendor to those in the asset management system and identified 384 pieces of computer equipment, including desktop computers, printers, and scanners, that were not in the property records. We conducted an unannounced inventory to determine whether the equipment was actually missing or inadvertently omitted from the property records. Although we found 143 pieces of equipment during this inventory that were not recorded on Educations books, and an additional 62 items were later found by Education, department officials have been unable to locate the remaining 179 pieces of missing equipment costing over $200,000. They surmised that some of these items may have been surplused; however, there is no documentation to determine whether this assertion is valid. According to Education officials, new policies were implemented that do not allow individual offices to purchase computer equipment without the consent of the Office of the Chief Information Officer. In addition, the new policies were designed to maintain control over the procurement of computers and related equipment, including purchasing computers from preferred vendors that apply the departments inventory bar code label and record the serial number of each computer on a computer disk that is sent directly to the Education official in charge of the property records; loading the computer disk containing the bar code, serial number, and description of the computer into the property records; and having an employee verify that the computers received from the vendor match the serial numbers and bar codes on the shipping documents and the approved purchase orders. unattended. Without enhanced physical security, Education will continue to be at risk for further computer equipment losses. We also have concerns about HUDs accountability for computer and related equipment purchased with purchase cards because of the large volume of purchases for which it did not have appropriate documentation. In these cases, HUD likely does not know what was purchased, why it was purchased, whether there was a legitimate government need for the item purchased, and where the item is now. For example, HUD employees used their purchase cards to purchase portable assets such as computer equipment and digital cameras, totaling over $74,500, for which they have provided either no support or inadequate support. Further, in its purchase card remedial action plan, which I will discuss further shortly, HUD stated that not all property is entered in its automated property inventory system. When these purchases are not entered in an agencys inventory system, they become more vulnerable to loss or theft. In our follow-up work, we plan to determine whether these items are included in HUDs inventory and are being appropriately safeguarded. In April 2002, OMB issued a memorandum requiring all agencies to develop remedial action plans to manage the risk associated with purchase card usage. Agencies were required to submit their plans to the Office of Federal Procurement Policy no later than June 1, 2002. Both HUD and Education submitted their plans to OMB on time. While Educations plan was accepted by OMB and addressed the findings and recommendations in our September 2001 interim report and final Education report, HUDs plan was rejected because it lacked a timeline for when the corrective actions would be implemented. This plan also did not address key weaknesses we identified. does not specifically identify who is responsible for developing or implementing any of the proposed improvements. We will be issuing a separate letter to HUD that will include recommendations to address these and other issues we identified during our review of its purchase card program. In contrast, Educations plan specifically addresses the findings and recommendations in our September 2001 interim report and final Education reports. These recommendations included (1) emphasizing policies on appropriate use of the purchase card and cardholder and approving official responsibilities, (2) ensuring that approving officials are trained on how to perform their responsibilities, and (3) ensuring that approving officials review purchases and their supporting documentation before certifying the statements for payment. Education took actions to respond to these recommendations, such as (1) reducing monthly and single purchase spending limits, (2) blocking over 300 MCCs, (3) implementing a new approval process, and (4) issuing new policies and procedures. However, during our follow-up work at Education, we found that weaknesses remained that continued to leave the department vulnerable to fraudulent and improper payments and lost assets. For example, the effectiveness of the departments new approval process was minimized because approving officials were not ensuring that adequate supporting documentation existed for all purchases. According to Education, it has since implemented a quarterly monitoring program to assess compliance with key aspects of the purchase card program. As discussed in our Executive Guide, which I will cover later, managing improper payments is a continuous cycle and includes, among other things, constant monitoring of the effectiveness of implemented controls and adjustments to these controls as warranted by monitoring results. Educations grant and loan disbursement process relies on computer systems application controls, or edit checks, to help ensure the propriety of payments. We focused our review on these edit checks and related controls because they are key to helping prevent or detect improper payments in an automated process. As we testified in July 2001, controls over grant and loan disbursements at Education did not include a key edit check or follow-up process that would help identify schools that were disbursing Pell Grants to ineligible students. To identify improper payments that may have resulted from the absence of these controls, we performed a variety of tests, including a test to identify students 70 years of age and older because we did not expect large numbers of older students to be receiving Pell Grants. Our review also built upon earlier work where we identified abuses in the Pell Grant program. Based on the initial results of our tests and because of the problems we identified in the past, we expanded our review of seven schools that had disproportionately high numbers of older students to include recipients 50 years of age and older. We found that three schools fraudulently disbursed about $2 million in Pell Grants to ineligible students, and another school improperly disbursed about $1.4 million in Pell Grants to ineligible students. We also identified 31 other schools that had similar disbursement patterns to those making the payments to ineligible students. These 31 schools disbursed approximately $1.6 million of Pell Grants to potentially ineligible students. We provided information on these schools to Education for follow-up. Educations staff and officials told us that they have performed ad hoc reviews in the past to identify schools that disbursed Pell Grants to ineligible students and have recovered some improper payments as a result. However, Education did not have a formal, systematic process in place specifically designed to identify schools that may be improperly disbursing Pell Grants. In our September 2001 interim report, we recommended that the Secretary of Education (1) establish appropriate edit checks to identify unusual grant and loan disbursement patterns and (2) design and implement a formal, routine process to investigate unusual disbursement patterns identified by the edit checks. Education subsequently implemented an age limit edit check of 75 years of age or older. If the students date of birth indicates that he or she is 75 years of age or older, the system edit will reject the application and the school will not be authorized to give the student federal education funds until the student either submits a corrected date of birth or verifies that it is correct. However, without also looking for unusual patterns and following up, the edit may not be very effective, other than to correct data entry errors or confirm older students applying for aid. Education also implemented a new system, called the Common Origination and Disbursement (COD) system, which became operational in April 2002. Education officials told us that this integrated system will replace the separate systems Education has used for Pell Grants, direct loans, and other systems containing information on student aid, and it will integrate with applicant data in the application processing system. The focus of COD is to improve program and data integrity. If properly implemented, a byproduct of this new system should be improved controls over grant and loan disbursements. According to Education officials, they will be able to use COD to identify schools with characteristics like those we identified. However, until there is a mechanism in place to investigate schools once unusual patterns are identified, Education will continue to be vulnerable to the types of improper Pell Grant payments we identified during our review. We performed several additional tests of Educations disbursements to identify potentially improper grant and loan payments that may not have been detected because of missing or ineffective edit checks. In addition to Pell Grant payments to students 70 years of age and older, we identified $28.8 million of other potentially improper grant and loan payments made by more than 1,800 schools to students who (1) were much older or younger than would be expected, (2) had social security numbers (SSN) that were either not in Social Security Administration (SSA) database or were in SSA death records, or (3) received Pell Grants in excess of statutory limits. Based on supporting documentation provided to us by Education, we determined that $20.3 million of these payments were proper. However, Education did not provide adequate supporting documentation to enable us to determine the validity of the remaining $8.5 million of payments made by these schools. Although Education officials told us that they requested supporting documentation from the approximately 1,800 schools that disbursed these funds, over 1,000 schools did not provide the documentation, and documentation provided by some of the schools was inadequate for independent verification of the validity of these payments. According to Education officials, if a school that did not provide support or provided inadequate support had only a small number of potential improper payments, the department did not follow up because it did not consider doing so a wise use of its resources. We agree that Education should weigh the costs of resources required to follow up on potential improper payments with the benefits that could be obtained when making such decisions. However, 20 of the schools that did not provide support or provided inadequate support had from 20 to 138 instances of these potential improper payments totaling $1.5 million. While the amount of improper and potentially improper grant and loan payments we identified is relatively insignificant compared to the billions of dollars disbursed for these programs annually, it represents a control risk that could easily be exploited to a greater extent. As I will discuss later, once such a risk has been identified, appropriate control activities need to be implemented to respond to it. similar to those we found that improperly disbursed Pell Grants to determine whether the grants were properly disbursed, (2) follow up with the schools that had high concentrations of the $12 million in potential improper payments for which the department did not provide adequate supporting documentation, and (3) implement a process to verify borrowers SSNs and dates of birth submitted by schools to Loan Origination System (LOS). While Education has implemented a process to verify borrowers SSNs and dates of birth submitted by schools to LOS, the other two recommendations remain open. Internal control standards state that monitoring should assess the quality of performance over time and ensure that review findings are promptly resolved. Due to a lack of monitoring, the internal controls of the HUD multifamily housing programs payment processes do not provide reasonable assurance that improper payments would be identified and corrected in the normal course of business. As we testified in July 2002, HUD has a limited ability to effectively monitor its contractors and as I am about to discuss, this left HUD vulnerable to abusive billing practices by its property management firms. HUD contracts with two property management firms, which are given a great deal of autonomy, to manage the operation of its multifamily properties, including apartment projects, nursing homes, and hospitals. These management firms are charged with initiating property renovations, hiring on-site staff, selecting vendors and certifying the acceptable delivery and performance of these activities. The vendors that provide the goods and services at the HUD properties submit their invoices to the property management firm for payment by HUD. The management firm forwards the invoices and required supporting documentation to another HUD contractor that maintains the departments property management system, provides a limited cursory review of the supporting documentation, and pays the vendors. HUD pre-approval for payment of these goods and services is not required when (1) the vendors estimate will cost less than agreed upon dollar thresholds, which, depending upon the property management company, are as high as $50,000, or (2) an emergency situation exists that affects or endangers the health and/or safety of residents or property. The property manager is also not required to obtain competitive bids when the work is done to correct an emergency situation. Generally, the contractor that pays the vendors obtains a daily E-mail authorization from HUD prior to disbursing the funds. However, unless the amount exceeds the predetermined thresholds, HUD does not routinely review documentation supporting the payments and does not verify that the work was actually performed. Given the fairly broad delegation of authority to these contractors, it is important that HUD have effective processes for monitoring performance and the propriety of payment. We found that HUD did not comply with its monitoring policy to perform quarterly, on-site inspections and management reviews of its multifamily housing projects and had incomplete guidance on how to do so. Inspections and reviews were not conducted at the majority of multifamily properties and HUD could not provide documentation for some of the limited reviews and inspections that HUD officials said were performed. We found no on-site inspection guidance in the multifamily handbook, which establishes the policies and procedures to be followed by the multifamily staff. In two instances where HUD did conduct and document reviews of one of the property management firms, it did not follow up on or promptly resolve its findings. Based on these two reviews of the purchasing practices of the property management firm, HUD documented concerns about the (1) amount of money being disbursed to a limited number of construction companies with little control in place to ensure fair and reasonable prices and (2) unusually high number of emergency renovations made by this management firm. Yet HUD continued to authorize payments of over $8 million to these construction companies after it was known that the property management firm was not selecting these companies in accordance with provisions of its contract that required obtaining competitive quotes from several vendors, even for purchases below the $50,000 pre-approval threshold. Obtaining competitive quotes helps ensure that the government pays a reasonable price for goods and services. The property management firm told HUD that the vendors it used were the only ones that would work in the neighborhoods where the properties were located, and that other vendors did not feel comfortable with HUDs vendor payment process. HUDs staff accepted this explanation without independent verification. Had HUD followed up on their findings, it may have discovered what we found funds being disbursed for alleged emergency goods and services that were not received or performed. controls by (1) alleging that construction renovations were emergencies, thus not requiring multiple bids or HUD pre-approval, and (2) splitting renovations into multiple projects to stay below the $50,000 threshold of HUD-required approval. Over 18 months HUD authorized and paid for approximately $10 million of renovations, of which each invoice was for less than $50,000, at two properties where the above-mentioned maintenance director was employed. HUD did not verify that any of the construction renovations were actually performed or determine whether the emergency expenditures constituted such a classification. The following examples of improprieties, which are now being investigated by the HUD OIG and our Office of Special Investigations, could have been prevented or detected had HUD performed its contractor monitoring responsibilities. During June 2001, the maintenance director of the property management company falsified documents that indicated that 15,000 square feet of concrete sidewalk, at a cost of $227,500, was replaced and classified these repairs as an emergency. To remain below the HUD threshold of $50,000, the property management maintenance director had the vendor submit five separate invoices, each for $45,500, for the replacement of 3,000 square feet of concrete sidewalk in front of five buildings. HUDs contractor paid all five invoices. Based on our site visits and conversation with the maintenance director, we determined the square footage billed for sidewalk replacement had not actually been replaced. Figure 1 illustrates how only portions (the lighter shaded sections) of the sidewalk were replaced and not the entire sidewalk as was listed on the paid invoices. result, more than $164,000 of the $227,500 billed and paid for emergency installation of concrete sidewalk appears to be fraudulent. At this same property, we found instances where HUD paid construction companies for certain apartment renovations, deemed emergency repairs, that were not made. Three of the 10 tenants we interviewed told us that some work listed on the invoice that the property management firm submitted was not performed at their homes. For instance, while an invoice indicated that the apartment floor and closet doors had been replaced at a cost of $10,400, the tenant stated that the floors and doors were never replaced. On several other occasions, HUD paid the same amount to perform emergency renovations of apartments of varying sizes and, more than likely, in differing degrees of disrepair. For example, HUD paid three identical $32,100 invoices for the emergency renovation of a one bedroom (600square feet), a two bedroom (800 square feet) and a three bedroom (1000 square feet) apartment. All three invoices listed the exact work performed. For example, each invoice listed a $4,500 cabinet fee, yet the one bedroom unit had five fewer cabinets than the three bedroom dwelling. We and the independent construction firm we hired questioned the validity of the same charge for units of varying sizes and the likelihood of numerous apartments being in identical condition and in need of the same extensive renovations. When confronted with these disparities, the property management companys maintenance director told us that although he did not have any documentation to support it, he kept mental notes of work that was billed and not performed and had the construction company perform additional unbilled renovations, rather than revising original emergency invoices. Our review of the maintenance directors files found multiple boilerplate copies of signed receiving reports, indicating that acceptable emergency work had been done, that had yet to be awarded to vendors, further evidence of ongoing improprieties. We will be providing formal recommendations to HUD to address these issues, as well as other acquisition management challenges, in a separate report to be issued in November 2002. Now I would like to talk about some of the things that HUD, Education, and other federal agencies can do to address their improper payments comprehensively. As we recently reported, our review of improper payments reported in agency financial statements over the past 3 years shows some change in individual agencies and programs, but little change in the total amount over the period. While the total reported amount has decreased from about $20.7 billion in fiscal year 1999 to $19.1 billion in fiscal year 2001, these figures do not give a true picture of the level of improper payments in federal programs and activities. As significant as the $19 billion in improper payments is, the actual extent of improper payments government wide is unknown, likely to be billions of dollars more, and will likely grow without concerted, coordinated efforts by agencies, the administration, and the Congress. As we have seen, weak or nonexistent internal controls can result in a variety of improper payments that can affect an agencys ability to achieve its goals. Attacking the problem of improper payments requires strategies tailored to the organization involved and its particular risks. To identify effective practices and provide case illustrations and other information for federal agencies to consider when addressing improper payments, we contacted public and private sector organizations and talked with them about actions they had taken and considered effective in reducing improper payments. Participants were the Department of Health and Human Services Health Care Financing Administration; the Social Security Administration; the Department of Veterans Affairs; the states of Illinois, Texas, and Kentucky; the governments of Australia, New Zealand, and the United Kingdom; and three private sector corporations. Our executive guide, Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations, issued last year, highlights the actions taken by these organizations. We categorized the actions into the five components of internal control outlined in the Comptroller Generals Standards for Internal control in the Federal Government. We defined these components as follows: Control environmentcreating a culture of accountability by establishing a positive and supportive attitude toward improvement and achievement of established program outcomes. Risk assessmentperforming comprehensive reviews and analyses of program operations to determine if risks exist and if so, their nature and extent. Control activitiestaking actions to address identified risk areas and help ensure that managements decisions and plans are carried out and program objectives are met. Information and communicationsusing and sharing relevant, reliable and timely financial and nonfinancial information in managing activities related to improper payments. Monitoringtracking improvement initiatives over time, and identifying additional actions needed to further improve program efficiency and effectiveness. I will address each of these control activities briefly in turn, giving examples that illustrate their use in combating improper payments. While I will discuss these activities separately, it is important to remember that managing improper payments typically requires continuous interaction among these areas. Perhaps the most significant of the elements critical to identifying, developing and implementing activities to reduce improper payments is the control environment. Top officials, whether in government or the private sector, and oversight bodies such as legislatures, set the stage for change with clearly established expectations and demands for improvement. Many of the officials we met with in the course of our work told us that without the clearly established demands and expectations for improvement by top management and legislators, little would have happened to effectively reduce fraud and errors in their programs. In addition, while top management sets the tone for cultural change, all personnel must buy into this change and work to achieve its overall goals. The cultural change fostered by an effective control environment stresses the importance of improvement and efficient and effective program operations while maintaining a balance with concerns about privacy and information security in a world where computers and electronic data are indispensable to making payments. In the oversight and legislative arena, it involves initiatives such as those in the Presidents Management Agenda, as I discussed earlier and legislation such as that introduced by you, Mr. Chairman, which requires comprehensive improper payment reviews and reporting. Interest in the amount of improper payments at the organizations that participated in our study often resulted from program, audit or media reports of misspent funds or fraudulent activities. As the magnitude of improper payments became known, government officials and legislative bodies faced increased pressure to reduce them. In Texas, for instance, the legislature was instrumental in changing in the states benefit programs after reports of improper payments in the Medicaid program that ranged from $365 million to $730 million as well as in the Temporary Assistance to Needy Families and Food Stamps programs, estimated at a total of $222.4 million. Lawmakers sought to reduce these improper payments by mandating specific actions that included use of computer technology to deter fraud and abuse. The government has led the way in setting the stage for changes in the United Kingdom. Following Comptroller and Auditor General reports stating that the government did not know enough about the level of fraud in its benefits programs, Parliament required the Department of Work and Pensions (DWP) to improve measurement of fraud in its programs. DWP conducted a benefit review from which the government estimated that $3 billion per year were lost to known fraud. The government further noted that if all suspicions of fraud were well founded, the figure could be as high as $10 billion per year. DWP proposed a strategy to reform the welfare system and reduce improper payments. Through the process, Parliament has stayed actively involved, enacting legislation to allow data sharing between government agencies and departments. In addition, the Treasury requires departments to disclose irregular expenditures arising from erroneous benefit awards and fraud by claimants. Further, the Comptroller and Auditor General qualified his opinion on DWPs fiscal years 1995 through 2000 financial statements because of the level of fraud and error identified in the benefit programs. This served to reinforce the message that high levels of improper payments are unacceptable. At the day-to-day level, improper payments resulting from miscalculation and other errors often receive inadequate attention. Centrelink, a one-stop shop that pays a variety of Australian government benefits, found through audit reports that up to 30 percent of its work was rework. The organizations management responded by implementing a Getting it Right strategy in 2000, setting out the roles and responsibilities of managers and team leaders as well as minimum standards for the staff to apply when making payment decisions. Centrelink distributed posters and mouse pads to reinforce the Getting it Right message. Centrelinks Chief Executive Officer has stated that she expects the implementation of the strategy to result in a reduction of improper payments as well as continued timeliness in payments to beneficiaries. Study participants successfully used the following strategies to create a control environment that instilled a culture of accountability over improper payments, and could also be used at federal agencies: Provide leadership in setting and maintaining the agencys ethical code of conduct and in ensuring proper behavior under the code. Provide a cultural framework for managing risk by engaging everyone in the organization in the risk management process. Increase accountability by establishing goals for reducing improper payments for major programs. Foster an atmosphere that regards improper payments as unacceptable. Among the organizations we studied, pressures from oversight entities and top management were instrumental in creating change. The Presidents Management Agenda and the previously mentioned legislation help define and communicate the need for improvement. By being transparent in redefining the culture, oversight entities and top management can set expectations and obtain agreement on the need for change from individuals managing day-to-day program activities. This culture of accountability is necessary to begin the critical next step in managing improper payments, the risk assessment process. Strong systems of internal control provide reasonable assurance that programs are operating as intended and are achieving expected outcomes. A key step in gaining this assurance is conducting a risk assessment. This involves comprehensively reviewing and analyzing program operations to determine where risks lie and what they are, and then measuring the potential or actual effect of those risks on program operations. The information developed during a risk assessment forms the foundation from which management can determine the corrective actions needed and provides baseline information for measuring progress. Specific methodologies for managing risk vary by organization depending on mission and the difficulty in quantifying and defining risk levels. In addition, because economic, governmental, industrial, regulatory, and operating conditions continually change, risk assessments should be updated to identify and address any new risks. The organizations that participated in our study found that conducting risk assessments to determine the nature of their improper payments was essential to helping them focus on the most significant problem and determine what needed to be done to address it. While many federal agencies do not perform risk assessments, some do. The Department of Health and Human Services, for example, began reporting an annual estimate of improper payments in the Medicare fee-for-service program in 1996. In fiscal year 2001, it reported estimated improper Medicare fee-for-service payments of $12.1 billion, or about 6.3 percent of such benefits. This analysis and reporting has led to the implementation of several initiatives to identify and reduce improper payments, including working with medical providers to ensure that medical records support billed services. HUD also measures improper payments in its housing assistance programs, reporting $1.87 billion in fiscal year 2000 and $2 billion in fiscal year 2001. HUD has taken actions to identify the risks associated with these programs and is working to refine the procedures currently used to obtain more useful information. HUD has not, however, done risk assessments in other disbursement areas. A thorough risk assessment allows organizations to target high-risk areas, focusing limited resources where the greatest exposure exists. The Illinois Department of Public Aid (IDPA), for instance, found that it had a payment accuracy rate of 95 percent. Its payment accuracy review identified errors and their causes that allowed IDPA to focus its attention on the 5 percent of inaccurate payments. In doing so, it discovered that of the $37.2 million spent for nonemergency transportation services, $11.55 million, or 31 percent, was estimated to be in error. This discovery led to a series of actions to address this problem. Government agencies in other countries have also used payment accuracy reviews to identify high-risk areas. For instance, the United Kingdoms DPW uses the results of rolling program reviews to determine levels of fraud and error in its Income Support and Jobseekers Allowance benefit programs. These reviews quantify the amount of fraud and error affecting benefit claims and are used to target areas for prevention and detection. Participants in our study used the following strategies successfully to assess risk and determine the nature and extent of improper payments. We believe that federal agencies should also consider these strategies to address improper payments. Institute a systematic process to estimate the level of improper payments being made by the organization. Based on this process, determine where risks exist, what those risks are, and the potential or actual effect of those risks on program operations. Use the results of the risk assessment to target high-risk areas and focus resources where the greatest exposure exists. Reassess risks on a recurring basis to evaluate the effect of changing conditions, both external and internal, on program operations. Assessing risk allows an organization to set goals and target its efforts to reduce improper payments. Having developed such a framework, an organization can then proceed to determine which control activities to implement to reduce risks and, ultimately, fraud and errors. improper payments vary depending on risks faced; objectives; managerial judgment; size and complexity of the organization; the operational environment; sensitivity of data; and requirements for system reliability, availability, and performance. Control activities can include both prepayment and post payment mechanisms. Given the large volume of federal payments, it is generally more efficient to prevent improper payments rather than attempt to recover overpayments that have already been made. Recognizing, however, that some overpayments are inevitable, agencies should adopt effective detection techniques to identify and recover them. These techniques can range from sophisticated computer analyses of program data to post award contract audits and are dictated by the type of payment activity that presents the most risk in a particular organization. They include the following: data sharing, which allows organizations to compare information from different sources to help ensure that payments are appropriate; data mining, which analyzes data for relationships that were previously neural networking, which analyzes associations and patterns among data recovery auditing, which is the practice of identifying and recovering overpayments using payment file information; contract audits, which verify that payments are being made in accordance with contract terms and applicable regulations, and prepayment investigations, in which contradictory information is investigated before payment is made. Data sharing, data mining, and neural networking techniques are powerful internal control tools that provide useful, timely access to information. Using these techniques can provide potentially significant savings by identifying reporting errors and misinformation before payments are made or by detecting improper payments already made. However, more extensive use of personal information in an evolving technological environment raises new questions about privacy and how it should be protected. In the federal arena, these techniques must be implemented consistent with the protections of the Privacy Act of 1974, as amended by the Computer Matching and Privacy Protection Act of 1988, and other privacy statutes. through March 2000, data matches identified 217,000 inconsistencies for investigation, resulting in another $53 million in benefit savings. In the United States, SSA shares information with federal agencies through more than 15 data matches to prevent and detect fraud. SSA estimates that it saves approximately $1.5 billion each year for other agencies through data these data matches. In its own programs, SSA estimates that it saves $350 million annually for Old Age and Survivors Insurance and Disability Insurance and $325 million annually for Supplemental Security Income through the use of data matching. While data matching or sharing gives an organization the means to compare data from different sources, data mining offers a tool to review and analyze diverse data. The IDPA, for instance, had identified one of its risk areas as health care providers who were billing in excess of 24 hours in a single day. Using its data mining capability, the Illinois OIG identified 18 providers who had billed in excess of 24 hours for at least 1 day during a 6-month period. A number of these providers were already under investigation for other program violations. As a result of this analysis, the OIG planned to refer serious cases to law enforcement agencies and take administrative action against less serious violators. Neural networking analyzes associations and patterns among data elements, allowing an organization to find relationships that can result in new queries. In Texas, models used with neural networking technology identified fraudulent patterns from large volumes of medical claims and patient and provider history data. Such models can help identify perpetrators of both known and unknown fraud schemes by analyzing utilization trends, patterns, and complex interrelationships in the data. The state currently has models for physicians and dentists and plans to initiate a model for pharmacies. Recovery auditing, which came into use about 30 years ago, has a long-standing record in the private sector, and more recently, in the federal government. More extensive use of recovery auditing could offer federal agencies an opportunity to prevent and detect improper payments. One private sector company that participated in our study contracted with a recovery audit firm to review its accounts payable files. The companys own systems had found no errors in these files, yet the review resulted in the recovery of $8 million in improper payments. Subsequently, the company began to use recovery auditing techniques on accounts payable information to prevent improper payments, through such things as identifying potential duplicate payments. During our visit, this system identified and avoided a duplicate payment of $136,000 from the reports generated by the recovery audit software. In addition, as a result of using recovery auditing before payments are made, the company identified and stopped the processing of $41 million in duplicative wire payments. The particular software this company uses also identifies the employees making the errors so that they can be trained appropriately. The organizations that participated in our study used the following strategies successfully to identify and address risks. We believe these same strategies could be used successfully by federal agencies. Based on an analysis of the specific risks facing the organization, and taking into consideration the nature of the organization and the environment in which it operates, determine which types of control activities would be most effective in addressing the identified risks. Where in-house expertise is not available, investigate the possibility of contracting activities out to firms that specialize in specific areas, such as recovery auditing and neural networking. Perform cost-benefit analyses of potential control activities before implementation to help ensure that the cost is not greater than the potential benefit. Ensure that personnel involved in developing, maintaining, and implementing control activities have the requisite skills and knowledge, recognizing that staff expertise needs to be frequently updated in evolving areas such as information technology and fraud investigation. Recognize and consider the importance of privacy and information security issues when developing and implementing control activities. An agencys internal control activities should be flexible, weigh costs and benefits, and be tailored to an agencys needs. Once control activities are in place, the internal control cycle continues with the prompt communication of information that managers need to help them carry out these activities and run their operations efficiently and effectively. Those responsible for managing and controlling program operations need relevant, reliable, and timely financial and nonfinancial information to make operating decisions, monitor performance, and allocate resources. This information can be obtained through a variety of sources using a wide range of data collection methodologies. The organizations that participated in our study used internal and external sources to obtain the information they needed. Further, these sources varied widely, from multiple computer databases to periodic meetings. benefit programs that involve recipients and providers of services. Organizations in our study developed educational programs to assist these participants in understanding eligibility and other requirements, and for service providers, information on issues including common claim filing errors. For instance, in 1997 Texas implemented several initiatives to educate new medical providers before they enroll in the Texas Medicaid program. Each new provider receives a hand-delivered package with information on claim filing, helpful tips, and instructions on how to use the automated phone system for inquiries. Three months after the provider is enrolled, a field representative from Medicaid evaluates a sample of the providers claims and revisits the provider to answer questions and discuss any problems noted in the claims sample. In another example, Australias Health Insurance Commission (HIC) implemented a feedback program to provide medical practitioners with regular information about their own benefit authorization, patient demographics, and comparative statistical information showing services rendered and the dollar value of benefits paid. All 32,000 practitioners receive correspondence once a year from HIC. While at first most practitioners did not realize that HIC was able to accumulate and analyze this information, the program has now become an effective deterrent to wrongdoing as well as a desired source of information to medical providers. Some practitioners have asked for additional information or statistics prior to the annual feedback report. HIC has since established an on-line feedback and statistics site for general practitioners, 2,100 of whom accessed their reports online in 1999. Coordination and cooperation with local law enforcement and other sources outside an agency can also establish an infrastructure conducive to preventing and detecting fraud. The IDPA OIG established a Fraud and Abuse Executive (FAE) whose objective is to be a conduit among internal and external parties for all fraud issues. As a result of cooperation between the Illinois State Police, one bank, and the FAE, thousands of dollars in fraudulent payments were stopped and a number of perpetrators were arrested. Organizations that participated in our study used the following strategies to help them effectively use and share knowledge to manage improper payments. These strategies could also be used by federal agencies. Determine what information is needed by managers to meet and support initiatives aimed at reducing improper payments. Ensure that necessary information provided to managers is accurate and timely. Provide managers with timely feedback on applicable performance measures so they can use the information to manage their programs effectively. Develop educational programs to assist program participants in understanding program requirements. Ensure that there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant effect on improper payment initiatives. Develop working relationships with other organization to share information and pursue potential instances of fraud or other wrongdoing. Communications are effective when information flows up, down, and across an organization. In addition to internal communications, management should ensure that there are adequate means to give and obtain information from external parties who could have an effect on the agencys goals. Moreover, effective information technology management is critical. Managers need operational and financial data to monitor whether they are meeting their agencys goals with appropriate resources. Monitoring focuses on assessing the quality of an organizations performance over time and on promptly resolving problems identified either through separate program evaluations or audits. Evaluation of an organizations programs and its successes in meeting its established goals and in identifying additional actions is an integral element of performance measurement and continued improvement in operations. Once an organization has identified its risks related to improper payments and undertaken activities to reduce these risks through internal controls, monitoring performance allows the organization to gauge how well its efforts are working. When Illinois had assessed the risk of improper payments in its Medicaid program, based on the results, it implemented initiatives to improve payment accuracy. To monitor the effect of the new initiatives, the state uses random claims sampling to test the accuracy of payments. The goal of the project, which reviews 1,800 claims per year, is to ensure that every paid claim faces an equal chance of random review. This approach not only provides periodic estimates of payment accuracy rates but helps deter future erroneous and fraudulent billings. people, has established performance measures for entitlement accuracy, services to reduce benefit crime, and debt management. WINZs financial statements are the main accountability reports used by Parliament to monitor the agencys performance. In addition, Parliament uses the audited information to make informed decisions on resource allocation, and through a monitoring body, to hold the entitys chief executive officer responsible if performance standards are not met. Participants in our study used the following strategies successfully to track the success of improvement initiatives. We believe the strategies would be effective for federal agencies as well. Establish agency-specific goals and measures for reducing improper payments. Using baseline information for comparison, periodically monitor the progress in achieving the established performance measures. Make the results of performance reviews widely available to permit independent evaluations of the success of efforts to reduce improper payments. Ensure timely resolution of problems identified by audits and other reviews. Adjust control activities, as necessary, based on the results of monitoring Organizations should monitor the control activities they use to address improper payments continuously, ingraining them in their operations. This kind of ongoing monitoring enables organizations to measure how well they are doing, track performance measures, and adjust control activities based on the results. Monitoring should also include policies and procedures for communicating review results to appropriate individuals in the organization so any problems can be resolved. In closing, Mr. Chairman, I want to emphasize that high levels of improper payments need not and should not be an accepted cost of running federal programs. The organizations that participated in our study found that they could effectively and efficiently manage improper payments by (1) changing their organizations control environments or cultures, (2) performing risk assessments, (3) implementing activities to reduce fraud and errors, (4) providing relevant, reliable and timely information and communication to management on results and (5) monitoring performance over time. While HUD, Education, and other agencies have taken some steps in these areas, effectively addressing improper payments requires a comprehensive strategy that permeates the entire organization. Implementing such a comprehensive strategy at federal agencies will not be easy or quick. It will require continued strong support from the President, the Congress, top-level administration appointees, and agency officials. The effort must include a willingness to dedicate personnel and money to implement the changes. This could involve performing needs assessments and hiring individuals with the necessary skills and knowledge to turn planned actions into reality. In addition, many actions that proved successful for organizations in our study involved computer assisted analyses of data. Implementing some of these practices could involve funding for computer software or hardware, and additional staff or training. In addition, it is important that the results of actions taken to address improper payments be openly communicated not only to the Congress and agency management, but to the public. This transparency demonstrates the importance that government places on the need for change at the same time it openly communicates performance results. It also acts as an incentive for agencies to be ever vigilant in their efforts to address wasteful spending that results from weak controls that lead to improper payments. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other Members of the Subcommittee may have.
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This testimony discusses (1) how internal control weaknesses make the departments of Housing and Urban Development (HUD) and Education vulnerable to, and in some cases have resulted in, improper and questionable payments and (2) strategies these and other federal agencies can use to better manage their improper payments. Despite a climate of increased scrutiny, most improper payments associated with federal programs continue to go unidentified as they drain taxpayer resources away from the missions and goals of our government. GAO found that both HUD and Education lacked fundamental internal controls over their purchase card programs that would have minimized the risk of improper purchases. Combined with a lack of monitoring, environments were created at HUD and Education where improper purchases could be made with little risk of detection. One of the most important internal controls in the purchase card process is the review of supporting documentation and approval of each purchase by the approving official. Another control that is effective in helping to prevent improper purchases is the blocking of certain merchant category codes. This control, available as part of the agencies' purchase card contracts with the card issuing financial institutions, allows agencies to prohibit certain types of purchases that are clearly not business related.
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NMMSS is the United States’ official nuclear materials tracking and accounting system. NMMSS provides information on nuclear materials to support both domestic programs and international nuclear policies. Keeping track of the growing amount of nuclear materials is especially important as a result of the breakdown of the Soviet Union and increases in both domestic and international terrorism. Tracking and accounting for the hundreds of tons of plutonium, highly enriched uranium, and other nuclear materials that have accumulated are important to help (1) ensure that nuclear materials are used only for peaceful purposes, (2) protect nuclear materials from loss, theft, or other diversion, (3) comply with international treaty obligations, and (4) provide data to policymakers and other government officials on the amount and location of nuclear materials. The NMMSS database contains data on nuclear materials supplied and controlled under international agreements, including U.S.-supplied international nuclear materials transactions, foreign contracts, import/export licenses, government-to-government approvals, and other DOE authorizations, such as authorizations to retransfer U.S.-supplied materials between foreign countries. NMMSS also maintains and provides DOE with information on domestic production and materials management, safeguards, physical accountability, financial and cost accounting, and other data related to nuclear materials accountability and safeguards for Nuclear Regulatory Commission licensees. DOE and the Nuclear Regulatory Commission cosponsor NMMSS, and it is managed and operated by a DOE contractor—Martin Marietta Energy Systems, Incorporated. NMMSS has been used to account for U.S. imports and exports of nuclear materials since 1977. Because the existing NMMSS is an older system, DOE decided to replace and modernize it. The existing NMMSS is housed on a mainframe using unstructured COBOL code. Performing modifications on the existing NMMSS and designing custom reports are difficult because of the volume and complexity of the code. Accordingly, DOE’s Office of Nonproliferation and National Security, which is responsible for operating NMMSS, tasked the Lawrence Livermore National Laboratory with developing a new NMMSS. Livermore hired a subcontractor to perform this task in February 1994 and assigned a program manager to oversee the effort. In April 1994, Livermore formed a technical advisory committee, composed of senior computer scientists and material control and accountability specialists, to assist the program manager in overseeing the system development. The replacement NMMSS is scheduled to become operational on September 1, 1995. Martin Marietta is scheduled to discontinue operation of the existing NMMSS during September 1995. To address our objectives, we reviewed the replacement NMMSS contract, transition plan, test plan, and various other draft system documents. We requested documentation on the status of the system coding and testing; however, none was available for our review. We also analyzed documentation provided to us by Lawrence Livermore’s technical advisory committee on the subcontractor’s development efforts. In addition, we analyzed documentation from various user groups on their concerns with the NMMSS development. We analyzed DOE Order 1330.1D, Computer Software Management, to determine its applicability to this project and whether or not it was being followed. We interviewed DOE officials in the Office of Nonproliferation and National Security concerning actions taken to implement the recommendations in our previous report and the status of the NMMSS development. We also interviewed the NMMSS program manager, members of Lawrence Livermore’s technical advisory committee, contract officials at DOE and Lawrence Livermore, and the NMMSS subcontractor’s lead programmers, system engineer, and project managers to determine the status of the system development. In addition, we interviewed officials in DOE’s Defense Programs Office—the biggest user of NMMSS information—on their concerns about the replacement NMMSS development. We performed our work between February 1995 and May 1995, in accordance with generally accepted government auditing standards. Our work was primarily done at DOE’s headquarters in Washington, D.C., and its offices in Germantown, Maryland; at Lawrence Livermore National Laboratory in Livermore, California; and at the subcontractor’s facility in Norcross, Georgia. The Department of Energy provided written comments on a draft of this report. These comments are presented and evaluated in the report, and are reprinted in appendix I. In December 1994, we reported that DOE did not adequately plan the development effort for the replacement NMMSS. For example, DOE did not follow sound system development practices such as identifying and defining users’ needs and adequately exploring design alternatives that would best satisfy these needs in the most economic fashion. Accordingly, we recommended that DOE determine users’ requirements, investigate alternatives, conduct cost-benefit analyses, and develop a plan to meet identified needs before investing further resources in the replacement NMMSS. In its official response to the recommendations in our prior report, DOE stated that it did not concur with our recommendations and that it did not believe it would be cost-effective to delay its effort to transition from the existing system to the new system. Further, in commenting on a draft of this report, the Acting Director of the Office of Nonproliferation and National Security stated that DOE’s planning was sufficient. However, because of DOE’s lack of basic planning, it does not know if the system will fulfill the needs of its major users or be cost-effective. Adhering to generally accepted system development practices helps to ensure that information systems perform as desired. These practices include (1) generating clear, complete, and accurate documentation throughout the system development process, (2) placing the software development under configuration management, and (3) ensuring that the system successfully completes acceptance testing prior to becoming operational. However, because DOE has not required the subcontractor to follow any of these practices for the replacement NMMSS, the Department does not know how much of the system development is completed and whether the part that is completed performs as required. As a result, the risk of system failure is inordinately high. DOE Order 1330.1D, Computer Software Management, requires that the development of a system be documented so that, among other things, the status of the system is known at all times. Documentation, such as the results of system testing and the tracking of source code as it changes, allows program managers to review the development’s progress and determine if requirements are being met. The subcontractor developing the replacement NMMSS could not provide any system documentation—software specifications, system requirements, results of formal reviews (e.g., system/preliminary/critical design) or informal system testing reports, operational procedures, quality assurance checklists, or project tracking reports. Because little system documentation exists, and the contract does not require any interim deliverables that measure system performance, DOE does not know the status of the system development. In addition, members of Livermore’s technical advisory committee told us they have been unable to obtain the documentation they needed to determine the status of the development effort. As a result, the committee said it could not accurately determine such factors as the number of lines of code in the system. In fact, the advisory committee could only estimate system size in very gross terms—between 10,000 and 100,000 lines of code. DOE officials agreed that the development effort is largely undocumented and stated that DOE historically has not enforced its own regulations requiring system documentation. At the conclusion of our review and in commenting on a draft of this report, DOE officials told us that they will begin to require such documentation for the replacement NMMSS. A successful system development project should include a software configuration management plan that clearly defines the procedures for identifying, accounting for, and reporting on changes to software items that are under configuration control. Configuration management is necessary throughout the life cycle of a software project because it provides (1) a control mechanism to ensure that the software status is accurately known at all times and (2) a baseline for system developers and testers. Although the subcontractor developed a software configuration management plan for the replacement NMMSS, no software had been placed under configuration control. As a result, DOE does not know what version of the software is current, which versions of the software have been tested, what problems were identified during testing, and what corrections are being made. Developing software without configuration management frequently results in projects that are delivered late, exceed budget, and perform poorly. Officials in DOE’s Office of Nonproliferation and National Security agreed that the replacement NMMSS software had not been placed under configuration management at the time of our exit conference. The officials stated that, until recently, they had not required the use of configuration management on software development projects. In its written comments on a draft of this report, DOE stated that the replacement NMMSS is now being placed under configuration control. During acceptance testing, tests are performed to determine if a system will meet its hardware, software, performance, and user operational requirements. Acceptance testing is usually performed by the system developer and witnessed by an independent verification and validation group, which includes system users. Such testing is important to determine if the new system performs as required. The previous implementation schedule for the replacement NMMSS called for acceptance testing and 2 months of parallel operation with the existing NMMSS. In addition, in a January 1994 memorandum, an official from DOE’s Office of Nonproliferation and National Security stated that the replacement NMMSS would not be made operational until “it has been demonstrated that the new system is capable of meeting present and new customer needs and requirements.” Adhering to this position on testing the replacement NMMSS would have greatly reduced system risks. In January 1995, DOE changed its position and decided to make the replacement NMMSS operational without performing acceptance testing. DOE officials stated that this decision was made to avoid the cost of simultaneously funding both the existing and replacement systems. Instead, DOE plans to perform what it is calling “system testing” on a subset of system reports—87 of approximately 500 reports. While DOE stated that these 87 reports were selected based on users’ needs, it could not produce documentation to validate this statement. The only system testing at the time of our review was the informal testing that the subcontractor stated it had performed. However, the subcontractor could not provide documentation on either its test plans or the test results. In its written comments on a draft of this report, DOE officials stated that system test procedures have now been written and approved. In addition, parallel operations with the existing NMMSS are not scheduled. During parallel operations, both systems would perform all required functions, and then outputs would be compared to ensure that the replacement system is producing accurate reports. Because the replacement NMMSS will replicate the functions of the existing NMMSS, a period of parallel operations is especially important. Without parallel processing, DOE is introducing additional risk that the replacement system will not perform all functions of the existing system or, more importantly, that the information produced by the replacement system will not be accurate. As a result, DOE cannot guarantee its users that the information they need from NMMSS to do their jobs will continue to be available. NMMSS users told us that information they get from the existing NMMSS within hours could take weeks or months to gather if they cannot obtain it from the new NMMSS or if they cannot be sure that the information in the new NMMSS is accurate. DOE has stated that it will discontinue the existing system on September 1, 1995, and begin operation of the replacement NMMSS without acceptance testing. However, DOE’s replacement NMMSS is being developed in an undisciplined, poorly controlled manner that makes success unlikely. Planning was inadequate and basic system development practices are not being followed. As a result, DOE will not know if the replacement NMMSS will produce the accurate and timely reports needed to meet users’ needs before it accepts the system and pays the subcontractor. DOE’s disregard for basic system development practices necessary to ensure the accuracy and dependability of its nuclear tracking system is inconsistent with the importance of NMMSS, which provides the United States’ official record for tracking nuclear materials. It is not in DOE’s best interests, therefore, to disconnect the existing NMMSS and replace it with an untested, undocumented new system. The history of software development is littered with systems that failed under similar circumstances. We recommend that the Secretary of Energy immediately terminate any further development of the replacement NMMSS. Further, as we recommended in our December 1994 report, the Secretary should direct the Office of Nonproliferation and National Security to determine users’ requirements, investigate alternatives, and conduct cost-benefit analyses before proceeding with any plan to develop a replacement NMMSS. If, after thorough planning, the Office proceeds with plans to develop a new NMMSS, we recommend that it follow generally accepted system development practices. In the interim, we recommend that DOE continue using the existing NMMSS system until the above recommendations are addressed. The Department of Energy provided written comments on a draft of this report. Their comments are summarized below and reproduced in appendix I. The Department of Energy agreed with the need for systems development documentation, configuration management, and adequate testing. However, the Department did not concur with our assessment of its analyses and planning for the system development effort, or with our recommendation that it terminate the system development until users’ requirements, alternatives, and cost-benefit analyses have been performed. DOE stated that its planning was adequate because it is converting an existing system from an unstructured language to a structured, fourth generation language, rather than developing a new system. We disagree. Without sound analyses or planning, DOE does not know that “converting an existing system” is a cost-effective way to meet its needs. Furthermore, as our report discusses, DOE is implementing this unsupported approach in an unsatisfactory manner. Therefore, DOE should discontinue its current effort and perform users’ requirements, alternatives, and cost-benefit analyses before proceeding. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will provide copies of this report to the Secretary of Energy; the Director, Office of Management and Budget; appropriate congressional committees; and other interested parties. Copies will also be made available to others upon request. Please call me at (202) 512-6253 if you or your staff have any questions. Major contributors to this report are listed in appendix II. Valerie C. Melvin, Assistant Director Keith A. Rhodes, Technical Assistant Director Suzanne M. Burns, Evaluator-in-Charge Linda J. Lambert, Senior Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) progress in developing a new nuclear materials tracking system, focusing on: (1) DOE actions to implement previous GAO recommendations concerning the system; and (2) whether DOE is adequately addressing key system development risks. GAO found that: (1) DOE has not implemented any of the GAO recommendations regarding new system planning and analysis and has no plans to do so because it believes its planning is sufficient and delaying the system would lead to unnecessary costs; (2) DOE does not know if its new system will meet users' needs or be cost-effective; (3) DOE has not addressed the subcontractor's failure to document its system development process and to place its software under configuration management, or its failure to require acceptance testing before taking delivery of the system and plan for parallel operations of the new and old systems to check the new system's performance; and (4) the risk of system failure is high, since DOE does not know the status of the system development effort or whether certain system components will perform as required.
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DOD has some 20 acquisition organizations as well as a diverse, multilayered workforce. In recent years, Congress has enacted legislation that requires DOD to reduce its acquisition workforce significantly and to identify opportunities to streamline and consolidate acquisition organizations and functions. These legislative efforts, aimed primarily at reducing the acquisition workforce consistent with decreasing budgets and acquisition reform initiatives, allow the Secretary of Defense wide latitude in implementing the reductions. DOD has long sought to focus on infrastructure reductions in an effort to fund weapons modernization. Section 906(a) of the National Defense Authorization Act for Fiscal Year 1996 (P. L. 104-106) required a plan that, if implemented, would reduce the acquisition workforce by 25 percent over the 5-year period beginning October 1, 1995. Section 906(d) further required a reduction of 15,000 persons in fiscal year 1996. Appendix I contains a complete list of these acquisition organizations. Section 277 of the same act required DOD to develop a 5-year plan to consolidate and restructure its laboratories and test and evaluation centers. Section 902 of the National Defense Authorization Act for Fiscal Year 1997 (P. L. 104-201) amended section 906 to require a total reduction of 30,000 personnel in fiscal years 1996 and 1997 combined. Section 912 of the National Defense Authorization Act for Fiscal Year 1998 (P. L. 105-85) required a reduction of 25,000 personnel in fiscal year 1998. The act gave the Secretary of Defense the authority to reduce that number to as few as 10,000 if he determined and certified to Congress that further reductions would be inconsistent with the cost-effective management of defense acquisition systems and would adversely affect military readiness. On June 1, 1998, the Secretary notified Congress that the reductions in fiscal year 1998 would be 20,096. Section 912(b) required DOD to report on recent reductions, define the term defense acquisition workforce, and apply the term uniformly throughout DOD. Section 912 (c) required DOD to submit an implementation plan, by April 1, 1998, designed to streamline and consolidate acquisition organizations. DOD has submitted its plan. Our analysis of data obtained from the Defense Manpower Data Center (DMDC) indicates that DOD is still on schedule to achieve acquisition workforce reductions of 25 percent by the end of fiscal year 2000. DOD reduced its acquisition workforce 15.8 percent (or 59,974) during fiscal years 1996 and 1997. This reduction is nearly two-thirds of the reduction of 95,153 personnel that DOD must achieve to meet its 25 percent, 5-year target. Despite these reductions, potential savings cannot be directly tracked in DOD budget accounts. In addition, some of the potential savings DOD anticipates it will achieve through these reductions may be offset by other costs. Our analysis of data obtained from DMDC indicates that during fiscal years 1996 and 1997, DOD reduced its acquisition workforce at a significantly higher rate than it reduced its overall workforce. At the end of fiscal year 1995, DOD employed 380,615 persons in its acquisition organizations. At the end of fiscal year 1997, the total number of personnel employed dropped to 320,641—a reduction of 59,974 (or 15.8 percent). Since the 25-percent planned reduction by the end of fiscal year 2000 is 95,153, DOD achieved nearly two-thirds of the target during the 2-year period. Table 1 provides an analysis of workforce reductions that have already taken place in each of the acquisition organizations. By contrast, at the end of fiscal years 1995 and 1997, respectively, DOD employed 2,319,401 and 2,158,927 persons overall. This overall reduction of 160,474 (or 6.9 percent) during the same period was less than one-half of that achieved in DOD’s acquisition workforce. While most of the reductions in the acquisition workforce have been achieved directly through personnel reductions, a significant portion was also attained by disestablishing the Army Information Systems Command and distributing the majority of its personnel into a nonacquisition organization (i.e., an organization outside the purview of DOD Instruction 5000.58). DOD’s civilian acquisition workforce comprises nearly 40 percent of DOD’s overall civilian workforce and is paid primarily through operations and maintenance (O&M) and RDT&E funding. The Congressional Budget Office estimates that the average annual salary and benefits of an acquisition worker is about $53,000. Using this average, the personnel reduction in acquisition organizations during fiscal years 1996 and 1997 represents a potential savings of approximately $3.2 billion. However, DOD’s accounting systems are unable to directly track workforce reductions in acquisition organizations to DOD budget accounts. For example, although, since 1995, the civilian payroll portion of DOD’s O&M budget has been reduced by approximately $3.6 billion (roughly 9 percent), it is unclear how much of that decline is accounted for by acquisition workforce reductions. During the same period, the RDT&E account actually increased approximately $826 million (more than 2 percent). It is also unclear how much of that increase is accounted for by acquisition workforce changes because DOD’s RDT&E account does not break out civilian payroll. In addition to DOD’s inability to accurately track savings from personnel reductions in acquisition organizations, such savings have not been and may not be fully realized due to other offsetting costs. For example, potential savings from acquisition workforce reductions may be offset in part by contracting with private entities for some services previously performed by government personnel (i.e., substituting one workforce for another). According to a DOD official, other mission-specific costs that may offset savings from workforce reductions include (1) investment costs, such as early buyouts and (2) undocumented costs, such as overtime and workforce inefficiencies introduced by personnel shortages or inexperienced workers. Our analysis shows that while DOD’s acquisition workforce has declined, defensewide contract awards for support services have increased over the past 5 years. As shown in figure 1, DOD’s spending on support services, as a percentage of overall DOD spending on contracts, is increasing. For example, the dollar value of DOD’s support service contracts in fiscal year 1997 was $47.8 billion (roughly 40 percent), compared to $45.5 billion (about 33 percent) in fiscal year 1993. Although we cannot directly correlate the increase in support service contracting to specific reductions in the acquisition workforce, we found that support service contracts generally increased for certain occupational fields that experienced the largest personnel reductions, including management analyst, contracting, administrative, and computer specialist. DOD officials stated that they have not studied the direct correlation of outsourced activities as they relate to mandated reductions. DOD is in the process of trying to determine cost savings associated with outsourcing activities. Numerous definitions have been applied to DOD’s acquisition workforce. These definitions can greatly affect how this workforce is counted and thus the number of personnel included. In response to congressional direction, DOD has developed a new way to define its acquisition workforce that it believes (1) more accurately reflects the numbers of personnel performing acquisition functions throughout the agency and (2) has the potential to directly link the management of acquisition personnel to DOD’s overall manpower and budgeting systems and processes. While DOD’s acquisition workforce has been defined in numerous ways over the years, generally one of three approaches has been used. The first is to identify organizations with missions that fit the concept of acquisition and to include all the people in those organizations as the acquisition workforce. Under this approach, various segments of that workforce have been exempted. The first three examples in table 2 (1 through 1.b) show the number of acquisition workforce personnel as defined by this approach. A second approach has been to focus on the senior professional members of the acquisition workforce having to meet the certification requirements of DAWIA. The act, (10 U.S.C. 1701 et seq.) enacted November 5, 1990, aims to professionalize DOD’s acquisition workforce. It requires the Secretary of Defense to establish an acquisition workforce with specific experience, education, and training qualifications. Specific provisions of the act require the Secretary of Defense to (1) establish a management structure along with policies and regulations for implementing the act’s provisions, (2) establish qualification requirements, (3) provide training and education to meet these requirements, and (4) enhance civilian opportunities to progress to senior acquisition positions. A third approach provides the basis for DOD’s new definition; that is, to identify acquisition functions and related occupations and then identify the people performing those functions regardless of their assigned organization. DOD officials contend that the first approach overstates the number of personnel involved in acquisition and excludes others performing acquisition functions in other DOD organizations. For example, if all individuals that are employed in the organizations included in DOD Instruction 5000.58 (see app. I for a complete list) are identified as acquisition personnel, such occupations as doctors and security guards would be included. Conversely, the Defense Information Systems Agency, which, according to a DOD official, is the primary purchasing agent for DOD’s information systems technology, is not listed in 5000.58 as an acquisition organization and would not be included as part of the acquisition workforce. In response to the requirement contained in section 912(b) of the National Defense Authorization Act for Fiscal Year 1998, the Secretary of Defense informed Congress that beginning October 1, 1998, members of the acquisition workforce will be uniformly identified using an updated version of an approach developed by the 1986 Packard Commission. This method, developed by DOD’s Acquisition Workforce Identification Working Group in cooperation with an outside consultant, identifies the workforce by considering occupations across DOD and occupations in certain organizations. The workforce will be a combination of (1) certain occupations regardless of the organizational designation, (2) certain occupations only if employed in certain organizations, and (3) other selected functions throughout DOD. These three categories, for the first time, create a DOD-wide framework around which each of the military services and defense agencies can seek consensus. The Working Group has subsequently engaged the services and agencies in identifying the personnel that would constitute a newly defined acquisition workforce. The Working Group is also seeking ways to incorporate the acquisition workforce into DOD’s manpower management and budgeting systems. One of the Group’s primary objectives is to tie DOD-wide acquisition functions directly to corresponding budgetary program element codes, thus linking the acquisition workforce to DOD’s budget process for the first time. This approach, according to the Working Group, would allow DOD to address some specific shortfalls in its traditional approach. For example, it could (1) improve significantly, DOD’s ability to effectively manage the acquisition workforce in budgeting and planning for training and (2) allow DOD to more directly identify and track the impacts of changes in the acquisition workforce, such as reductions and potential savings. Significant cuts in DOD’s acquisition workforce might be expected to result in reductions in associated infrastructure. In a review of a major Air Force laboratory reorganization, however, we found that DOD’s efforts focused more on management efficiencies than actual infrastructure reductions. We believe the results of DOD’s laboratory consolidation efforts are instructive in attempting to understand the lack of change in the infrastructure related to the acquisition workforce. In 1996, Congress required DOD to develop a 5-year plan for restructuring and consolidating its laboratories and test and evaluation centers. DOD’s response was Vision 21, a plan based on the reduction, restructuring, and revitalization of its RDT&E infrastructure. In our report on best practices associated with restructuring the federal RDT&E infrastructure, we pointed out that a variety of critical elements need to be in place to ensure that any restructuring effort is successful, and we concluded that DOD’s Vision 21 plan incorporated many of these elements. These elements include (1) a crisis or catalyst that served to spark action; (2) an independent authority to overcome parochialism and political pressure that impede decision-making; (3) core missions focused to support the organization’s overall goals and strategies; (4) clear definitions that fully delineate the existing infrastructure; and (5) accurate, reliable, and comparable data that capture total infrastructure costs and utilization rates for each affected activity. To position itself for DOD’s implementation of the Vision 21 plan, the Air Force restructured its research laboratories. The Air Force Research Laboratory, created in October 1997, was a consolidation of four independent laboratories and is responsible for research and technology development in support of the Air Force’s future and existing aircraft and weapon systems. The specific objectives of creating a single laboratory were to (1) streamline the laboratory organizational structure, with emphasis on reducing the cost of operating the infrastructure; (2) consolidate full resource ownership and accountability (dollars and people) under a single commander; (3) reduce fragmentation of similar technologies currently distributed among multiple technology directorates; and (4) create a more robust, focused laboratory enterprise postured for the future. Under this consolidation, the independent laboratories were all functionally consolidated as a single organization. The number of directorates was reduced from 22 to 9, and the number of planning staffs was reduced from 5 to 1. Laboratory officials told us that they are now in the process of identifying and collecting actual total operating costs, such as civilian and military labor, base operating support, depreciation, contract support, and equipment. These officials expect to eventually reduce the laboratory’s management overhead by 450 positions. Although 78 percent of the Laboratory’s budget is outsourced to industry and academia, Laboratory officials estimate that its support costs are 24 cents per dollar of revenue, or about $591 million. The goal is to maintain the laboratory’s support cost at 24 cents per dollar for the period 2000-2005, a move that would save an estimated $50 million a year. Laboratory officials told us that there were two basic reasons the closure of major facilities was not considered as part of their consolidation efforts. First, they believed that Congress would be unwilling to approve any unilateral restructuring of its research facilities unless a base realignment and closure (BRAC) process is undertaken. Second, they did not want to preempt any action that might take place under Vision 21, which calls for a comprehensive review of all DOD laboratories and test centers. But Vision 21 was subsequently subsumed by the Quadrennial Defense Review, which called for two additional BRAC rounds for fiscal years 1999 and 2001. DOD decided not to submit its legislative package for Vision 21 and instead opted to include its RDT&E infrastructure in any future BRAC rounds. Congress has rejected the recommendation for additional BRAC rounds. In response to section 912(c) of the National Defense Authorization Act for Fiscal Year 1998, the Secretary of Defense called for further study of DOD’s RDT&E base. DOD has reduced its acquisition workforce and associated costs. Further, DOD is on schedule to meets its 25-percent personnel reduction target. However, the potential savings from these reductions cannot be precisely tracked in DOD’s O&M and RDT&E budget accounts. In any case, these anticipated savings may be offset by other costs. Furthermore, DOD has not reduced its acquisition infrastructure to the extent that it reduced its acquisition personnel. Further attention may be needed to achieve cuts in the infrastructure associated with the personnel reductions. DOD’s redefinition of its acquisition workforce appears to be based on a solid analytical framework of identifying and linking acquisition personnel and acquisition functions. Tying the acquisition workforce to the budget process, if successful, could increase the quality and timeliness of information critical to decisionmakers. We provided DOD officials with a draft of this report. DOD provided oral comments and concurred fully with the information contained in it. To determine the extent of reductions in DOD’s overall workforce and in its acquisition workforce, we obtained employment levels, as measured by end strength, through the end of fiscal year 1997 from DMDC located in Monterey, California (West Division), and Washington, D.C. (East Division). We performed analyses on various aspects of the data, stratifying it by organization, occupational/job series, and so forth. We also interviewed and obtained defense manpower data from officials in the Office of the Under Secretary of Defense (Personnel and Readiness), the Office of the Under Secretary of Defense (Acquisition & Technology), and other selected DOD components. To examine trends in DOD O&M budget accounts, we obtained the Future Years Defense Program’s Total Obligational Authority figures for fiscal years 1996-99. We stratified the budget data by pay for civilian personnel versus all other obligational authority. To examine trends in contract awards for services, supplies, and equipment, we retrieved contract data from DOD’s Individual Contract Action Report for fiscal years 1993-97, stratified by year. We converted budget, payroll, and contract data to constant 1998 dollars. In reviewing the Air Force Research Laboratory consolidation, we interviewed cognizant Air Force officials, to obtain their justifications and rationale for initiating the restructuring effort. To ascertain the Laboratory’s pre- and post-consolidation parameters, we obtained specific data regarding the size and composition of the workforce, the number of laboratories and sites, overlap of primary areas of research, and so forth. We discussed various consolidation and restructuring cases with officials in the Office of the Under Secretary of Defense and other DOD components. In determining appropriate case studies for this report, we also applied an analytical framework developed in earlier work. We did not independently review the reliability of DOD’s management information systems or databases. However, we interviewed DMDC officials regarding their quality control procedures for minimizing sources and chances for error. Further, we independently obtained the data and compared the results of our analyses to those of other users of the same database. Checking and matching of this independently derived information gave us assurance that the data were consistent. Lastly, we ascertained the extent to which DOD assessed the reliability of the Data Center’s products. We performed our work from January through May 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Ranking Minority Member of the House National Security Committee, the Secretary of Defense, and the Director of the Office of Management and Budget. We will make copies available to others upon request. If you have any questions concerning this report, please contact me at (202) 512-4841. Major contributors to this report are listed in appendix II. The Department of Defense (DOD) Instruction 5000.58 states that the mission of an acquisition organization, with its subordinate elements, includes planning, managing, and/or executing acquisition programs that are governed by DOD Directive 5000.1 (reference (n)), DOD Instruction 5000.2 (reference (o)), and related issuances. Specifically, these organizations (and any successor organization of these commands) are as follows: Office of the Under Secretary of Defense (Acquisition and Technology) Army Information Systems Command Army Materiel Command Army Strategic Defense Command (now the Army Space and Strategic Defense Command) Army Acquisition Executive Office of the Assistant Secretary of the Navy (Research, Development, and Acquisition) Naval Sea Systems Command Naval Air Systems Command Naval Supply Systems Command Naval Facilities Engineering Command Office of the Chief of Naval Research Space and Naval Warfare Systems Command Navy Strategic Systems Program Office Navy Program Executive Officers/Direct Reporting Program Manager Marine Corps Systems Command Office of the Assistant Secretary of the Air Force (Acquisition) Air Force Systems/Air Force Logistics Commands (now the Air Force Material Command) Air Force Program Executive Organization Strategic Defense Initiative Organization (now the Ballistic Missile Defense Organization) Defense Logistics Agency Special Operations Command (now the Special Operations Command Acquisition Center) Best Practices: Elements Critical to Successfully Reducing Unneeded RDT&E Infrastructure (GAO/NSIAD/RCED-98-23, Jan. 8, 1998). Defense Acquisition Organizations: Reductions in Civilian and Military Workforce (GAO/NSIAD-98-36R, Oct. 23, 1997). Defense Acquisition Organizations: Changes in Cost and Size of Civilian Workforce (GAO/NSIAD-96-46, Nov. 13, 1995). Defense Acquisition Infrastructure: Changes in RDT&E Laboratories and Centers (GAO/NSIAD-96-221BR, Sept. 13, 1996). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) acquisition workforce reductions, focusing on: (1) DOD's progress in reducing its workforce in acquisition organizations by 25 percent; (2) the potential savings associated with these personnel reductions; (3) the status of DOD efforts to redefine its acquisition workforce; and (4) DOD's efforts to consolidate and restructure acquisition organizations. GAO noted that: (1) DOD has been reducing its acquisition workforce at a faster rate than its overall workforce and is on schedule to accomplish a 25-percent reduction by the end of fiscal year 2000; (2) however, potential savings from these reductions cannot be precisely tracked in DOD's budget; (3) in addition, some of the potential savings from acquisition workforce reductions may be offset by other anticipated costs; (4) such costs include those for contracting with private entities for some services previously performed by government personnel; (5) DOD developed a new definition for the acquisition workforce and is using it to identify individuals who perform acquisition functions throughout the Department; (6) DOD is also exploring a process by which it can, for the first time, link management of the acquisition workforce to DOD's overall manpower and budget processes; (7) although far from assured, success in this arena could allow better planning and budgeting for workforce training and tracking changes in the workforce; (8) GAO recently reported that DOD's efforts to streamline and consolidate the research, development, test, and evaluation segment of its acquisition organizations have not resulted in significant infrastructure reductions; and (9) GAO's further analysis of the results of one Air Force effort confirmed GAO's earlier conclusions that such initiatives have been unable to overcome numerous obstacles, which often impede them.
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The Secretary of HHS has issued regulations that form the “Federal Policy for the Protection of Human Subjects.” This policy is often referred to as the “Common Rule” because 17 other federal agencies that conduct, support, or regulate human subjects testing now follow some form of the policy. The Common Rule lays out the basic policies that should govern any research involving human subjects that is approved, funded, or conducted by the agencies that follow the Common Rule, as well as by all entities that need these agencies’ approval of their human subjects research. Much of the Common Rule focuses on the role of IRBs in the testing process, as IRBs are the primary oversight mechanism for human testing. For example, the policy specifies that there must be at least five members of an IRB, with varying backgrounds, who are sufficiently qualified through experience, expertise, and diversity. The IRB must include members who have the professional competence to review the specific research activities being considered, as well as members with an understanding of a testing entity’s internal protocols, the applicable law, and standards of professional conduct. Furthermore, among other requirements, the IRB should have members of mixed gender and mixed professions; should include at least one member with a scientific background and one with a nonscientific background; and should not have any members with a conflict of interest with the project being reviewed. The IRB review process is intended to assure, both in advance and by periodic review, that appropriate steps are taken to protect the rights and welfare of humans participating as subjects in the research. IRBs have the authority to approve, require modifications in, or disapprove proposed research. Figure 1 below provides a simplified illustration of the IRB approval process for human subjects research protocols. By law, clinical trials of experimental medical devices and drugs involving human subjects cannot begin until an IRB has approved the research protocol and any changes requested by the IRB have been made. To approve a research proposal, IRBs must determine that the following requirements are satisfied: risks to research participants are minimized; risks to research participants are reasonable in relation to any anticipated benefits, and to the importance of the knowledge that the research might produce; informed consent will be sought from each prospective study participant or the participant’s authorized representative; and there are adequate provisions in place to protect research participants’ privacy and to maintain the confidentiality of research data. When seeking to obtain research participants’ informed consent to participate in a study, researchers must make sure they offer the potential participants sufficient opportunity to consider whether or not to participate without undue influence or possibility of coercion. In addition, consent forms must contain language that is easily understood, and cannot contain any language that causes or appears to cause the participants to waive their legal rights, or that minimizes or appears to minimize the liability for negligence of the researcher and the sponsors of the research. In addition to reviewing proposed research protocols, IRBs are responsible for conducting continuing review of research at least once a year, or more frequently if the research represents a higher degree of risk to the human research subjects. IRBs also play a central role in the process by which entities apply for federal funding for human subjects research. An entity must have an approved assurance in order to receive federal funding for research involving human subjects testing from HHS and other federal agencies. An assurance is basically a declaration submitted by an entity engaged in human subjects research that it will comply with the requirements for the protection of human subjects under 45 C.F.R. Part 46. HHS has jurisdiction over human subjects research that is supported through federal funding, and approves assurances for federalwide use. As such, other federal agencies that have adopted the Common Rule may rely on an assurance from HHS for any human subjects research they sponsor. To obtain an assurance, HHS requires an entity to declare to HHS that its activities related to human subjects are guided by ethical principles and federal regulations—the Common Rule—and to designate one or more IRBs to review the research covered by the assurance. In order for the application for assurance to be approved by HHS, all IRBs listed on the application are required to be registered with HHS. IRB registration involves providing HHS with basic information about the IRB, such as the name and contact information for the organization operating the IRB and for its head official, and the names and qualifications of its board members. In evaluating an application to determine whether or not to approve an assurance, HHS is required to consider, among other things, the adequacy of the proposed IRB in relation to the research activities of the entity that submitted the assurance. We succeeded in getting a real company to send a research protocol and related materials to our bogus IRB for its review. As mentioned above, we created a Web site for our bogus IRB that resembled those of actual IRBs, and then advertised the services of our bogus IRB online and in newspapers to attempt to persuade legitimate medical researchers to send protocols to us. In our advertisements, we stated that we were “HHS approved,” in reference to our bogus IRB’s registration with HHS. We also sought to make our IRB look as attractive as possible by emphasizing the speed of our review process (“Fast Approval!”) and flexibility to customer needs. The company that sent materials to us was seeking our bogus IRB’s approval to add one of the company’s clinics as a new test site for ongoing human trials involving invasive surgery. Our bogus IRB could have authorized human subjects testing to begin at this new test site—even though it was a fictitious IRB, with no medical research expertise whatsoever. Moreover, because this transaction involved a company conducting private (i.e., not federally funded) research, and did not involve any FDA-regulated products, our bogus IRB could have approved the research to begin without needing to register with any federal agency. We also received inquiries from five other real companies, which expressed interest in our bogus IRB’s services. However, none of these five companies submitted any materials for us to review. All IRBs that review federally funded human subjects research are required to be registered with HHS. After we registered our bogus IRB with HHS, HHS provided us with a registration number and listed our bogus IRB in its online directory of registered IRBs that review federally funded research. Our only communication with HHS as part of registering our IRB was through an online registration form, with no human interaction. The IRB registration process is meant to collect data that HHS uses during the subsequent assurance approval process. As such, HHS is not required to verify the information it receives during the IRB registration process. However, our investigation of the assurance process, as described below, shows the importance of IRB registration data as they relate to HHS’s evaluation of assurance applications. Moreover, if our bogus IRB had been an actual IRB that did not intend to review federally funded human subjects research, it would not have been required to submit any registration information. IRBs that intend to review privately funded human subjects research are not currently required to register with HHS or any other federal agency, although recently implemented regulations will change this as of July 2009. We found that the process for obtaining HHS approval for an assurance lacks effective controls. As mentioned above, we formed a fictitious medical device company with phony company officials and a mailbox for its business location—where human subjects research would supposedly be conducted. We then submitted an application to HHS for its approval of an assurance on behalf of our fictitious medical device company. As part of the application, we named our bogus IRB as the IRB responsible for reviewing the research covered by the assurance. HHS approved our assurance application, provided us with an assurance approval number, and listed our bogus medical device company in its online directory of approved assurances. Our only communication with HHS as part of this application was through an online application form and a faxed signature to complete the application. We did not have any real-time contact with HHS, whether by telephone, in person, or through a site visit. We do not know what verification HHS performed, if any, in its review of our assurance application. However, if HHS had performed basic screening of the assurance application, HHS would have found discrepancies that would have warranted further investigation, such as the fact that we used only a mailbox as our business location. As mentioned above, in evaluating an application to determine whether or not to approve an assurance, HHS is required to consider the adequacy of any IRB designated on the application, as the IRB will be responsible for overseeing the research activities of the entity that submitted the assurance application. By approving our assurance application, HHS essentially deemed our bogus IRB as adequate to oversee human subjects research, as conducted by our fictitious medical device company. Moreover, by obtaining an approved assurance from HHS, our fictitious medical device company can apply for federal research funding from HHS or other federal agencies. In addition, we used the assurance approval to boost the credibility of our fictitious medical device company by posting our assurance number on the fictitious medical device company’s Web site. The IRB that approved our fictitious medical device protocol, as discussed below, is listed on HHS’s Web site as being involved in more than 70 assurances on behalf of actual medical researchers. Each of these assurances is a first step for the medical researcher to apply for federal funding for human subjects research, with this IRB formally designated to oversee the research. We were able to get an actual IRB to approve a fictitious protocol for human subjects research, which raises concerns that other IRBs may conduct protocol reviews without exercising due diligence, thereby exposing research volunteers to significant risk. For this test, we created a research protocol for a fictitious medical device with no proven test history and bogus specifications, and sent the protocol to three actual, independent IRBs under the guise of the medical device company we created for obtaining an assurance from HHS in our second test, as mentioned above. Our protocol offered only vague information about certain aspects of our proposed study and was designed using information publicly available on the Internet. As mentioned above, our fictitious device was a post-surgical healing device for women that matched multiple examples of “significant risk” devices provided in FDA guidance. In addition, we fabricated additional documents we needed to submit along with our protocol, such as a CV detailing the educational and professional experience of a fictitious researcher at our company, and a bogus medical license for the researcher. We succeeded in getting our fictitious protocol approved by an IRB, even though we were a bogus company with falsified credentials and an unproven medical device. If we had been a real medical device company, we could have begun testing our “significant risk” experimental device on actual human subjects. We also could have used our bogus IRB mentioned above to approve our fictitious protocol. This shows the potential for unethical manipulation in the IRB system. The IRB that approved our bogus research protocol (IRB 1) required only minor edits to our submission materials, and did not verify that the information contained in our protocol and related materials was correct or authentic, or even that our medical device company actually existed. For example, we provided IRB 1 with bogus information that FDA had already cleared our device for marketing because our device was found to be substantially equivalent to an existing, legally marketed device. IRB 1 did not attempt to verify this information even though a quick check of FDA’s online database would have shown no evidence that FDA had ever cleared our device. By taking advantage of this lapse, our investigators—who lacked technical expertise in this subject—bypassed any requirement to develop a risk assessment for a device that, under normal circumstances, would be considered “significant risk” according to FDA guidance. Meeting minutes from IRB 1’s board meeting show that it accepted the bogus information about FDA clearance of our device as evidence that our device did not require any further risk assessment. See figure 2 below. IRB 1 “conditionally approved” our protocol after a full board review, but requested that we modify our informed consent form for study participation in order to make the language understandable at a fifth-grade reading level. We modified our informed consent form as requested by using medical information found on the Internet, after which the board members of IRB 1 voted unanimously to approve our fictitious medical device protocol (see fig. 2 above). IRB 1 approved our fictitious protocol, thereby authorizing us to begin human testing, after only contacting us by e-mail or fax, and never by telephone or in person. IRB 1’s board meeting minutes indicate that it believed our device was “probably very safe,” as shown in figure 2 above. Although our protocol mentioned fictitious animal studies that we conducted on our device to ensure its safety, IRB 1 approved our protocol without ever seeing proof of these studies or any other evidence that our device was reasonably safe for use in human subjects. On its Web site, IRB 1 advertises the speed of its reviews and states that it performs a “triple check” for quality. IRB 1 has approved research protocols for experimental drugs tested by major pharmaceutical companies. The remaining two IRBs (IRB 2 and IRB 3) provided feedback on our protocol that was so extensive we determined we did not have the technical expertise or resources to gain approval. The extensive nature of the feedback IRB 2 and IRB 3 provided on our initial submission materials indicated that they follow a much more thorough review process than IRB 1, which approved our protocol. For example, IRB 2 noticed that our fictitious protocol mentioned previous testing of the device performed on animals, and requested that we provide a copy of the results from the fictitious animal testing. In addition, IRB 3 requested that we send it a copy of the diagram that our bogus researcher would use to record incision lines he made as part of the surgery involved in our study, and raised a number of questions about the timing and locations involved in our fictitious testing. The documents and information that IRB 2 and IRB 3 requested would have taken extensive time and research to fabricate, and demanded a level of technical expertise that we did not possess. IRB 1 approved our protocol without obtaining any of the additional information requested by IRB 2 and IRB 3. Our contacts with IRB 2 and IRB 3, during their review of our protocol, were done entirely by e-mail. We later interviewed representatives from IRB 2 and IRB 3 to obtain additional details about why they did not approve our protocol. Representatives from both IRBs expressed concern that our protocol did not contain adequate information about the safety of our fictitious medical device. For example, the manager of IRB 2 said that she worried that our device could cause infection in patients, or possibly even cause patients to develop sepsis. In addition, a board member from IRB 3, who claimed to have 15 years of experience reviewing research protocols with this IRB, stated that our protocol lacked any evidence that our bogus medical device was actually safe for implantation into a human body. He also said that IRB 3’s board voted unanimously to reject our bogus protocol. Figure 3, below, shows additional examples of IRB 2’s and IRB 3’s comments on our fictitious medical device and protocol. None of the three IRBs questioned us about the authenticity of our bogus CV and counterfeit medical license. As mentioned above, we fabricated these documents by using information found online and with commercially available hardware, software, and materials. Our bogus CV contained information on our fictitious researcher’s human subjects research background, which we created by using phony drug and device names and with information that we accessed on the Internet. Our counterfeit medical license contained a bogus license number with a similar format to real license numbers used by the state we claimed our license was from. We briefed HHS officials on the results of our investigation. They stated that HHS receives around 300 IRB registrations and 300 assurance applications every month, and that OHRP currently has three employees who review all registrations and applications. According to HHS officials, the department does not review IRB registrations or assurance applications to assess whether the information submitted is factual. HHS officials said that the department reviews assurance applications to ensure that applicants have submitted all of the necessary information and meet minimum standards. Moreover, although HHS is required by law to consider the adequacy of IRBs listed on assurance applications when reviewing applications, the director of OHRP stated that his office would require more staff to do so. However, HHS officials added that they would not consider additional evaluation of IRB registrations or assurance applications to be worthwhile even if the office had increased resources. HHS officials stated that the assurance process is not a meaningful protection against unethical manipulation. They stated their belief that anyone submitting false or misleading information as part of the assurance application process would likely be detected during the subsequent process of applying for federal funding for human subjects research. However, our work shows that an unethical company could leverage an HHS assurance for purposes unrelated to the federal funding application process. For example, representatives from one of the IRBs that rejected our protocol stated that the HHS assurance number listed on our bogus medical device company’s Web site gave our company credibility because it meant that HHS had recognized our company. When we discussed this with HHS, the director of OHRP acknowledged that an HHS-approved assurance is meaningful in this regard. Mr. Chairman, this concludes our 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 Gregory D. Kutz at (202) 512-6722 or [email protected]. Contacts points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. GAO staff who made major contributions to this testimony include Matthew D. Harris, Assistant Director; Matthew Valenta, Assistant Director; Timothy Persons, Chief Scientist; Christopher W. Backley; Ryan Geach; Ken Hill; Jason Kelly; Barbara Lewis; Andrew McIntosh; Sandra Moore; James Murphy; and Seong B. Park. 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.
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Millions of Americans enroll in clinical studies of experimental drugs and medical devices each year. Many of these studies are meant to demonstrate that products are safe and effective. The Department of Health and Human Services' (HHS) Office for Human Research Protections (OHRP) and the Food and Drug Administration (FDA) are responsible for overseeing aspects of a system of independent institutional review boards (IRB). IRBs review and monitor human subjects research, with the intended purpose of protecting the rights and welfare of the research subjects. GAO investigated three key aspects of the IRB system: (1) the process for establishing an IRB, (2) the process through which researchers wishing to apply for federal funding assure HHS their human subjects research activities follow ethical principles and federal regulations, and (3) the process that medical research companies follow to get approval for conducting research on human subjects. GAO investigated these three aspects of the IRB system by creating two fictitious companies (one IRB and one medical device company), phony company officials, counterfeit documents, and a fictitious medical device. The IRB system is vulnerable to unethical manipulation, which elevates the risk that experimental products are approved for human subject tests without full and appropriate review. GAO investigators created fictitious companies, used counterfeit documents, and invented a fictitious medical device to investigate three key aspects of the IRB system. These are the results: Establishing an IRB. GAO created a Web site for a bogus IRB and advertised the bogus IRB's services in newspapers and online. A real medical research company contacted the bogus IRB to get approval to join ongoing human trials involving invasive surgery--even though GAO's investigators had no medical expertise whatsoever. Since the transaction involved privately funded human subjects research and did not involve any FDA-regulated drugs or devices, GAO's bogus IRB could have authorized this testing to begin without needing to register with any federal agency. Obtaining an HHS-approved assurance. GAO also registered its bogus IRB with HHS, and used this registration to apply for an HHS-approved assurance for GAO's fictitious medical device company. An assurance is a statement by researchers to HHS that their human subjects research will follow ethical principles and federal regulations, which is required before researchers can receive federal funding for the research. On its assurance application, GAO designated its bogus IRB as the IRB that would review the research covered by the assurance. Even though the entire process was done online or by fax--without any human interaction--HHS approved the assurance for GAO's fictitious device company. With an HHS-approved assurance, GAO's device company could have applied for federal funding for human subjects research. Obtaining IRB approval for human testing. GAO succeeded in getting approval from an actual IRB to test a fictitious medical device on human subjects. GAO's fictitious device had fake specifications and matched several examples of "significant risk" devices from FDA guidance. The IRB did not verify the information submitted by GAO, which included false information that FDA had already cleared GAO's device for marketing. Although records from this IRB indicated that it believed GAO's bogus device was "probably very safe," two other IRBs that rejected GAO's protocol cited safety concerns with GAO's device. No human interaction with these IRBs was necessary as the entire process was done through e-mail or fax. GAO's bogus IRB mentioned above also could have approved the fictitious protocol, which shows the potential for unethical manipulation in the IRB system. GAO briefed HHS officials on the results of its investigation. The director of OHRP stated that, when reviewing assurance applications, HHS does not consider whether IRBs listed on the applications are adequate--even though HHS is required to do so by law. In addition, HHS officials stated that the department does not review assurance applications to determine whether the information submitted by applicants is factual.
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Changes in the structure of the financial regulatory and supervisory system in France reflect the evolution of the post-war French financial system. As distinctions among different classes of financial institutions began to fade, the regulatory structure was altered to provide more even-handed treatment for all institutions involved in banking activities. Other post-war developments in the French financial system included two rounds of nationalizations and privatizations of French banks and a liberalization of credit and exchange controls. France has a universal banking system in which banks may conduct deposit, lending, discount, securities, safe custody, insurance and real estate activities either directly or through subsidiaries. Indeed, French banks are the leading players in the French securities industry. While banks may not underwrite insurance directly, they may do so in subsidiaries and may sell insurance products in the bank. All of the major universal banks own insurance subsidiaries that together constituted approximately 50 percent of the life insurance market in 1994. Banks may also invest in nonbanking, commercial companies, but no single equity participation may exceed 15 percent of the bank’s net capital, and total equity participations in commercial enterprises may not exceed 60 percent of the bank’s net capital. As of December 31, 1993, there were 1,674 credit institutions conducting banking operations in France and Monaco holding approximately Fr.fr. 16 trillion ($2.7 trillion) in assets. The number of credit institutions is high relative to many other developed countries, partly because the definition of banking and credit institutions in French banking law is quite broad.Credit institutions in France are divided into six categories: banks, mutual or cooperative banks, savings banks, municipal credit banks, finance companies (including security houses), and specialized financial institutions (see table 1.1). Banks are the largest category of credit institutions in France and may conduct any of the universal banking and financial transactions permitted under banking law. On December 31, 1993, as shown in table 1.1, the banking sector held almost 47 percent of the total deposits of French credit institutions, slightly over 50 percent of total loans, and almost 60 percent of credit institution assets—Fr.fr. 9.6 trillion. The number of banks in France has remained relatively stable in the last half century—around 400 since 1950—with a few large banks accounting for the majority of loans and deposits. As of December 31, 1993, there were 409 authorized banks in France and 16 banks with their head offices in Monaco. The five largest banks held over 63 percent of total bank-only deposits and close to 60 percent of total bank-only loans. Ninety-nine of the 425 banks were foreign-owned subsidiaries—of which 3 were in Monaco—and 90 were foreign-owned branches—of which 6 were in Monaco. Eighty-three of the foreign banks in France—45 subsidiaries and 38 branches—were headquartered in other European Union (EU) member countries. Mutual and cooperative banks are distinguished from banks primarily by their ownership; they are owned by their members (depositors). They were established to provide credit to their members who belonged to certain categories of businesses or individuals—farmers, for example. Mutual and cooperative banks may now conduct all the operations and transactions that banks may, and the largest among them—Crédit Agricole, which is the largest credit institution in France—are difficult to distinguish from banks. As of December 31, 1993, there were 146 mutual or cooperative banks with approximately Fr.fr. 2.6 trillion in assets. Savings banks and municipal credit banks, with few exceptions, are locally owned, nonprofit institutions. Until various reforms were implemented in 1983 and 1984, the powers of savings banks were restricted to offering passbook savings accounts to depositors and investing their funds in the central savings bank—the Centre National des Caisses d’Epargne et de Prévoyance. Today they are able to offer more products and services, including mutual funds and checking accounts; may invest in a wider variety of activities, including cable television, tourism, education, health, and regional planning; and may lend to corporations. The savings banks—which held about Fr.fr. 930 million in assets in 1993—purposefully consolidated their numbers from 468 in 1984 to 35, as of December 31, 1993, in order to allow savings banks to benefit from certain economies of scale. The bulk of the business of municipal credit banks, of which there were 21 with Fr.fr. 15 million in assets as of year-end 1993, consists of loans granted to the general public. Finance companies are restricted to certain types of operations, such as leasing, or specialize in the financing of a specific industry or specific customers and may not receive deposits of less than 2 years in maturity. On December 31, 1993, there were 857 finance companies providing 7.5 percent of the total credit provided by the French banking system and holding Fr.fr. 1.6 trillion in assets. Securities houses, which specialize in the investment and management of transferable securities and negotiable instruments, are included in the finance company category. On December 31, 1993, one-third of the 156 securities houses in France were subsidiaries of foreign finance institutions such as U.S. investment banks. The 32 specialized financial institutions in France were set up by the government to perform certain public interest tasks, such as financing low- and moderate-income housing, providing long-term credit for acquiring industrial equipment, or making financing available to local authorities. These institutions hold over Fr.fr. 1.3 trillion in assets and provide over 15 percent of total credit but collect less than 1 percent of total deposits. The current French bank regulatory and supervisory structure was created through legislation in July 1984 and consists of three regulatory committees on which the Ministry of Economic Affairs and the Bank of France (France’s central bank) are the most prominent members. Under this structure, all financial institutions that conduct banking activities are subject to common prudential requirements, regulation, and supervision. In addition to experiencing changes in the bank regulatory structure, French banks also were subject to other major changes including two waves of nationalizations in 1945 and 1982. Before 1984 the regulation of financial institutions was quite fragmented. From 1941 to 1945, banks were regulated and supervised by two committees: the Standing Committee of Banks, consisting of six bankers and a government representative charged with enacting regulation and taking supervisory measures concerning individual institutions, and the Bank Control Commission, which was responsible for enforcing bank regulations. A banking act passed in 1945 replaced the Standing Committee with the Conseil National de Crédit—National Credit Council (CNC)—with the regulatory responsibilities remaining the same. The Minister of Economics, Finance and Budget chaired CNC, but CNC was staffed by the Bank of France. Other categories of financial institutions, such as finance companies, savings banks, or mutual and cooperative banks, were regulated and supervised separately according to special law—in most cases either directly or indirectly by the Treasury Department (Treasury). According to French officials, Treasury is the most influential Department of the Ministry of Economic Affairs, then known as the Ministry of Economics, Finance and Budget. According to Commission Bancaire (CB), the Banking Commission, officials, by 1984 banks were widely considered to be at a competitive disadvantage compared to other financial institutions as a result of the split in regulatory responsibilities. While prudential regulations for banks had evolved with changes in financial markets, laws and regulations governing institutions such as mutual banks or savings banks remained less stringent. At the same time, these other institutions were expanding their activities, thereby becoming direct and strong competitors of the banks. The French Banking Act of 1984 (1984 Act) was intended to settle these regulatory inequities by placing all financial institutions deemed to conduct broadly defined banking activities under the same legal framework. In addition, it aimed to resolve the sometimes overlapping responsibilities of CNC and the Bank Control Commission by separating bank regulation and supervision into three distinct areas—authorization, regulation, and supervision—and giving jurisdiction over each of these areas to three separate committees. Thus three new committees were created: (1) the Comité des Établissements de Crédit, the Credit Institutions Committee (CEC), was given authority over authorization; (2) the Comité de la Réglementation Bancaire, the Bank Regulatory Committee (CRB), received jurisdiction over most regulatory issues; and (3) CB was made responsible for bank supervision, replacing the Bank Control Commission. The CNC was not eliminated but its authority was reduced to a purely advisory one. The act also strengthened some supervisory weaknesses of the old Bank Control Commission by giving CB broader powers and a wider scope of authority. First, CB was given authority for supervision of all credit institutions. Second, its powers were broadened by mandating that it scrutinize credit institutions’ operations and monitor their financial standing as well as supervise their compliance with regulations. Finally, it was given the authority to inspect (1) bank subsidiaries, (2) the legal bodies directly owning or controlling the bank and their subsidiaries, and (3) overseas branches and subsidiaries of French banks. This increased authority allowed CB to find and address perceived problems in credit institutions as a whole. French credit institutions are regulated and supervised almost exclusively to ensure the safety and soundness of individual banks and of the system as a whole. For example, French banking law does not directly address such issues as fair lending practices or community reinvestment requirements. The French banking industry experienced some major changes in the post-war era including two waves of nationalizations in which the ownership of most banks was transferred to the French government. The first period of nationalization occurred shortly after the end of the Second World War in 1945. It was intended to prop up the ailing banking industry and to give the French government the power to direct credit to the industries that needed it in order to revive the post-war economy. At the same time, the Bank of France, which had been established in 1800 as a private bank at the instigation of Napoleon Bonaparte and, beginning in 1803, was granted the right to issue banknotes, was also nationalized. The Nationalization Act of 1945 transferred the Bank of France’s capital to the State effective on January 1, 1946, and reimbursed the Bank’s previous shareholders with 20-year bonds. With the exception of the Bank of France, the banks nationalized in 1945 were gradually privatized by the end of the 1970s under conservative French governments. The second wave of nationalizations occurred in 1982 through 1983 after the election of a Socialist president and a Socialist Assemblée Nationale, National Assembly, in 1981. This return of bank ownership to the government was justified by the ruling party as a part of its political program to promote the financing of small- and medium-sized businesses and a stronger industrial policy. These nationalizations were followed by a privatization program implemented by a Conservative government in 1986, which stalled for several years after the election of another Socialist government in 1988. In recent years, however, the election of a Conservative National Assembly has once more prompted a series of privatizations, and the vast majority of French banks are now in private hands. To date, Crédit Lyonnais, the country’s largest bank, remains the only large nationalized bank, although there are also a handful of smaller nationalized banks. There are plans that these remaining nationalized banks be privatized within the next five years since both the Socialist and Conservative parties now agree that having nationalized banks conflicts with the premise of a free market that is one of the cornerstones of the EU. For example, Crédit Lyonnais—which lost Fr.fr. 6.9 billion in 1993, principally as a result of poor commercial and real estate investments—benefited from a Fr.fr. 4.9 billion bailout in July 1994, raising questions about the role the government plays as the owner of the largest French bank and the effect that has on competition in the French banking industry. The 1980s also brought an extensive liberalization of restrictions on some banking and securities activities. Credit restrictions—credit ceilings and interest rate controls—were completely removed by 1987. Foreign exchange controls were eliminated in 1989. Deposit interest rates have been decontrolled, although paying interest on demand deposits held by residents is prohibited by French law to allow banks to maintain free checking services. Securities commissions and fees were also deregulated and new markets, such as the Marché à Terme International de France (MATIF)—the French financial futures market—and the short- and medium-term notes markets, have been organized. Overlaying these events has been the development of a unified financial services market in the EU, which has also affected French bank regulation and supervision. Central to the liberalization of financial services under the EU’s Single Market Program is the concept of a “single passport,” a concept which the French have been influential in helping to develop. Once a financial firm is established and licensed in one EU member country—its home country—that firm can use a single passport to offer financial services in any other EU member state—its host country. Underlying the single market program is an understanding that a minimum level of harmonization in regulation is necessary among the member countries to ensure the safety and soundness of the financial system. For instance, the EU Second Banking Directive requires all EU banks to have a minimum capital base and a minimum level of shareholder disclosure and limits equity participation in nonfinancial firms. Consequently, EU member countries have had to change their banking laws and regulations as necessary to meet the minimum requirements imposed by EU financial services directives. To date, EU directives have not resulted in major changes to the structure of bank regulation and supervision in France. The recent independence of the Bank of France is, however, a result of an EU mandate in the Treaty on European Union that all EU member countries have independent central banks. As a result of this mandate, the purpose and structure of the Bank of France were redefined in the 1993 Act on the Status of the Banque de France and the Activities and Supervision of Credit Institutions (the 1993 Act). This act made the Bank of France independent of the Ministry of Economic Affairs in formulating and implementing monetary policy. As a result, the Bank of France “shall neither seek nor accept instructions from the Government or any other person in the performance of its duties” with respect to monetary policy. Before the passage of the 1993 Act, the government determined monetary policy, which the Bank of France was in charge of implementing. Securities activities may be conducted within the banks or other credit institutions or in separate subsidiaries. CB is responsible for the supervision of these activities when securities activities are conducted within the bank or in separate maison de titres subsidiaries, of which there were 26 on December 31, 1994. When securities activities are conducted in société de bourses subsidiaries, of which there were 54 at year-end 1994, these are supervised by the Conseil des Bourses de Valeurs, the regulator of the French stock exchange, and the Société des Bourses Françaises (SBF), which runs the day-to-day operation of the stock market. In either case, CB is responsible for the supervision of the parent bank and the consolidated entity. Under banking law, it may also inspect all of the subsidiaries of a bank, even when these are supervised by another supervisory authority. In practice, however, it relies on information provided by the supervising authority rather than on the imposition of its jurisdiction. All insurance activities are supervised by the Commission de Contrôle des Assurances, the Insurance Control Commission (CCA), which is headed by the Ministry of Economic Affairs. If an insurance company is a subsidiary of a bank, then CB is responsible for the consolidated entity, but CCA supervises the insurance subsidiary. If an insurance company owns a bank, then CCA supervises the consolidated entity, but CB supervises the bank subsidiary. According to CB officials, coordination and cooperation between supervisory authorities have grown steadily stronger in recent years in response to the development of financial conglomerates and the increasingly global nature of financial activities. In 1992, for example, secrecy restrictions were lifted between CB and CCA. As a result, periodic meetings now take place between CB and CCA to (1) discuss the situation of individual institutions or financial groups of concern to both authorities, (2) exchange views on problems of common general interest, such as the supervision of financial conglomerates and the transposition of EU directives, and (3) promote mutual understanding of risk evaluation methods and supervisory techniques. In addition, the regulators of all financial institutions and markets meet as a group three or four times a year at the Treasury, according to Treasury, CB, and Bank of France officials, to exchange information on the institutions for which they are primarily responsible and on financial markets in general. This informal group, called the Comité de Liaison des Autorités Monétaires et Financières (CLAMEF), includes the heads of its member organizations. In addition, a group called mini-CLAMEF, consisting of lower rank individuals from each of the member groups, meets every month to discuss financial market issues of concern and interest. Regulation, supervision, and examination of banks in France is shared among several regulatory participants, some more influential than others. These include CNC; the three regulatory committees that have responsibilities over authorizing, regulating, and supervising credit institutions; the Bank of France; and the Ministry of Economic Affairs. Although CNC was initially created in 1945, its structure and purpose were changed in the 1984 Act, and its function is now purely advisory. It is primarily a forum for studies on issues relevant to credit institutions and the economy. The Minister of Economic Affairs is CNC’s Chairman, and the Governor of the Bank of France is its Deputy Chairman. In addition to these two individuals, CNC has 51 members appointed by the Minister of Economic Affairs. These members are to be drawn from the government, Parliament, credit institutions, professional and consumers’ organizations, and trade unions, and include other professionals chosen for their competence in banking and financial matters. CEC, an independent regulatory committee, authorizes individual credit institutions to conduct banking activities as defined in the 1984 Act. CEC’s membership consists of the Governor of the Bank of France, who acts as its Chairman; the Director of the Treasury; and four other members chosen from CNC membership and appointed by the Minister of Economic Affairs for 3-year terms. These four members include a representative of the Association Française des Établissements de Crédit (AFEC), the French Association of Credit Institutions; a representative of the trade unions for credit institution employees; and two prominent individuals chosen for their knowledge of financial issues. Decisions of CEC are made by majority vote, with the Chairman having the deciding vote in case of a tie. In addition to CEC members, the association representing the credit institution about which a decision is being made is represented during the meeting and has a vote in any decision affecting that institution. The Director of the Treasury may request a postponement of any decision of CEC. The Secretariat of CEC is staffed by approximately 60 staff who work in the credit institutions directorate of the Bank of France. CRB, which is an independent committee, is responsible for developing regulations applicable to all credit institutions. CRB has six members including the Minister of Economic Affairs, who is its Chairman; the Governor of the Bank of France; and four other members chosen from CNC membership, who are appointed by the Minister of Economic Affairs for 3-year terms. Similar to CEC, these members are to include representatives of AFEC and the trade unions, and two prominent individuals chosen for their knowledge of financial issues. Decisions of CRB are made by majority vote, with the Chairman having the deciding vote in case of a tie. A two-person Secretariat of CRB is provided by the Bank of France. According to Bank of France and CB officials, the Secretariat works closely with the Banking Division of the Treasury, whose Director is president of the committee. The Bank of France also provides staff from its Credit Institutions Directorate and from the General Secretariat of CB to assist CRB when necessary. CB is a six-member independent committee, which has the responsibility for supervising credit institutions in France. It is chaired by the Governor of the Bank of France and its membership includes the Director of the Treasury, who acts as its chairman, and four other members appointed by the Minister of Economic Affairs for 6-year terms. These four members are two senior judges and two members chosen for their expertise in banking and financial matters. In case of a tie vote, the Chairman has the deciding vote. The Bank of France currently provides the staff and resources for the General Secretariat of CB. An amendment to the 1984 Act also gives the General Secretariat the authority to hire staff outside the Bank of France, although this provision has not yet been used. The General Secretariat of CB is divided into two divisions (1) micro supervision, responsible for permanent oversight of individual banks—but not including examination—and (2) macro supervision, responsible for legal affairs, international affairs, European affairs, banking analysis, accounting and reporting, and information technology. These divisions share approximately 230 staff who are located in Paris. In addition, CB is assisted by 95 Bank of France inspection staff who conduct credit institution inspections for CB. The Bank of France is managed by a Governor, who is assisted by two Deputy Governors. All three are appointed by a decree of the French Cabinet for irrevocable 6-year terms, which may be renewed once. The Bank’s responsibilities include (1) issuing legal tender, (2) determining and implementing monetary policy, (3) regulating the relationship between the French franc and foreign currencies, (4) ensuring the proper functioning of the banking and payments systems, (5) keeping treasury accounts and managing treasury bills and similar obligations, and (6) monitoring the state of the economy and the health of business enterprises. In August 1993, in the Bank of France Act of 1993, the Bank of France was given complete independence in determining and implementing monetary policy; and the terms of the Governor, Deputy Governors, and the members of the Monetary Policy Council were made irrevocable. The Bank of France is required, though, to carry out its duties “within the framework of the government’s overall economic policy” without this requirement affecting its independence. In practice, the government can communicate its point of view to the Monetary Policy Council through the Prime Minister or the Minister of Economic Affairs, as both are entitled to attend the Monetary Policy Council meetings but do not have voting privileges. This facilitates direct dialogue between the government and the monetary authority. The Bank of France has two governing bodies—the Monetary Policy Council and the General Council. The Monetary Policy Council was created by the 1993 Bank of France Act to formulate monetary policy, which is then implemented by the Governor. The Council has nine members: the Governor, who chairs the Council and who has the deciding vote in case of ties; the two Deputy Governors; and six other members. These members are appointed by a decree of the Cabinet from a list drawn up by mutual consent or, failing that, in equal parts by the President of the Senate, the President of the National Assembly, and the President of the Economic and Social Council. The six appointed members have 9-year, nonrenewable, irrevocable terms. The General Council is responsible for administering the Bank of France and meets approximately every 2 weeks. It is headed by the Governor and comprises the members of the Monetary Policy Council and a representative of the Bank of France staff. The General Council prepares the Bank’s estimated expenditures, draws up its annual accounts, and proposes the distribution of profits and the amount of the Bank’s dividend to be paid to the government. A Censor, appointed by the Minister of Economic Affairs, is to attend the meetings of the General Council and may submit proposals for the consideration of the Council and may also oppose decisions of the Council. Among other things, the presence of the Censor allows the government to follow the Bank’s budgetary process. In practice, the General Council exercises little independent authority vis-a-vis the Governor, according to Bank of France officials with whom we spoke. As noted above, the Bank of France was nationalized in 1946, and its stock is held by the Treasury. It is required to pay annual dividends to the Treasury, but these dividends vary from year to year, depending on the Bank’s profits, and are not based on any specific formula. The Bank of France performs its tasks through 9 directorates general and its network of 211 branches. It had 15,065 “banking” staff as of December 31, 1993, plus 1,997 staff employed in its bank note printing department. Fifty-seven percent of its banking staff were employed in the Bank’s branches. These branches are used for various activities including note and coin circulation, studying and reporting on the local economy, and meetings to solve over-indebtedness problems of individuals. The Ministry of Economic Affairs is considered to be the most powerful government ministry, according to French officials with whom we spoke. It is headed by the Minister of Economic Affairs, a political appointee, who is part of the government’s cabinet. The Ministry has three main functions: to (1) promote economic growth in France and formulate market regulations; (2) observe the state of the French economy and forecast its evolution; and (3) manage public finances. Within the Ministry, the Trésor, the Treasury, is the most important department. It is headed by the Director of the Treasury, who is a civil servant, not a political appointee. Within the Treasury, the Division of Banking Regulation and National Banks is responsible for fulfilling the Ministry’s responsibilities with respect to bank regulation and supervision. Because the Banking Division has a relatively small staff of 12, it relies on other agencies to gather the data that it needs to conduct its work. At the request of Congressman Charles E. Schumer, we examined various aspects of the French bank regulatory and supervisory system. Specifically, our objectives were to describe (1) the French bank regulatory and supervisory structure and its key participants; (2) how that structure functions, particularly with respect to bank authorization, regulation, and supervision; (3) how banks are examined in France; and (4) how the Central Bank handles other bank-related activities. We completed similar studies on the bank regulatory and supervisory structures in the Federal Republic of Germany and the United Kingdomand are currently performing studies of the systems in Canada and Japan. In preparing this report, we carried out interviews with senior officials from CB, CRB, CEC, the Treasury, and the Bank of France. They also provided us with various documents and statistics including three volumes of statistics that banks submit to CB; annual reports of the Bank of France, CB, CEC and CRB; and selected banking regulations. In addition to our interviews with those responsible for bank regulation and supervision, we met with senior representatives of the Association Française des Banques, the French Bank Association (AFB), and AFEC; several senior executives at French banks; senior executives from external auditing firms and from the Compagnie Nationale des Commissaires aux Comptes (CNCC), the association representing accountants in France, which is responsible for setting standards for annual audits of French corporations, including banks; as well as several other individuals expert on French bank regulation and supervision and the auditing of banks in France. Finally, we reviewed translations of the 1984 Act, the law that relates most directly to bank regulation and supervision in France, and the Bank of France Act of 1993. This review does not constitute a formal legal opinion on the requirements of either law, however. We conducted our review, which included three visits to France, from September 1994 through March 1995 in accordance with generally accepted government auditing standards. We gave senior officials of the Bank of France, the Ministry of Economic Affairs, CB, AFB, AFEC, and CNCC a draft of this report for their informal comments. They provided primarily technical comments that were incorporated where appropriate. Under the 1984 Act, the responsibility for bank authorization, regulation, and supervision is divided among three committees—the Credit Institutions Committee (CEC) has responsibility for authorization, the Bank Regulatory Committee (CRB) for regulation, and the Banking Commission (CB) for supervision. A fourth committee, the National Credit Council (CNC), is purely advisory. While the overall division of responsibilities is clearly defined under law, it is not as evident in the day-to-day operations of the three committees. For instance, the Bank of France provides the staff for all three committees to ensure both a common background and the basis for cooperation among the staff and at least some Bank of France influence over the committees’ work. Furthermore, CB may contribute to the work of the other two committees, if needed. Finally, the chairmanships of the three committees and CNC are divided between the Bank of France and the Ministry of Economic Affairs—the two most influential participants in bank regulation and supervision—providing both an incentive and an opportunity for cooperation and collaboration among the chairmen and the committees. Bank regulation and supervision were structured under the 1984 Act specifically to accomplish several goals. These goals related both to the composition of the separate committees and the division of responsibilities among the committees. According to a senior Bank of France official, the decision to assign bank regulation and supervision to separate committees was designed to ensure that (1) all major parties who had an interest or stake in bank regulation and supervision also had a part in it and (2) no individual or agency was solely responsible for making decisions that could affect individual institutions or the industry as a whole. Thus membership in the three regulatory and supervisory committees includes the Bank of France, the Ministry of Economic Affairs, representatives of the credit institution industry, and various outside experts. This structure allows for decisions to be based on a broad range of knowledge and experience and acknowledges different points of view. It also takes into consideration the perceived imperative that both the central bank and the government be involved in bank regulation and supervision. The central bank is involved because of its role in financial markets and in developing monetary policy, and the government because of the nationalized sector of the banking industry and the government’s role as a potential financial resource if a large bank were to fail. Since the committees have distinct legal powers, they are able to behave independently of the institutions their members represent and thus allow the Ministry and the Bank of France to distance themselves from committee decisions, to a certain degree, if they so desire. However, the preparation for committee decisionmaking and the implementation of these decisions is done by Bank of France personnel who staff all three regulatory and supervisory committees. According to Bank of France officials, this helps ensure that the Bank of France has all the information it needs for the monetary policy and other work it does while also lending a consistency to the decisionmaking process. When the structure of regulation and supervision was being developed, it was felt advisable to separate enforcement and supervisory responsibilities from regulatory and licensing responsibilities. A senior Bank of France official likened this separation to that of separating the judicial from the legislative authority. Such a split was intended to (1) avoid giving too much authority to one entity, particularly since the supervisor has very strong enforcement authority, and (2) ensure independent decisionmaking so that conflicts between initial regulatory decisions and future enforcement actions were less likely to arise. For example, if omissions in the licensing process allowed an institution to get into trouble, the supervisor might be less willing to take enforcement actions against the institution for fear of having to acknowledge its own regulatory mistakes. While the separation of enforcement and other regulatory actions only necessitated two committees, the regulatory functions were split into two committees, for a total of three, to allow the Bank of France and the Ministry of Economic Affairs to each chair one of the two committees. CEC is responsible for authorizing and licensing credit institutions to undertake banking operations. Thus, any bank or credit institution must receive permission from CEC to operate. It also may withdraw authorizations and must approve any significant changes to a credit institution’s structure or ownership. For example, it must approve any changes in controlling ownership interest and the crossing of ownership thresholds—purchases of shares that increase ownership to 10, 20, or 33.3 percent. It must also be kept informed of any management changes and may disapprove such changes. In addition, it must approve modifications to the institution’s legal form, business name, location of head office, scope of activities, and branch networks within the European Union (EU). Finally, CEC may grant exemptions provided for in law and regulations to individual institutions. In authorizing a bank, CEC is to assess several criteria. First, it must judge whether an institution qualifies for a banking license or whether its license should be limited to that of another type of credit institution. This is a very important part of CEC’s work, since a banking license carries more prestige than a license for a more specialized institution and, consequently, many institutions that do not intend to take deposits and grant loans—one of the principal requisites of a banking license—apply for a banking license. In addition, CEC must ensure that the applying institution meets the minimum required capital standard. Particularly in the case of banks, CEC usually requires start-up capital higher than the minimum requirement because new credit institutions generally lose money in their first year of operation, according to Bank of France officials, and CEC is responsible for ensuring that minimum capital standards are still being met at the end of the first year of business. According to Bank of France officials with whom we spoke, CEC also checks that at least two individuals are responsible for “the effective direction” of the institution, and that they have “the necessary integrity and adequate experience for their duties.” CEC must also assess the institution’s business program, its technical and financial resources, and the suitability of the individuals investing capital in the institutions and their guarantors, where applicable. If CEC decides that the main shareholder of a proposed bank is not satisfactory, either in terms of experience or financial resources, its policy is to ask that the bank obtain a shareholder who is among the world’s 500 largest banking institutions and operates in France. The bank shareholder must have a seat on the applicant bank’s board and must participate actively in the management of the bank. This is intended to ensure that the applicant bank benefits from the shareholder bank’s experience in the French market as well as from its financial resources, if necessary. CEC requests to banks that they obtain French bank shareholders are made quite frequently, according to Bank of France officials, particularly when the applicant bank is not among the world’s largest 500 banks. When a bank does not have a controlling shareholder, the larger shareholders must sign a written agreement that guarantees their cohesion and their actions should additional financial resources be necessary for the bank. In 1993, CEC authorized 53 new credit institutions. In 1993, CEC reviewed approximately 600 total applications, about one-quarter of which concerned credit institutions surrendering their authorizations. A growing proportion of the other applications was made under the provisions of the Second European Banking Coordination Directive dealing with the freedom of EU member banks to provide services anywhere in the EU. In 1993 and 1994, CEC received a total of 22 applications from French credit institutions to open branches in EU countries. Such applications must be approved by CEC before the French institution may open the branch. By EU agreement, once the home country authority—CEC in this case—gives its approval, the host country in which the French bank is expanding has no authority to disapprove the establishment of the branch. In the same time period, CEC also received 149 declarations from French credit institutions that intended to provide cross-border services in other EU countries. The provision of cross-border services does not require CEC approval, although CEC sometimes deems that the services being proposed require a branch, in which case it will request that the bank proposing those services apply to establish a branch. Finally in 1993 and 1994, CEC received 64 notifications from non-French EU banks that they wanted to provide cross-border services in France, and 17 notifications from EU banks that they had received permission from their home country authorities to establish branches in France. CEC meets approximately once a month but can be called into session more often when necessary. Meetings of CEC are generally divided into sessions, each of which is devoted to a specific category of credit institution as represented by the professional associations—of which there are four—or their central organizations—of which there are six—plus a session for interbank brokers, which are also licensed and authorized by CEC and supervised by CB. With the exception of interbank brokers, each session includes a voting representative of the category of institution being discussed, either a member of the institution’s association or its central organization. As a result, CEC decisions are generally voted on by seven individuals. CEC meetings are chaired by the Governor of the Bank of France or his representative—usually the Vice-Governor. We were told that the meetings usually begin with the committee staff presenting the cases to be discussed. After the case presentations, the committee members discuss the issues and vote. The Chairman of the committee does not significantly influence the outcome of the discussions, and unless there is a tie vote, in which case his vote counts double, his vote is no more significant than those of the other five members. However, because CEC staff are all from the Bank of France, and because they present the issues for discussion, prepare the files upon which committee members rely for information and propose specific actions, the Bank of France position on the cases presented does carry significant weight. Nevertheless, the committee sometimes votes contrary to the course of action proposed by the staff, albeit infrequently, according to Bank of France officials with whom we spoke. The Minister of Economic Affairs—or his representative—enjoys a unique right not given to the other committee members, namely to ask for adjournment of the committee. He generally uses this privilege to obtain more information on a case before voting on the issue. For example, since the Minister has a specific responsibility toward the provision of social housing, which is partially financed by the state, he may require additional information if a case involves a credit institution that provides credit for public housing. In France, the National Assembly has the authority over all laws and legal provisions. It may, however, delegate the authority over some types of legal provisions, such as regulations, to other official bodies. Consequently, the Banking Act of 1984 gave CRB the responsibility to develop the regulations applicable to credit institutions. This delegation of authority is quite significant since in France most legal actions concerning credit institutions are taken through regulations, not through law, as is the case in some countries such as Germany. The areas in which CRB may propose regulations include (1) minimum capital levels; (2) prudential standards, such as minimum solvency and liquidity requirements; (3) the conditions under which individuals may own voting powers in a credit institution; (4) the opening of branches; (5) bank equity participations in other companies; (6) transaction requirements, such as interest rates on deposits and rules on information provided to borrowers; (7) the disclosure of accounting documents and information; and (8) management standards, particularly with respect to safeguarding institutional liquidity, solvency, and stability. All major prudential rules—such as regulations with respect to solvency, liquidity, and financial structure requirements—must be observed by all categories of credit institutions. However, CRB may differentiate among types of credit institutions. Although CRB has a broad scope, more and more regulations are being determined at the international level through the EU. In such cases, the responsibilities of CRB are reduced to transposing international decisions into French law. Rules that are still determined primarily at the national level include those established to protect consumers as well as prudential norms that have not yet been harmonized within the framework of the EU. Regulations are usually proposed and initially developed by the Credit Institutions Directorate of the Bank of France, acting in its capacity as CRB Secretariat, or in prudential supervision matters by the CB Secretariat, according to Bank of France and CB officials. Regardless of who initially drafts and is responsible for the technical work on a regulation, the Ministry of Economic Affairs and the Bank of France are in close contact before a regulation is proposed and are almost always in agreement on a text before it is sent forward to CRB, according to Bank of France staff. The process for obtaining agreement between the Treasury and the Bank of France is not always an easy one, however, according to CRB and CB staff, primarily because of differences in points of view. The other committee members are also consulted before any measure is brought to CRB for its approval because, according to Treasury staff, it is not sufficient to have Ministry and Bank of France approval to get a regulation through CRB. The other committee members must agree with any proposal since they have four of six votes. Finally, CRB and other agency staff involved in the drafting process have created working groups as well as an informal consultative process involving the banking community, the associations that represent banks, and other interested parties such as accounting and law firms. This consultative process between the bank regulators and the industry is viewed by the Association of French Credit Institutions (AFEC) and AFB as one of their primary responsibilities and helps promote cooperation between the regulators and the regulated. However, extensive consultations do not always mean that there is full agreement on proposed regulations by the regulated or other interested parties. As a result of the external and internal consultative process, agreement on proposed regulations is usually unanimous among the six CRB members, according to CRB and Treasury staff. Nevertheless, there are occasions when there are serious discussions among the members of CRB, particularly between the Treasury and the Bank of France. Amendments are sometimes made to a proposed regulation as it is being considered by CRB—word changes to address legal uncertainties, for example—but if a regulation is formally proposed to the committee, it generally is passed. All regulations proposed by CRB must be stamped and signed into force by the Minister of Economic Affairs, not as Chairman of the CRB, but by virtue of his position as Minister of Economic Affairs. Thus, the Minister has veto power over any regulations proposed through CRB. As of March 1, 1995, no regulation had ever been vetoed, in part because discussion and consultation involved in preparing a regulation includes the Ministry, and also because the Minister, as Chairman of the CRB, would not present a regulation for CRB approval if he did not agree with it, according to Treasury officials. While CB has no formal role in approving regulations, it does have the responsibility of making sure that they are implemented. As part of this duty, it will issue clarifications and further details on specific regulations that, according to CB officials, credit institutions would regard as seriously as a regulation—even though these clarifications do not have the force of law. Such clarifications are generally of a relatively minor nature, however, since the responsibility for the interpretation of law lies with CRB and the Minister, according to Bank of France officials with whom we spoke. There is another agency in France that contributes to the drafting and clarification of banking regulations that specifically address accounting issues. This agency, the Conseil National de la Comptabilité, is an advisory committee attached and reporting to the Ministry of Economic Affairs. Its membership of approximately 100 is made up of representatives of the accounting profession, private industry, and government agencies. Its purpose with respect to bank accounting regulations is twofold. First, it is to comment on proposed regulations when asked for its opinion by CRB. Second, and perhaps more significantly, it is to publish its opinion on how accounting standards should be implemented. These opinions are generally used as precedents by courts of law and CNCC, the accounting profession’s association, recommends that its members apply CNC opinions when auditing banks as well as other organizations. CNC has no authority, however, over the way in which auditors conduct their financial audits. This authority rests with CNCC (see ch. 3). The primary responsibility for ensuring that deposits in credit institutions are safeguarded—one of the goals of the 1984 Act—lies with CB. CB thus has responsibility over the supervision of all credit institutions authorized under the 1984 Act. It is the duty of CB to ensure that credit institutions observe legal and regulatory requirements, as well as the industry’s rules of good conduct; to ensure that the rules of sound banking practice are observed; and to monitor the financial soundness of credit institutions. If CB observes regulatory breaches or financial irregularities in a credit institution, it is responsible for taking enforcement actions to resolve any problems. According to CB, its experience has proven that “failures of credit institutions are always attributable to overconcentration of risks, notably credit or liquidity risks.” Historically, French banks have often become specialized in specific industries—leading to concentration problems. In addition, French companies tend to rely on only one major bank for all banking services, again leading to concentrations. Many of CB’s efforts are therefore focused on examining the concentration of a bank’s loan portfolio and other businesses. In turn, according to CB, concentration risks “can only arise as a result of shortcomings in the system of internal controls.” CB, therefore, places a significant amount of emphasis on a bank’s internal control systems, which establish a set of procedures designed to guarantee the quality of the information provided to bank management, shareholders, supervisors and other interested parties. It also attaches importance to a bank’s internal control department, which is responsible for verifying the effectiveness and coherence of these internal control systems. All banks are required to have both. To help ensure that banks are implementing internal controls properly, CB proposed a regulation approved by CRB and the Minister of Economic Affairs in 1990 that specifies certain requirements for internal audit systems. CB officials have described this regulation as one of the most important that it enforces. The regulation requires that bank internal audit systems must be able to ensure an adequate audit trail with respect to information that is contained in published accounts. This audit trail must make it possible to (1) reconstruct operations in a chronological order, (2) support all information with original documents, and (3) account for the movement in balances from one statement to the next. Institutions are also required, at least once a year, to provide CB with a report on how internal auditing is carried out. Furthermore, the decisionmaking body of the institution is required to review the activities and results of the internal audit at least once a year. According to CB, it is “determined to take a strict line with regard to internal controls” and will assess the competence, independence, and results of the internal control departments. In doing its work, CB maintains that it “must refrain from interfering in the management of credit institutions.” It emphasizes that it is not its role to substitute for credit institution managers, and that CB’s task “in no way detracts from the obligations and responsibilities incumbent upon” those managers. For example, CB does not set derivatives limits for banks; instead, banks are required to set individual derivative risk limits about which they must report to CB. CB is solely responsible for taking enforcement actions against credit institutions when they are “in breach of the rules of sound banking practice” or when they have “contravened a law or regulation” relating to their business. The 1984 Act gives CB a wide range of enforcement powers, ranging from warnings to disciplinary actions culminating in the withdrawal of an institution’s authorization. Because CB has the ability to take very strong enforcement actions—including replacing bank management or withdrawing a bank’s authorization—credit institutions fully understand that if they do not comply with less forceful actions, such as warnings, they will be subject to stronger actions that will follow. As a result, CB does not have to resort to forceful actions frequently since warnings—both official and unofficial—and injunctions are generally respected by banks. Official warnings have been issued at the rate of about 50 a year and are meant to formally bring a CB concern to an institution’s attention without penalizing the institution, and they usually follow at least one, often more, unofficial warnings, according to CB staff. If, for example, an institution is contravening sound banking practices, CB may, after giving management an opportunity to explain the situation, issue an official warning. It can request an institution to increase its provisioning against doubtful loans or to match its funds more closely to lending. CB may also issue a warning if it finds a breach of the industry’s rules of good conduct, something which it has done only once in the last 3 years, although it has issued more unofficial warnings. If an unofficial or official warning is heeded, no further action is taken or sanction imposed by CB. If a warning is not heeded, CB can enjoin an institution to take all necessary measures to resolve financial or management problems by a specific deadline. According to CB, this type of injunction is used quite frequently. In the last 3 years, CB has issued 63 injunctions that ordered institutions to (1) transmit periodic documents to CB on time, provide more information on share ownership, strengthen their financial structure, and appoint a second responsible manager, as required under law; (2) institute efficient internal control systems; (3) comply with the rules on risk distribution; (4) provision adequately for losses; (5) amend management methods; and (6) strengthen liquidity ratios. Finally, CB may sanction an institution when it has disregarded an injunction or warning, or has contravened a law or regulation. Sanctions, which are categorized as disciplinary procedures, range in severity and include (1) cautions, (2) reprimands, (3) prohibitions or limits on the conduct of certain operations, (4) temporary suspensions or permanent dismissal of senior bank management, and (5) the withdrawal of an institution’s authorization. In addition, CB has the power to impose fines. In the past 3 years, CB has appointed acting managers 23 times and has initiated disciplinary proceedings 36 times. Reasons for taking such actions have included, among others, breaches of capital, solvency, and liquidity requirements; supplying misleading information to CB; breaches of risk distribution and exchange rate rules; and inadequate internal controls. Eight of the 26 disciplinary proceedings initiated in 1992 and 1993 have ultimately resulted in the revocation of an institution’s authorization. Recommendations to take enforcement actions against individual institutions are made by the staff of CB but must be approved by the six-member Commission. In 1993, CB met 9 times and issued 19 injunctions, appointed an acting manager 7 times, instituted 17 disciplinary proceedings, and withdrew authorizations 7 times. While CB would normally issue warnings to a bank before it takes more formal enforcement action, in an emergency it can act very quickly and require a bank to close operations immediately, according to CB staff. When taking an enforcement action, CB acts as an administrative court, and all enforcement actions must be agreed to unanimously by CB’s members. This may delay action to some extent until all CB’s members are present to vote. Enforcement actions are generally not made public at the time they are taken. Nevertheless, once a situation is resolved, CB’s policy is to publish the major actions taken and their outcomes in its annual report. The Chairman of CB—the Governor of the Bank of France—plays an important role in the decisionmaking of CB, even though the committee is deemed collegial by Bank of France and CB staff. Nevertheless, if the Treasury strongly supports or opposes a particular action, then it is difficult to contradict the Treasury, particularly because such situations happen very infrequently, according to CB staff. The Bank of France is also afforded another significant opportunity to influence the decisions of CB members through its staff who present the cases and proposed solutions to CB. Although CB generally follows the recommendations of the staff, we were told that concerns about perceived legal problems with staff proposals are not infrequent. According to CB staff, they always discuss every important decision with the Governor before any meeting so that the Governor is prepared to argue the proposed solutions. On very important decisions, the staff also discusses the case with the Treasury before CB meetings. An institution’s authorization may be withdrawn either by CEC or CB. If an institution ceases operation voluntarily it can petition CEC to withdraw its authorization. In the 5-year period from 1988 through 1993, CEC withdrew 207 authorizations for institutions that ceased to operate. If, however, an institution’s authorization is withdrawn due to financial difficulties or other supervisory problems, CB is responsible for taking such action. When it becomes clear to CB that an institution can no longer be rescued, it must initiate disciplinary proceedings against the institution and appoint an acting manager. According to CB staff, this is a difficult decision to make because it must not be taken too early, if there is still a chance for the institution’s survival, or too late because of the increasing cost over time of resolving an eventual failure. Usually when a problem situation develops, CB and the involved institution develop a solution to the problem in which the bank will slowly self-liquidate. This obviates the need for a liquidator and generally ensures that depositors’ funds are not endangered and that the deposit protection mechanism need not be activated. Since AFB—the French bank association—member banks are responsible for protecting depositors when a bank fails, as described further in chapter 4, AFB has an interest in how failing banks are resolved. Nevertheless, there is no legal requirement for CB to involve AFB in the failure resolution process, and CB staff stated that AFB’s role in failure resolution is very limited. Sometimes, however, AFB has been informally involved in determining potential solutions as was the case in 1992 when a small bank suddenly got into trouble and was eventually acquired by another bank, which had acted as the failing bank’s administrator. In this case, AFB worked with the acquiring bank and used the deposit protection structure to finance part of the acquisition. CB may appoint a liquidator when a bank’s authorization has been withdrawn and has done so 11 times in the last 2 years in cases when it has not been able to reach an agreement to allow the bank to self-liquidate. CEC, CRB, and CB are all established as politically independent committees. They do not report to Parliament or to the President of France. Their independence notwithstanding, we were told by Bank of France staff who work with the committees that there has not been a case when the government has disagreed with actions taken by them. Decisions taken by CEC and CB may be appealed before the highest administrative court in France, the Conseil d’Etat. We were told that such appeals have been infrequent, occurring approximately once or twice a year. While CEC had always won any appeals, as of May 1, 1995, CB has lost a few cases. However, its staff do not believe that these legal setbacks or the possibility of an appeal have affected their ability to get credit institutions to take corrective actions. CNC is described by the 1984 Act as an advisory committee to be consulted on monetary policy and credit policy. Its mandate includes studying the banking and financial system, particularly with respect to customer relations. It may issue opinions in these areas and set up working groups to conduct research. It may also be asked to give its opinion on bills and draft decrees within its area of responsibility. The 1984 Act also established a new committee that reports to CNC called the Comité Consultatif (Advisory Committee). The Advisory Committee is mandated to study the relations of credit institutions with their customers and to suggest recommendations in this area. The committee is composed predominantly of representatives of credit institutions and representatives of their customers. While the division of responsibilities among CEC, CRB, and CB is clearly defined under law, the execution of these responsibilities by the three committees and their staffs on a day-to-day basis is more flexible. There are a number of factors that contribute to this flexibility. First, by law, the Bank of France provides the staff of CEC, CRB, and CB. Being Bank of France employees, the staff may rotate back to the Bank of France or among the regulatory and supervisory committees. Consequently, the staffs of the committees are more likely to work together when necessary since they are all part of the same organization. Second, CB staff are often called upon to assist the other two committees in preparing some of their work in prudential supervision matters. Thus, for example, CB does the technical work on many of the bank regulations considered by CRB. Finally, the individuals involved in bank regulation and supervision often have similar backgrounds and have studied together, according to Bank of France staff. They tend to replace each other as they move from one job to another within the group. Furthermore, they are often in work groups and committees together. Both formally and informally there is a continual interchange of ideas among the committees and their staffs, and decisions are made on the basis of continuous discussions and give-and-take among the players. As a result, both in terms of staffing and decisionmaking, the system is not as disaggregated as it may look on paper. Institutionally, the Bank of France and the Ministry of Economic Affairs clearly have the most influence in the supervision and regulation of credit institutions. They split the chairmanships of the three regulatory and supervisory committees and CNC and are members of the committees they do not chair. The Governor of the Bank of France chairs CEC and CB, and the Minister of Economic Affairs chairs CRB and CNC. The decisionmaking on the committees has been described as collegial by Bank of France and CB staff. However, they also suggested that there is some rivalry between the Bank of France and the Ministry, and disagreements between the two do occur—both between their staffs and within the committees. If either the Governor or Minister, as chairman of a committee, strongly disagrees with the direction in which a meeting is moving, he may adjourn the meeting. A chairman may also deflect opposition by other committee members through his power over the committee’s agenda. In their roles as chairmen, they are sometimes identified with the work that is being done by their committees. For example, in several of our discussions with banks or their associations, the Bank of France was often mentioned as the authorizing agency, not CEC. In other cases, banks identified their supervisor as the Bank of France, not CB. The frequency of these portrayals may reflect the fact that the committees are chaired by the Governor of the Bank of France as well as the fact that the staff of the committees are Bank of France employees. The Ministry of Economic Affairs has significant influence (1) through its powerful position in the government’s cabinet; (2) because it appoints the other members of CEC, CRB, and CB, and is a member of all committees it does not chair; (3) because the Minister must sign any credit institution regulation before it may take effect; and (4) because it is the major stockholder in nationalized banks, which include the largest bank in France, Crédit Lyonnais. The extent of financial support the government is in the process of providing Crédit Lyonnais accentuates the role of the government in the banking industry and the effect its ownership could have on competition in the banking industry. To date, Crédit Lyonnais, the country’s largest bank, remains the only large nationalized bank, although there is a handful of smaller nationalized banks. There are plans that these remaining nationalized banks be privatized within the next five years since both the Socialist and Conservative parties now agree that having nationalized banks conflicts with the premise of a free market that is one of the cornerstones of the EU. For example, Crédit Lyonnais, which lost Fr.fr. 6.9 billion in 1993, principally as a result of poor commercial and real estate investments, benefited from a Fr.fr. 4.9 billion bailout in July 1994, raising questions about the role the government plays as the owner of the largest French bank and the effect that has on competition in the French banking industry. In addition to the influence the Bank of France obtains through its chairmanship of CEC and, in particular, of CB, which is the largest and arguably the most important of the three regulatory and supervisory committees, the influence of the Bank of France stems most directly from (1) the fact that it staffs all three committees, (2) its power to require credit institutions to contribute funds in a crisis to “ensure the smooth functioning of the banking system and safeguard the reputation of the financial center” whenever it deems such assistance is necessary, and (3) its importance in and influence over French financial markets. (See ch. 4 for a discussion of the crisis resolution powers of the Bank of France.) While both the Minister of Economic Affairs and the Governor of the Bank of France have a significant influence on the regulation and supervision of credit institutions, it is the Governor—both as Governor and as Chairman of CB—who is considered by banks to be the more influential player on a day-to-day basis and is considered to have a greater knowledge of the banking industry, according to banking and Bank of France officials with whom we spoke. For example, whenever a serious problem or question arises, we were told that a bank chairman would be likely to call the Governor of the Bank of France—not necessarily because of his position as the Chairman of CB, but because of his position as Governor. Furthermore, we were also told that the participants in France’s banking system know that the Bank of France staffs the regulatory and supervisory committees and understand the influence that conveys. Finally, we were told that in the eyes of the public, the Bank of France and CB, not the Minister of Economic Affairs, are held responsible if there are bank problems, unless the bank in question is nationalized, in which case the Treasury, as the representative of the state, would be held equally responsible. The Banking Commission (CB) obtains information necessary to enforce compliance with regulations and assess the financial condition of credit institutions through a combination of permanent oversight and inspection visits conducted by separate sections within CB and the Bank of France. These two sections—microsupervision within CB and inspection within the Bank of France—must coordinate closely to ensure the exchange of information relevant to the performance of CB duties. Information gathered and analyzed by the microsupervision section of CB in the performance of permanent oversight includes periodic reports filed by the institutions, discussions with their managers, and information provided by external auditors and other market sources. In order to fulfill its supervisory responsibilities, CB receives regular information filed electronically with CB by all credit institutions, according to CB officials with whom we spoke. Banks must file most of these reports quarterly, with the exception of larger banks who are required to file monthly, but some reports are filed semiannually or annually. CB is responsible for determining the content and frequency of any reports that must be filed by banks. In 1993, CB implemented a new reporting system for credit institutions called Base de Données des Agents Financiers (BAFI), the data base of financial agents. The new data base serves the purpose of collecting and analyzing information for prudential, monetary, and balance of payments purposes and is intended to provide an early warning of potential problems in individual banks or in the banking industry as a whole. BAFI includes several hundred pages of information on institutions’ balance sheets, profit and loss statements, solvency, liquidity, concentration risk, large exposures, exchange rate positions, and other areas. Appendixes to BAFI include information on risks associated with activities such as market making, trading, and derivatives. CB spent several years developing and implementing BAFI and intends to place a significant amount of emphasis on the information obtained through it. It relies on this information not just to assess a bank’s current financial status but also to monitor bank risk-taking, to determine whether a bank is entering new business areas, to follow up on banks’ actions in response to CB warnings or enforcement actions, and to assess whether a bank should have an inspection scheduled. Through BAFI, CB can check banks’ controls on concentration and exposure and assess the likelihood of future risks. It can conduct peer group comparisons, analyze individual banks’ break-even points, and forecast trends in the industry. If a bank is in good financial condition and has not expanded its risk-taking or entered into new activities, BAFI will be the primary source of information for CB. Approximately half of its staff—about 100 individuals—are devoted to the permanent microsupervision of credit institutions, which focuses on analyzing BAFI data. About 10 to 12 individuals in this group are involved in the microsupervision of the 10 largest banks in France. All BAFI data are filed with CB, and any statistics useful to develop monetary policy, as well as aggregate data on the banking industry, are forwarded to the Bank of France after they have been processed by CB staff, according to CB officials with whom we spoke. Banks are also required to separately report some information directly to the Bank of France, which CB may access. Information is to be submitted to the Bank of France on (1) material credits outstanding to companies, (2) current balance sheets of companies, (3) dishonored checks, and (4) repayment problems on loans to private individuals. Banks may access this data base for a fee and obtain information, for example, on their percentage of the total material loans outstanding to specific companies. In addition to BAFI information, banks are required to file with CB quarterly reports on loans to any one company or group of companies that exceed 15 percent of capital, quarterly reports on bank policies with respect to derivatives limits and how their derivatives activities compare to those limits, monthly foreign exchange position reports, monthly liquidity reports, monthly balance sheet reports, and annual reports on nonperforming loans. CB is moving toward a system—planned for completion by mid-1996—that should be able to analyze all of the quantitative and qualitative information on credit institutions available to CB—including information collected through on-site inspections—to conduct analyses of bank client activities, market activities, service operations, compliance with prudential regulations, and statistical analyses. The system is intended to allow for an analysis of a bank’s activities, risks, and profitability in greater detail than is now possible as well as for comparisons with a bank’s peer group. Institution specific information collected by CB through BAFI and other reports is not automatically shared with the Bank of France, even though CB staff are Bank of France employees. As part of the agreement to give the Bank of France independence in 1993, CB was officially separated from the Bank of France—it is now independent—and information does not automatically flow between them. Nevertheless, information on individual banks may be requested by the Bank of France, or any other member of CB, if there is a specific need—in the event of a financial crisis, for example. Furthermore, since the Bank of France chairs CB, it is regularly informed of any problems in the banking industry and, therefore, is aware of situations that it might be asked to resolve. If CB has any concerns or questions about a bank’s operations based on periodic filings by banks or other information it has received, CB has the authority to request and receive from banks any “information, clarification or proof necessary to the exercise of its functions.” CB officials told us that CB often obtains such information or clarification through discussions with bank management. For example, the bank’s accounts may be sent to CB and discussed with CB staff before they are released in June and December, if CB requests that information. If there appear to be any problems, the discussions are moved up to higher levels of CB staff. In April, CB is to receive a list of all the nonperforming loans at all the banks and information detailing how the banks have provisioned against these loans. This information is intended to allow CB to compare levels of provisioning at banks and then to recommend increases when banks fall below the normal level. The same is true for country risk provisioning. If a bank disagrees with CB’s assessment, then discussions are held between the bank and CB to clarify the bank’s position. According to CB staff, CB has numerous meetings with banks. There is no formal schedule for such meetings; instead, they are set up whenever there is a need. CB staff at different levels meet with banks every day and have numerous contacts by telephone and by fax. The level of the individual involved in the discussions depends on the issue being discussed. If a concern about a bank is being discussed, they said it will involve higher-level individuals—the General Manager or President of the bank—than if there is a question on appropriate accounting methods. In addition to bank specific questions, there are also many contacts between banks and CB on more general industry-related topics such as real estate problems. Finally, CB addresses numerous issues in correspondence. It sends and receives about 40,000 pieces of correspondence a year. BAFI-related questions are frequently asked and responded to in this fashion, for example. Technical questions about asset weighting for capital adequacy purposes or loan provisioning, for instance, are also generally the subject of correspondence between a credit institution and CB. Informal discussions with banks and other market sources sometimes provide CB with its first warning of potential problems in an institution and are consequently considered extremely important by CB staff. Such information may come through an informal notification that a market participant has stopped dealing with a particular bank because of perceived problems, for example, or that an institution’s method of operating in a specific business area differs significantly from that of its peers. Permanent oversight of credit institutions is supplemented with full-scope, as well as more limited, on-site inspections—or examinations. These inspections, which are to cover all elements of an institution’s activities, are done for CB by Bank of France inspectors. Inspection follow-up, on the other hand, is the responsibility of CB, and CB may differ with bank inspectors on the supervisory conclusions to be drawn from an inspection. According to Bank of France and CB officials, all credit institution inspections are led by high-level staff (inspectors), with at least 10 years of on-site inspection experience, of the inspection division of the Bank of France. They are assisted by a team of lower-level staff. Although the inspectors conduct inspections on behalf of CB, the inspection division reports directly to the Governor of the Bank of France. After the inspection is conducted, we were told that the inspectors write an inspection report, which is provided to the bank and CB, and brief CB on their findings and conclusions. CB then writes a follow-up letter to the bank notifying the bank of the actions it must take to resolve any problems found during the inspection. It is this CB letter, not the inspection report, that is binding on the bank. If the bank does not follow CB recommendations, it would be subject to enforcement actions; however, no action would be taken if the bank disregarded a problem addressed in an inspection report that was not addressed in CB’s letter. When opinions differ on the content of the CB follow-up letter to the bank, Bank of France and CB officials said that CB and the inspectors generally try to harmonize their views, primarily because they do not want to send the credit institution mixed signals. However, if they are not able to agree, CB sends the bank a follow-up letter that, on certain points, may not coincide with the inspection report, and both the inspector and CB will take responsibility for not coming to agreement. Although the inspection division is separate from CB, officials told us there is a significant exchange of information between the two. There are monthly meetings between the inspectors and the General Secretariat of CB assisted, as necessary, by CB experts; and the inspectors are to receive all of the BAFI reports. Furthermore, inspectors are to meet with CB staff before inspections and, after their inspection, when on an as-needed basis, they explain their major findings or especially complex points to CB experts. Finally, if the inspectors find any serious problems during their inspections, they are to report to the top management of CB immediately. Nonbank credit institutions that belong to central organizations are to be inspected by those organizations. For example, a savings bank would be inspected by the central savings bank—the Centre National des Caisses d’Epargne et de Prévoyance. The inspections are to be conducted by the central organization’s staff and their inspection reports are sent to CB. If CB believes that a further inspection is necessary—based on the inspection reports from the central organizations or for any other reason—then a Bank of France inspection team is to conduct a further inspection. In 1994, the Bank of France conducted 173 inspections for CB, including 117 full-scope reviews of credit institutions and 55 examinations of specific problems or thematic subjects. This frequency is considered to be insufficient by the Bank of France and CB, and the Bank of France is currently planning to increase its inspectorate staff by 30, from 95 inspection staff in December 1994, to 125 in 1995. This increase in staff is intended to reduce the average inspection rate to every 4 years, with problem banks being inspected much more frequently. When necessary, the Bank of France may call on other members of the Inspection Division, who normally work on internal audits of the Bank of France and its branches, to assist in bank inspections. In addition, the Bank of France could call on any Bank of France employee who has ever worked for CB or in the Inspection Division to assist on an inspection. According to CB, inspections “provide an opportunity for a more detailed review of the institution’s decisionmaking procedures and its financial situation.” They also serve to verify information collected through the reporting process, particularly with respect to judging the adequacy of an institution’s prudential ratios. Bank of France inspectors conduct three kinds of bank inspections for CB: (1) routine inspections, (2) inspections that focus on perceived problems, and (3) thematic inspections. All credit institutions are to receive a routine inspection at some time, according to Bank of France and CB staff. The timing of such an inspection depends on a number of factors. On average, Bank of France officials said banks will be inspected more frequently than other credit institutions, partially because they are involved in riskier and more extensive activities and partially because many other credit institutions are inspected by their central organizations, as discussed above. Finally, inspection rates depend on the individual institution. Based on information gathered through BAFI or market sources, institutions may be inspected more frequently—up to twice a year—if they are perceived to have financial difficulties; to be expanding into unfamiliar or more risky activities; or to be heavily involved in activities that may be experiencing a market downturn, such as real estate in the past several years. According to Bank of France policy, the primary purpose of on-site inspections is to assess the soundness of a bank—to judge its ability to conduct its business without a deterioration in its liquidity, solvency, and profitability. A routine inspection, therefore, is to cover all elements of an institution’s activities including organization, management, internal controls, capital, assets, earnings, and liquidity. Specific areas of a bank’s activities that are to be inspected include the bank’s market activities, electronic data processing (EDP), technology, derivatives activities, mergers and acquisitions, mutual funds, and leasing, among others. In the course of their mission, inspectors also are to check the accuracy of banks’ reported loan loss reserves and the bank’s prudential ratios: risk diversification, foreign exchange, maturity mismatch, capital, and liquidity. According to CB staff, CB is focusing more attention on management quality, internal controls, and corporate governance. With respect to management quality, inspectors are to assess the results of management strategies and the extent to which management is informed about the bank’s activities. The inspection is to include an assessment of the kind of information management receives—whether it is accurate and concise—and whether management reacts quickly to the information it has. Because the quality of information managers are provided with depends, to a large extent, on the efficiency of the institution’s internal controls, inspectors also are to test internal control procedures. According to CB, inspectors verify “the effectiveness and coherence of internal control systems” by determining whether “the procedures [for internal controls] are appropriate to the needs of the institution.” Since the mid-seventies, the inspection process has placed particular emphasis on an institution’s EDP, both to assess its reliability and to conduct inspection controls. CB is currently in the process of developing a new methodology for testing EDP for use by Bank of France inspectors. An important by-product of an inspection is the checking of the accuracy of the institution’s BAFI reports. Both CB and the Bank of France stressed the significance of these checks since CB relies very heavily on BAFI information in its permanent oversight. Generally, the testing finds that banks submit accurate information, but if a bank is found to be submitting inaccurate information, there is no question that it will be disciplined, according to CB staff. During an inspection, inspectors may examine bank subsidiaries—including subsidiaries located in other European Union (EU) countries. How often such subsidiaries are inspected depends on their significance to the institution as a whole—whether they significantly contribute to profits, asset size, or risks. If they do, then they are generally inspected with the parent company, according to Bank of France and CB officials with whom we spoke. During an inspection, the facts relevant to the inspection are to be discussed with the institution’s department heads in order to get their agreement on those facts, and the inspection team then writes a draft report. Although it is not compulsory, it is an established tradition for the inspectors to provide bank management with an opportunity to review the draft report or parts thereof, according to Bank of France officials with whom we spoke. After a short time—2 to 7 days—the inspector is to return to discuss the report with management but is only to change the report if the facts upon which he based his judgments were wrong, or if the bank’s situation has changed since the draft was written—for example, if a unit that was in trouble was sold. The president of the institution gets the final inspection report, which is confidential. CB is to use this report and any other information it has—including information on the general economy or the situation of the banking industry—to send a follow-up letter to the institution telling it what CB expects it to do in response to issues raised in the inspection. This letter is then to be followed up with meetings, additional correspondence, and monitoring of BAFI information to ensure that the institution is taking the recommended actions, according to CB staff. Depending on the size of the institution, an inspection could be from 2 months in length with an inspection staff of 2 to 4 for a medium-sized bank, to 4 to 6 months with an inspection staff of 4 to 8 for a larger bank.If a bank has significant credit activities, it requires a larger inspection staff to examine credit files than if it has extensive market operations. No inspectors are located full-time in any bank or other credit institution. If a bank is believed to have a problem based on the examination of reports available to CB, a specific inspection is to be conducted by the Bank of France that focuses on the area of the bank believed to have problems. If, for example, a bank’s loan portfolio is thought to be weak, inspectors are to examine the bank’s procedures for granting the loans and its loan administration. They are to also inspect the measures that were taken after a loan was determined to be in trouble, the provisioning taken against the loan, and the operations of the problem loan unit. In addition, they are to review the bank’s management and its internal controls in order to assess the criteria for decisionmaking. Finally, they are to inspect the bank’s loan portfolio, particularly its larger loans, to assess the amount of residual risk. Examinations of banks with problems may occur as often as twice a year. The inspectors of the Bank of France may also conduct thematic inspections. In these inspections, the inspectors are to examine a specific area of business or operation—such as derivatives activities, property risks, or the organization of internal auditing. Such inspections would be done across a sample of all institutions if the issue, such as internal controls, were relevant to them all; or across a sample of larger banks in areas such as derivatives activities. In this way, the inspectors can do a peer comparison of the banks as well as judge the impact a specific line of business is having on the industry as a whole. Historically, external audits of credit institutions have not played a major role in bank supervision in France. However, CB is beginning to place more reliance on information from external auditors and sees their role developing further. French credit institutions are required to receive annual audits, according to French corporate law. Such audits of banks are automatically sent to CB. The main duty of the statutory auditor is to certify to the shareholders as to the fairness of presentation of the financial statements. In addition, as of 1935, all audit firms have been required to report to the public prosecutor any criminal offense by their clients related to the auditor’s account that the auditors discover during their audit. They are not specifically required to look for such offenses, however. Under the 1984 Act, French banks, with the exception of those below a certain balance sheet size threshold, are required to be audited by at least two auditors, who split the annual audit responsibilities between them. According to CB officials, at least one of the auditors of most large banks is likely to be a “big six” international accounting firm, although the second firm is often to be a large French firm. Smaller banks are more likely to be audited by a small French accounting firm. CB has no minimum audit requirements for bank audits, but may take action against an external auditor, described below, if a bank audit is deemed unsatisfactory. In carrying out their audit work and in preparing their report on the financial statements, auditors are to comply with auditing standards developed by the national association of auditors (CNCC). CB is a member of the banking committee of the CNCC, which develops these standards and, consequently, has some input. Accounting rules, on the other hand, are proposed by the CRB—the regulatory committee. In conducting their annual audits, the external auditors typically are to check that banks are complying with capital requirements; to assess asset quality, loan loss reserves, earnings, and management capability; and to review internal controls. This work includes checking a bank’s balance sheet, its profit and loss statement, and related footnotes; and testing the bank’s internal controls. The auditors are to take samples of the bank’s loan portfolio but generally are to focus on the bank’s largest credits. They are then to determine whether the bank’s provisioning has been set adequately and may recommend increases. They also are to review the market risk calculations that all banks are required to include in their annual reports. Until the relatively recent development of financial problems—primarily due to real estate difficulties—banks, particularly larger ones, did not place much importance on the results of their audits, according to external auditors with whom we spoke. They said that they did not feel their reports were valued by the banks, and because French banks are not required to establish audit committees, auditors with whom we spoke felt that communication with the banks’ presidents or boards of directors was difficult. More recently, however, auditors have had more access to bank boards and their chairmen because of the financial difficulties many banks are facing, and said that they feel that their role has been enhanced. Nevertheless, the external auditors with whom we spoke felt that their work would be more valued if banks had an audit committee requirement. Such a requirement is strongly supported by CB, but is opposed by some of the larger banks, according to CB and AFB—the French Bank Association—officials. According to a manager of one of the large banks with whom we spoke, obtaining an audit opinion without qualification is extremely important to the bank. Consequently, he said, bank management will discuss and try to resolve any problems in audit reports with the bank’s auditor before the reports are finalized. While there is nothing unusual about such a process of consultation in his view, it could raise some questions about the usefulness of bank auditors’ opinions to CB or Bank of France in discharging their bank supervision responsibilities. While, to date, external auditors have not been relied upon by CB for any significant informational contribution to bank supervision, the relationship between the auditors and CB is evolving, according to CB staff. Until 1992, audit firms were prohibited by their client confidentiality responsibilities from providing CB with information. Legislation implemented in 1992 removed that barrier to reporting and now allows the auditor to provide CB with information. While there is no requirement that the auditor report any problems it uncovers unless CB specifically asks the auditor about the issue, auditors may report problems in banks to CB of their own volition. In addition, auditors sometimes approach CB with specific questions that make clear to CB that they have some concerns, according to CB staff. As a result, CB may then follow up with questions of its own. While CB staff assert that they may receive auditor reports on specific problems as frequently as once a month, CNCC, the association representing accountants in France, asserts that such reports are quite rare because of the client confidentiality protection under French criminal law. CNCC representatives said that, in any case, if an auditor were to report a specific problem to CB, separate from the annual audit report, he or she would usually notify the bank first before reporting to CB. On CB’s part, we were told that since 1992, when CB was first allowed access to auditors’ workpapers, it has been moving toward a greater reliance on them and would like to develop the relationship with auditors further. Part of the reason for this development is that CB is focusing more attention on internal controls and corporate governance issues, topics typically covered in an auditor’s report. A greater reliance on the auditors could, therefore, help reduce some duplicative efforts. The use of auditors for supervisory information is still in its nascency, however. CB officials told us that CB does not generally ask auditors for a meeting unless CB already suspects a problem in a bank. Audit workpapers also have not been used to any great extent. CB has, however, designated one of its staff to work specifically on auditor relations. Auditors with whom we spoke, on the other hand, were generally cautious about embracing a broader supervisory role, questioning the added cost of such efforts to banks and the willingness of their clients to pay for them. External auditors in France are to be appointed every 6 years by bank shareholders. Under the 1984 Act, credit institutions must notify CB of the appointment of their auditors, and CB has the authority to disapprove the appointment of an auditor by a bank within 2 months of the appointment. CB may disapprove of entire firms or it may disapprove of specific branches or individual partners of a firm. It may also disapprove an audit firm working for one bank but approve its working for another one. While CB action against external audit firms is not frequent—one to five times a year—it has been using the threat of disapproval more frequently in order to ensure that auditors have adequate training, knowledge, and experience. In 1991, for example, CB notified two audit firms that “it could give no assurance as to the position it would adopt” if credit institutions were to notify CB of the appointment of these two firms. Such a notice is tantamount to disapproving the appointment of the firms, even though it comes before the actual appointment is made. CB took this action because the firms had failed to qualify the accounts of two financial companies despite knowledge of factors that should have led to such a qualification.That same year, CB drew attention to another external auditor whose lack of vigilance had been cited by the regulator of the French stock exchange. In 1992, CB reviewed the audits conducted by seven firms and contested the appointment of two auditors. No actions were taken by CB against audit firms in 1993. According to French external auditors with whom we spoke, liability is not yet a big issue for external auditors in France—the level of claims and premiums for insurance are considered to be quite low. Furthermore, external auditors in France are not subject to joint and several liability, unless it can be proven that the auditor was an accomplice in any attempted deception. In case law, an auditor is only responsible for a proper and reasonable audit and is not required to be 100-percent accurate. Consequently, we were told by external auditors with whom we spoke that civil suits have not been a big problem for audit firms since the courts have simply apportioned part of the total judgment to each of the parties in the case. Thus, for example, they said that an institution’s own accountant is likely to be apportioned more blame than its external auditor since the accountant was responsible for the development of the financial statements, according to auditors with whom we spoke. The external auditors said that criminal cases against external auditors are more of a problem, since French prosecutors are leaning toward suits against all parties when some criminal activity is uncovered in an institution. In addition to its role in bank regulation and supervision, the Bank of France has responsibilities for other bank-related activities such as liquidity provision, crisis management, payments clearance, international negotiations, and lender of last resort. The French Bank Association (AFB) administers the system that protects deposits in French banks. The Bank of France’s bank-related responsibilities are not limited to supervision and regulation. It also plays a role in liquidity provision, crisis management, payments clearance, international organizations, and serves as lender of last resort. The Bank of France intervenes in the money market to implement its monetary policy with the goal of ensuring price stability. The Monetary Policy Council of the Bank of France was made responsible for defining the terms and conditions of such operations by the 1993 Bank of France Act, which gave the Bank of France independence over defining and implementing monetary policy. According to Bank of France officials, the Bank of France undertakes daily operations in the French money markets to supply or withdraw liquidity to the banking system, primarily in the form of repurchase agreements. Credit institutions obtain money from the Bank of France by selling securities under an agreement to repurchase them at a later date at a price that includes the agreed upon interest rate. The Bank of France may also grant cash loans to credit institutions but does this less frequently and only if the loans are collateralized. The Governor of the Bank of France plays a leading role in crisis management involving credit institutions in France reflecting both his authority as Governor, as well as his role as Chairman of the Banking Commission (CB). More specifically, though, the Governor is given a broad discretionary authority under Section 52 of the 1984 Banking Act to request assistance when a credit institution is in danger. This assistance may be requested in the first instance from the institution’s stockholders who will be asked to contribute more capital. Such requests for assistance have been made more frequently by the Governor, particularly in the past several years, as a result of the credit industry’s financial difficulties. The Governor’s power to request assistance from stockholders stems from the general belief that, since banking is considered a special industry and money a public good, a bank’s stockholders also have special responsibilities. It was also recognized by the drafters of the 1984 Act, though, that owning a bank should not be too onerous. Consequently, the Governor was given no enforcement authority with respect to his requests for assistance, other than his moral authority as Governor and Chairman of CB. If assistance from stockholders is not forthcoming—if the shareholders do not have money to give, for example—Section 52 also allows the Governor to request assistance from the banking industry to take “the measures needed to protect the interests of depositors and third parties, ensure the smooth functioning of the banking system and safeguard the reputation of the financial centre.” Again, Section 52 does not provide the Governor with sanctions if banks do not honor his requests for assistance. Nevertheless, banks would generally not refuse such a request because of the authority of the Bank of France, according to Bank of France officials with whom we spoke. According to Bank of France officials, the Governor has used his Section 52 authority to request assistance from the banking industry only once, in the case of the failure of Al Saudi Banque, S.A. (Al Saudi) in 1988. Although Al Saudi was a small bank, Bank of France officials said that the Governor felt that its depositors and creditors—many of whom were foreign, including several foreign banks who were lending short-term funds in the interbank market—should be protected in order to safeguard the reputation of French financial markets. The French deposit protection mechanism does not protect deposits in foreign currencies or interbank deposits. Consequently, French banks were requested by the Bank of France to provide over Fr.fr. 200 million in assistance to Al Saudi, and those who were creditors of Al Saudi were asked to forgive that debt.Because the primary goal of the rescue was to protect the reputation of French markets, foreign depositors and creditors of Al Saudi were completely paid off, while French depositors and creditors were only partially compensated under the terms of the rescue. The Bank of France has no specific criteria for using Section 52, preferring some uncertainty about whether a bank will be rescued and how much creditors might lose if a bank fails as a means of encouraging investors to use good judgment in investing their funds. According to Bank of France officials, the general wording of the Section 52 mandate gives the Governor extensive leeway in determining the extent of any action that should be taken with respect to a credit institution problem. The amount of the assistance that he requests of stockholders or banks, for example, is completely up to his discretion, as is the extent to which depositors and other creditors are reimbursed under any rescue. The Bank of France is able to act in financial crises because it has access to information about individual institutions through its role in the bank regulatory and supervisory structure and in the financial markets. The Bank of France plays a major role in payments clearance, primarily because of its legal responsibility to ensure “the smooth operation and security of payment systems.” It also has a significant amount of influence over the players in payments clearance since the 1984 Act restricts the right to issue and administer payment media to credit institutions, which the Bank of France helps regulate and supervise. The Bank of France is in charge of managing all 102 provincial clearing houses, the computer clearing centers, the interbank teleclearing system accounting system, the regional check record exchange centers, and SAGITTAIRE (automated system for the integrated handling and settlement of foreign transactions by means of telecommunication). It also acts as settlement agent for the members of those systems. In 1992, over 3.7 billion items were presented in the clearing houses, representing a total value of Fr.fr. 55,192 billion. In addition, about 3.3 billion messages representing Fr.fr. 59,219 billion were processed by SAGITTAIRE. There is no statutory supervision or regulation of the payment systems operating in France, over and above the supervision of credit institutions undertaken by CB and the general task of oversight of the payment system vested in the Bank of France by its statutes. The regulations on interbank payment and settlement systems have been developed by interbank consultative and standardization groups in which the Bank of France is represented and where its views are given great weight due to its role as central bank and banker of the Treasury. According to a recent Bank for International Settlements (BIS) report, the Bank of France does “regularly perform audit procedures for the interbank exchange and settlement systems which it administers. It pays particularly close attention to maintaining continuity of service.” According to BIS, the Bank of France also “has consistently promoted measures to modernize the French payments system. Consequently, it has played an active role in reforms, carried out in consultation with the banking industry, designed to lower the cost of bank intermediation by automating payment media and rationalizing payment circuits.” The Bank of France participates in developing French positions with respect to financial issues in several international organizations, even though it takes the lead only on the Basle Committee on Bank Supervision under BIS auspices, on which CB is also represented. In other groups, such as the EU and the Organization for Economic Cooperation and Development, the Bank of France and the General Secretariat of CB play active roles in negotiations and consultations, even though the lead role is played by the Treasury. COB, as the overseer of the securities markets, is the representative to the International Organization of Securities Commissions. While France historically has not had a problem with bank runs, it has experienced numerous occasions when banks have cut other banks off in the interbank market. If the Bank of France determines that the bank being cut off is simply experiencing liquidity problems, and not solvency problems, it may step in and provide liquidity, although it does so infrequently. In addition, separately from his authority under Section 52, discussed above, the Governor of the Bank of France may “request” banks to provide liquidity to other institutions who need it. For example, in 1993, the Bank of France asked some of the larger banks in France to provide lower-rate overnight loans to another large bank that had large liquidity needs but could not afford the high rates that had resulted from government intervention in the currency markets. Such requests for assistance have been made infrequently; however, and the Governor is only to ask banks for assistance if he is confident that they will accede to the request, according to Bank of France staff, since the Governor has no legal authority to enforce his requests. In very rare cases, the Bank of France may agree to cover potential losses from such lending, according to Bank of France officials with whom we spoke. The Bank of France has no strict policy regarding when it will provide liquidity or “encourage” other banks to do so. According to Bank of France officials, the Bank of France prefers to maintain a policy of “constructive ambiguity” in order to preserve market discipline to the greatest extent possible. AFB administers the system, called the Solidarity Mechanism (the Mechanism), whose purpose is to protect deposits in its members—the 425 banks. Although there is no legal requirement that banks join the Mechanism, there is a provision in the 1984 Act that requires all credit institutions to belong to an association or body that is affiliated with AFEC, the umbrella organization for French credit institutions. The AFB is that association for banks, and membership in the Mechanism is a requirement for AFB members. As of July 1, 1995, when the EU deposit insurance directive took effect, all EU banks were required to belong to the deposit protection schemes of their home countries. Consequently, branches of non-French EU member banks are not required to belong to the Mechanism, but all French banks and non-EU banks are legally required to belong, according to AFB officials with whom we spoke. The Mechanism is not a deposit insurance system in which banks pay premiums into a fund that is then used to cover insured deposits in failed institutions. Instead, after a member bank fails, the full membership of the Mechanism provides the funds as needed to cover the protected deposits in the failed bank. A determination of the level of funding needed and the burden sharing among the Mechanism’s members is determined by AFB staff. Until recently, the amount each bank was assessed to address a bank failure was based purely on the bank’s deposit size. As a result of complaints by larger banks who argued that they paid the most when a bank failed but were unlikely to fail themselves, the assessment system was changed. Now, only half of the agreed upon payment is based on deposit size. The other half is a per bank distribution divided evenly among the Mechanism’s membership, affecting small banks—and foreign banks who often have very low French franc deposits—in the same manner as large banks. French franc deposits, and since the beginning of 1994, EU currencies and European currency unit deposits, in failed banks are protected up to Fr.fr. 400,000 per capita. Foreign currency deposits, deposits in branches of French banks in other countries, and interbank deposits are not protected by this system. There is also a global limit of Fr.fr. 200 million on Mechanism payouts in any 1 year. However, since the unused funds of the previous 2 years plus the funds of the following 2 years may be used in any 1 year, the actual ceiling for bank failures in any 1 year is Fr.fr. 1 billion. Even this limit is fairly small compared to the size of France’s largest banks and indicates that the Mechanism was meant to cover small banks. If a large bank were to fail, the Bank of France, using Section 52 of the 1984 Act, or the French government would have to determine what action to take. Since the Mechanism was established on January 18, 1990, 10 banks have failed, costing the Mechanism’s membership a total of about Fr.fr. 450 billion.
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Pursuant to a congressional request, GAO reviewed the French bank regulatory structure and its key participants. GAO found that: (1) three independent committees oversee bank authorization, regulation, and supervision in France; (2) the Credit Institutions Committee (CEC) is responsible for authorizing and licensing credit institutions, approving any significant changes to a credit institution's structure and ownership, and disapproving management changes; (3) the Bank Regulatory Committee (CRB) is responsible for developing the regulations applicable to credit institutions; (4) the Banking Commission (CB) is responsible for supervising all credit institutions authorized under the French Banking Act of 1984, monitoring the financial soundness of credit institutions, enforcing legal and regulatory requirements, and providing technical assistance to other supervisory committees; (5) the French bank regulatory system is cohesive in spite of having three regulatory bodies with distinct jurisdictions; (6) the Minister of Economic Affairs has an influential position in bank regulation and supervision because he is the Chairman of CRB and a member of CB and CEC; (7) CB obtains the information necessary to enforce compliance with banking regulations and is able to assess the financial condition of credit institutions by conducting permanent oversight and on-site inspections of financial institutions; (8) the Bank of France is responsible for bank-related activities, such as liquidity provision, crisis management, payments settlement, international negotiations, and lender of last resort; and (9) the French Bank Association administers the deposit protection program for its member banks.
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Our August 2008 report identified four primary challenges with the U.S. voluntary market. First, the concept of a carbon offset is complicated because offsets can involve different activities, definitions, greenhouse gases, and timeframes for measurement. While most markets involve tangible goods or services, the carbon offset market involves a product that represents the absence of something—in this case, an offset equals the absence of one ton of carbon dioxide emissions or the equivalent quantity of another greenhouse gas. Project developers produce offsets from a variety of activities such as sequestration in agricultural soil and forestry projects, and methane capture. Specifically, carbon offsets can result from three broad types of activities: (1) reductions of greenhouse gases, which may include activities such as the capture of methane from landfills or coalmines, (2) avoidance of greenhouse gases, which may include activities such as the development of renewable energy infrastructure, and (3) sequestration, which may involve storing carbon dioxide in geologic formations or planting trees that take carbon dioxide out of the atmosphere. See figure 1 for a diagram of common types of carbon offset projects. An additional complication is that the parties involved in generating, buying, and selling offsets may also use different definitions of a carbon offset. The term is often used generically to describe reductions or avoidances of emissions of any or all of the six primary greenhouse gases. Furthermore, these six gases vary in their potency or climate forcing effect, referred to as global warming potential. See table 1 for a description of U.S. greenhouse gas emissions and global warming potential. Scientists have developed a concept known as carbon equivalence that takes these variations into account and provides a way to describe emissions of different gases in comparable terms. For example, methane is roughly equivalent in global warming potential to about twenty one tons of carbon dioxide, the most common greenhouse gas. Finally, the timing of an offset’s creation is complicated. In cases where offsets are sold before they are produced, the quantity of offsets generated from projects can be calculated using what is known as ex-ante (or future value) accounting. On the other hand, when offsets are sold after they are produced, the quantity of offsets can be calculated using ex-post accounting. Using future value accounting, consumers may purchase an offset today, but it may take several years before the offset is generated. Ensuring the credibility of offsets purchased before they are produced inherently involves a higher degree of uncertainty than purchasing an offset that has already been generated. The second challenge is ensuring the credibility of offsets. Our prior work identified four general criteria for credible carbon offsets—they must be additional, quantifiable, real, and permanent. A carbon offset project is generally considered “additional” if it decreases emissions of greenhouse gases below the quantity that would have been emitted in a projected business-as-usual scenario. “Quantifiable” means the reductions can be measured, and “real” means the reductions can be verified. “Permanent” means the emissions reduced, avoided, or sequestered by a project will not be released into the atmosphere in the future. Providing assurance that offsets are credible is inherently challenging because it involves measuring the reductions achieved through an offset project against a projected baseline of what would have occurred in its absence. For example, if a facility that emitted 200 tons of carbon dioxide per year implemented a project that reduced its emissions by 100 tons, it may have created 100 tons of offsets. See figure 2 for a hypothetical depiction of an offset project measured against a projected business-as- usual scenario. E m i s s i o n s w i p r o j e c t Our prior work found that additionality is fundamental to the credibility of offsets because only offsets that are additional to business-as-usual activities result in new environmental benefits. Several stakeholders we interviewed as part of our study said that there is no correct technique for determining additionality because it requires comparison of expected reductions against a projected business-as-usual emissions baseline. Determining additionality is inherently uncertain because, it may not be possible to know what would have happened in the future had the projects not been undertaken. There are many ways to estimate whether projects are additional, and many stakeholders said that applying a single test is too simplistic because every project is different from others and operates under different circumstances. There are many quality assurance mechanisms, commonly described collectively as “standards,” for assuring the credibility of carbon offsets in the U.S. voluntary market, but few standards, if any, that cover the entire supply chain. The proliferation of standards has caused confusion in the market, and the existence of multiple quality assurance mechanisms with different requirements raises questions about the quality of offsets available on the voluntary market, according to many stakeholders. The lack of standardization in the U.S. market may also make it difficult for consumers to determine whether offsets are fully fungible— interchangeable and of comparable quality—a characteristic of an efficient commodity market. The term “carbon offset” implies a uniform commodity, but offsets may originate from a wide variety of project types based on different quantification and quality assurance mechanisms. Because offsets are not all the same, it may be difficult for consumers to understand what they purchase. While the concept of carbon offsets rests on the notion that a ton of carbon reduced, avoided, or sequestered is the same regardless of the activity that generated the offset, some stakeholders believe that certain types of projects are more credible than others. Specifically, the stakeholders identified methane capture and fuel-switching projects as the most credible, and renewable energy certificates (REC) and agricultural and rangeland soil carbon sequestration as less credible. The stakeholders’ views on the credibility of different project types may stem from the fact that methane and fuel-switching projects are relatively simple to measure and verify, while other projects such as RECs, forestry, and agricultural and rangeland soil carbon projects face challenges related to additionality, measurement, and permanence. With respect to agricultural and rangeland sequestration and forestry, certain stakeholders said it is difficult to accurately measure emissions reductions from these types of projects. In addition, forestry offset projects may not be permanent because disturbances such as insect outbreaks and fire can return stored carbon to the atmosphere. Third, there are economic and environmental tradeoffs associated with using offsets in a regulatory program to limit greenhouse gas emissions. In many cases, regulated entities may find it economically advantageous to buy offsets instead of reducing emissions themselves. The Environmental Protection Agency (EPA) has stated that the cost of compliance with mitigation policies under consideration by the Congress decreases substantially as the use of offsets increases. Specifically, EPA’s analysis of the Climate Security Act of 2008 (S. 2191), introduced in the last Congress, reported that if the use of domestic and international offsets is unlimited, then compliance costs fall by an estimated 71 percent compared to the bill as written. Alternatively, the price increases by an estimated 93 percent compared to the bill as written if no offsets are allowed. Other studies show similar results. In general, the carbon price is lower in quantitative models of a U.S. compliance system when domestic and international offsets are widely available and their use is unrestricted. In the short term, lower prices make compliance with a policy to reduce emissions less expensive. Multiple stakeholders we interviewed as part of our study said that including offsets in a compliance scheme could slow investment in certain emissions reduction technologies in regulated sectors and lessen the motivation of market participants to reduce their own emissions. According to some stakeholders, if more cost-effective offsets are available as compliance tools, regulated sources may delay making investments to reduce emissions internally, an outcome that could ultimately slow the development of, and transition to, a less carbon- intensive economy. Fourth, allowing the use of offsets could compromise the environmental certainty of a regulatory program to limit emissions of greenhouse gases if the offsets do not meet requirements that underpin their integrity. If a significant number of nonadditional offsets enter the market, emissions may rise beyond levels intended by the scheme, according to some stakeholders. Nonadditional offsets could thus increase uncertainty about achieving emissions reduction goals. This concern underscores the importance of using quality assurance mechanisms to ensure the credibility of any offsets allowed into a compliance scheme. Using offsets in a compliance scheme could also increase administrative costs because of increased government oversight of quality assurance mechanisms used to ensure the credibility of offsets. Concerns associated with using offsets for compliance in a regulatory system to limit emissions could be minimized by restricting the use of offsets or including policy options for enhancing oversight of the market such as applying discounts or imposing insurance requirements on offsets with greater uncertainty or potential for failure. Certain stakeholders suggested imposing limits on the use of offsets in a compliance scheme to address some of these challenges, but stakeholders held different opinions about the potential effectiveness of this approach. Some said it may be necessary to place restrictions on the use of offsets in order to achieve internal emissions reductions from regulated sources. If all the effort to reduce emissions is in the form of offsets, then the compliance system may not provide the price signals necessary for long-term investment in technology at domestic industrial facilities and power plants, according to multiple stakeholders. They said that domestic abatement is central to achieving the long-term goal of any emissions reduction system. However, other stakeholders said that incorporating offsets into a compliance scheme will enable greater overall climate benefits to be achieved at a lower cost, as long as offsets are additional and are not double-counted. Our November 2008 report discussed the environmental and economic effects of the CDM and identified lessons learned about the role of carbon offsets in mandatory programs to limit emissions. First, with respect to environmental effects, the overall effect of the CDM on international emissions is uncertain, largely because it is nearly impossible to determine the level of emissions that would have occurred in the absence of each offset project. The CDM imposes a rigorous set of review requirements for applicants to complete before obtaining project credits, known as Certified Emissions Reductions (CERs), which can be sold or used for compliance with targets under the Kyoto Protocol. Applicants must demonstrate, among other things, that the project would not have occurred without the CDM and to obtain approval of the Executive Board, a regulatory body established by the Kyoto Protocol. See figure 3 for the resources and time associated with each step in the review process. This resource- and time-intensive process, however, has involved challenges. While the CDM project review process may provide greater assurance of credible projects, available evidence suggests that some credits have been issued for emission reduction projects that were not additional. Because additionality is based on projections of what would have occurred in the absence of the CDM, which are necessarily hypothetical, it is impossible to know with certainty whether any given project is additional. Researchers have reported that some portion of projects registered under the CDM have not been additional, and although there is little empirical evidence to support a precise figure, some studies have concluded that a substantial number of nonadditional projects have received credits. Second, with respect to economic effects, specifically opportunities for cost-effective reductions, available information and experts indicate that the CDM has enabled industrialized countries to make progress toward achieving their emissions targets at less cost and has involved developing countries in these efforts. For example, facilities covered under the European Union’s Emissions Trading Scheme (ETS) may invest in CERs as a lower-cost alternative to reducing emissions on-site or purchasing allowances under the ETS. Further, the availability of CERs may produce lower allowance prices than would be observed under a no-offset scenario. As a result, the CDM can potentially reduce firms’ compliance costs regardless of whether these firms choose to purchase CERs. See figure 4 for information about the number and types of offset projects in CDM pipeline. The first chart in figure 4 shows the most common types of projects and their growth over time while the second chart shows the volume of credits expected to be produced through 2012. The demand for CERs has also provided developing countries that do not have emissions targets under the Kyoto Protocol with an economic incentive to pursue emission reduction activities. However, while CDM projects have been established in over 70 developing countries, most benefits have thus far accrued to fast-growing nations such as China and India. In fact, these two countries host over half of all registered projects. Conversely, countries in Africa and the Middle East have seen little CDM- related investment. We also reported that investors in the CDM market face higher risks, depending on, for example, whether the rights to the CDM credits are purchased prior to actual issuance of the credits. Because the credits in this case are not issued until the project is completed and emissions are verified, there is some risk that the project will not produce the expected number of credits. For example, the CDM’s Executive Board may delay or reject a project and even approved projects might not be built on schedule or within budget. Further, the amount of actual reductions may differ from what was planned—for example, wind energy projects may generate more or less electricity depending on weather conditions. One study shows that projects reaching the registration phase tended to yield only about 76 percent of their forecasted CDM credits. Our review of the CDM experience, in particular using offsets in a compliance program, revealed that reducing compliance costs while maintaining overall environmental integrity can prove difficult. Using available information, stakeholder interviews, and our experts’ responses to a questionnaire, we identified three key lessons learned about the use of offsets in programs to limit emissions. First, the use of offsets can compromise the integrity of programs designed to reduce greenhouse gas emissions. In theory, if all offsets were real and additional, their use in a mandatory program to limit emissions shifts the location of the emission reductions and would not negatively affect the scheme’s integrity. However, as many experts mentioned, it is nearly impossible to demonstrate project additionality with certainty. Because the CDM is primarily used by countries to comply with the Kyoto Protocol’s binding targets and the ETS emissions caps, credits that do not represent real and additional emission reductions do not represent progress toward these targets or caps. If a significant number of nonadditional credits are allowed into the program, for instance, these credits may allow covered entities to increase their emissions without a corresponding reduction in a developing country. This can cause emissions levels to rise above the targets set by the program, introducing uncertainty as to the actual level of reductions, if any, achieved by the program. As a result, this use of nonadditional offsets negates one of the advantages—greater certainty about the level of emissions—of a cap-and- trade program compared to other market-based programs. Some research has advocated limiting the use of offsets in compliance schemes as a way to reduce the environmental risk of nonadditional projects; however, our research shows that even restricted offset use can have broad environmental implications. In particular, the experience of the European Union’s ETS illustrates the importance of considering offset limits in the context of a country’s overall reduction effort, in addition to its overall emissions target. As noted previously, limiting offsets based on the overall emissions cap—for example, allowing countries to meet 12 percent of their emissions cap with offsets—may mean in practice that most or all reductions occur outside of that country’s borders. If most reductions occur elsewhere, there may be little incentive for entities under the compliance program to make infrastructure changes or other technological investments. Furthermore, the negative environmental effects of nonadditional offsets increase as the number of imported credits rises. On the other hand, stringent limits can ensure that a certain portion of abatement activity occurs at home and help secure a carbon price that is high enough to spur investment in low-carbon technologies; limits also can lessen the impact of nonadditional credits. If limits are imposed, therefore, it is important that such limits are sufficiently stringent and are based on actual expected emission reductions, not the overall emissions cap. Second, carbon offset programs involve important tradeoffs and the use of such programs may be, at best, a temporary solution to addressing climate change. While the CDM may encourage developing countries to participate in emission reduction activities, it also may increase their reliance on external funding for such activities. According to several experts, the CDM effectively deters efforts that fall outside the scope of creditable activities. Moreover, as many of our experts pointed out, the concept of additionality presents a difficult regulatory problem. Rigorous project reviews may help ensure some degree of credit quality, but also can increase the overall cost of the program. Overall, many experts suggested that the CDM has not yet achieved an effective balance of these priorities. There is general consensus among climate change experts that both industrialized and developing countries must be engaged in emission reduction efforts to meet international emission reduction goals. In light of these circumstances, several experts we consulted noted that international offset programs such as the CDM can help to engage developing nations and encourage emission reductions in areas that may not otherwise have incentives to do so. Several experts also said that the CDM helps stimulate interest in international climate change dialogue and may help facilitate progress toward future emission reduction commitments. Given these tradeoffs, some observers have said the best approach may be to gradually incorporate developing nations under a global emission reduction plan or move toward full-fledged, worldwide emission trading. However, political and institutional capacity may make worldwide emission trading an unlikely possibility. As a result, the CDM may be best used as a transition tool to help developing nations move toward a more comprehensive climate change strategy. Third, the CDM’s approval process may not be a cost-effective model for achieving emission reductions. Most experts expressed dissatisfaction with this approach, which requires individual review and additionality assessments for each project. Observers also have described the project- by-project approach as inefficient, noting that the long, uncertain process can create risks and costs for investors. Host country stakeholders we spoke with generally agreed with this assessment, saying that the process was bureaucratic and overly burdensome. Indeed, the length and administrative complexity of the process, as well as the shortage of available emission verifiers, has resulted in bottlenecks and delays as the CDM’s administrative structure has struggled to keep up with the number of projects. Moreover, the transaction costs and investment risks associated with CDM projects can reduce their effectiveness as a cost- containment mechanism when linked to compliance schemes. While the CDM’s intensive review process may help ensure some degree of environmental integrity, it also can limit the number of potential projects in the system. For example, the cost to initiate a CDM project and usher it through the approval process may be too high for certain projects, rendering them unviable. The CDM’s oversight board has taken a number of actions to help improve the process over time, but many experts said that the program does not yet provide a sufficient level of quality assurance. Also, it is unlikely under the current approach that the CDM will achieve large-scale reductions or significantly impact global emissions in the future. The scale of the CDM is limited not only by the extensive set of requirements; it also is constrained by the fundamental time and resource limitations of the 10-member Executive Board and its subsidiary panels, and the shortage of accredited auditing firms to validate projects and verify emissions. Even assuming all projects are real and additional, it is likely that reductions from these projects will only represent about 2 percent to 3 percent of annual energy- related carbon dioxide emissions in China and India, and less than 1 percent in Africa. Finally, the design features of an offset program such as the CDM can be fine-tuned to help maximize their effectiveness, but the underlying challenges of determining additionality, for example, may not be eliminated completely. While some of the experts who participated on our panel said that offset programs on their own are unlikely to be sufficient to help curb developing country emissions, others stated that reforming or supplementing the CDM could make a broader impact worldwide. Experts provided a number of potential improvements to the CDM, many of which would represent fundamental changes to the current mechanism’s structure and procedures. For example, moving toward a sectoral approach under the CDM would involve crediting emission reductions in relation to baselines set for different economic sectors, such as a benchmark based on the best available technology for the industry, rather than making a project-specific determination of additionality. A sectoral approach would eliminate the need for project-specific determination of additionality, because credits are awarded based on performance in relation to a predetermined baseline. However, this approach requires reliable historic emissions data to set baselines and the technical capacity to monitor emissions, requirements which may prove problematic for some developing countries. In addition, a few experts recommended discounting CDM credits. For example, with a discount rate of 30 percent, a project that is expected to reduce carbon dioxide by 100 metric tons would only receive 70 credits. While discounting may not help screen out nonadditional projects, it can help mitigate the environmental consequences of nonadditional credits. Our November 2008 report discusses these and other alternatives to the CDM in greater detail. Our reports on two different markets for carbon offsets—the U.S. voluntary market and the CDM under the Kyoto protocol—have identified matters for the Congress to consider as it deliberates legislation to limit greenhouse gas emissions. While carbon offsets have the potential to lower compliance costs for entities that could be affected by regulatory limits on emissions, their use for compliance in a mandatory emissions reduction scheme could undermine the program’s integrity if the offsets lack credibility. Our report on the voluntary market for offsets in the United States highlights the complexity and challenges with a largely unregulated market that lacks transparency and provides market participants with limited information on the credibility of offsets. Alternatively, our work on CDM identifies challenges with using carbon offsets in a mandatory emissions reduction program despite the use of rigorous quality assurance procedures. The experience with both markets demonstrates the importance of ensuring the credibility of offsets, but this remains a challenge for both markets because of the inherent uncertainty associated with estimating emissions reductions relative to projected business-as- usual baselines. Using offsets in a mandatory emissions reduction program would involve fundamental trade-offs between offset credibility and compliance costs. As we have reported, to the extent that the Congress chooses to develop a program that limits greenhouse gas emissions while allowing the use of carbon offsets for compliance, it may wish to establish (1) clear rules about the types of offset projects that regulated entities can use for compliance, as well as standardized quality assurance mechanisms for these allowable project types; (2) procedures to account and compensate for the inherent uncertainty associated with offset projects, such as discounting or overall limits on the use of offsets for compliance; (3) a standardized registry for tracking the creation and ownership of offsets; and (4) procedures for amending the offset rules, quality assurance mechanisms, and registry, as necessary, based on experience and the availability of new information over time. In addition, our report on international carbon offset programs generated matters for consideration that may prove useful if the Congress looks to the CDM as a model for an offset program. Specifically, Congress may wish to consider that (1) the existing program may not be the most direct or cost-effective means of achieving reductions in emissions, (2) the use of carbon offsets in a cap-and-trade system can undermine the system’s integrity, given that it is not possible to ensure that every credit represents a real, measurable, and long-term reduction in emissions; and (3) while proposed reforms may significantly improve the CDM’s effectiveness, carbon offsets involve fundamental tradeoffs and may not be a reliable long-term approach to climate change mitigation. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact John Stephenson, Director, Natural Resources and Environment at (202) 512-3941 or [email protected]. Key contributors to this statement were Michael Hix (Assistant Director), Kate Cardamone, Janice Ceperich, Jessica Lemke, Alison O’Neill, and Joe Thompson. Cindy Gilbert, Anne Johnson, Richard P. Johnson, Ardith A. Spence, and Lisa Vojta also made important contributions. 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.
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Carbon offsets--reductions of greenhouse gas emissions from an activity in one place to compensate for emissions elsewhere--can reduce the cost of regulatory programs to limit emissions because the cost of creating an offset may be less than the cost of requiring entities to make the reductions themselves. To be credible, however, an offset must be additional--it must reduce emissions below the quantity emitted in a business-as-usual scenario--among other criteria. In the U.S., there are no federal requirements to limit emissions and offsets may be purchased in a voluntary market. Outside the U.S., offsets may be purchased on compliance markets to meet requirements to reduce emissions. The Congress is considering adopting a market-based cap-and-trade program to limit greenhouse gas emissions. Such a program would create a price on emissions based on the supply and demand for allowances to emit. Under such a program, regulated entities could potentially substitute offsets for on-site emissions reductions, thereby lowering their compliance costs. Today's testimony summarizes GAO's prior work examining (1) the challenges in ensuring the quality of carbon offsets in the voluntary market, (2) the effects of and lessons learned from the Clean Development Mechanism (CDM), an international offset program, and (3) matters that the Congress may wish to consider when developing regulatory programs to limit emissions. In an August 2008 report, GAO identified four primary challenges related to the United States voluntary carbon offset market. First, the concept of a carbon offset is complicated because offsets can involve different activities, definitions, greenhouse gases, and timeframes for measurement. Second, ensuring the credibility of offsets is challenging because there are many ways to determine whether a project is additional to a business-as-usual baseline, and inherent uncertainty exists in measuring emissions reductions relative to such a baseline. Related to this, the use of multiple quality assurance mechanisms with varying requirements may raise questions about whether offsets are fully fungible--interchangeable and of comparable quality. Third, including offsets in regulatory programs to limit greenhouse gas emissions could result in environmental and economic tradeoffs. For example offsets could lower the cost of complying with an emissions reduction policy, but this may delay on-site reductions by regulated entities. Fourth, offsets could compromise the environmental certainty of a regulatory program if offsets used for compliance lack credibility. In a November 2008 report, GAO examined the environmental and economic effects of the CDM--an international program allowing certain industrialized nations to pay for offset projects in developing countries--and identified lessons learned about the role of carbon offsets in programs to limit emissions. While the CDM has provided cost containment in a mandatory emissions reduction program, its effects on emissions are uncertain, largely because it is nearly impossible to determine the level of emissions that would have occurred in the absence of each project. Although a rigorous review process seeks to ensure the credibility of projects, available evidence from those with experience in the program suggests that some offset projects were not additional. In addition, the project approval process is lengthy and resource intensive, which significantly limits the scale and cost-effectiveness of emissions reductions. The findings from these two reports illustrate how challenges in the voluntary offset market and the use of offsets for compliance--even in a rigorous, standardized process like the CDM--may compromise the environmental integrity of mandatory programs to limit emissions and should be carefully evaluated. As a result of these challenges, GAO suggested that, as it considers legislation that allows the use of offsets for compliance, the Congress may wish to consider, among other things, directing the establishment of clear rules about the types of projects that regulated entities can use as offsets, as well as procedures to account and compensate for the inherent uncertainty associated with offset projects. Further, GAO suggested that the Congress consider key lessons from the CDM, including the possibility that, (1) due to the tradeoffs involving cost savings and the credibility of offsets, their use in mandatory programs may be, at best, a temporary solution to achieving emissions reductions, and (2) the program's approval process may not be a cost-effective model for achieving emission reductions.
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I am pleased to be here today to discuss the implementation of the Community Policing Act with special attention to statutory requirements for implementing the Community Oriented Policing Services (COPS) grants. The Community Policing Act authorized $8.8 billion to be used from fiscal years 1995 to 2000 to enhance public safety. Its goals are to add 100,000 officer positions, funded by grants, to the streets of communities nationwide and to promote community policing. This statement is based primarily on our September 3, 1997, report on the design, operation, and management of the COPS grant program. At that time, the COPS grant program was midway through its 6-year authorization period. Thus, the information contained in this statement should be considered as a status report at that time rather than a reflection of current operations. My statement makes the following points. COPS grants were not targeted on the basis of greatest need for assistance. However, the higher the crime rate, the more likely a jurisdiction was to apply for a COPS grant. COPS office grant monitoring was limited. Monitoring guidelines were not prepared, site visits and telephone monitoring did not systematically take place, and information on activities and accomplishments was not consistently collected or reviewed. Small communities were awarded most COPS office grants, but large cities received larger awards. In accordance with the act, about half the funds were awarded to agencies serving populations less than 150,000. As of June 1997, a total of 30,155 law enforcement positions funded by COPS grants were estimated by the COPS office to be on the street. Community policing is a philosophy under which local police departments develop strategies to address the causes of and reduce the fear of crime through problem solving tactics and community-police partnerships. Community policing emphasizes the importance of police-citizen partnerships and cooperation to control crime, maintain order, and improve the quality of life in communities. Community Policing Act, the Attorney General had discretion to decide which Justice component would administer community policing grants. Justice officials believed that a new, efficient customer-oriented organization was needed to process the record number of grants. The result was the creation of the new Office of Community Oriented Policing Services (COPS). The Community Policing Act requires that grantees contribute 25 percent of the costs of the program, project, or activity funded by the grant, unless the Attorney General waives the matching requirement. According to Justice officials, the basis for waiver of the matching requirements is extraordinary local fiscal hardship. The act also requires that grants be used to supplement, not supplant, state and local funds. To prevent supplanting, grantees must devote resources to law enforcement beyond those resources that would have been available without a COPS grant. In general, grantees are expected to use the hiring grants to increase the number of funded sworn officers above the number on board in October 1994, when the program began. Grantees are required to have plans to assume a progressively larger share of the cost over time, looking toward keeping the increased number of officers by using state and local funds after the expiration of the federal grant program at the end of fiscal year 2000. The Community Policing Act does not target grants to law enforcement agencies on the basis of which agency has the greatest need for assistance, but rather to agencies that meet COPS program criteria. In one of our previous reports, among other things, we reviewed alternative strategies for targeting grants. We noted that federal grants have been established to achieve a variety of goals. For example, if the desired goal is to target fiscal relief to areas experiencing greater fiscal stress, grant allocation formulas could be changed to include a combination of factors that allocate a larger share of federal aid to those states with relatively greater program needs and fewer resources. expressed uncertainty about being able to continue officer funding after the grant expired and about their ability to provide the required 25-percent match. However, community groups and local government representatives we interviewed generally supported community policing in their neighborhoods. Monitoring is an important tool for Justice to use in ensuring that law enforcement jurisdictions funded by COPS grants comply with federal program requirements. The Community Policing Act requires that each COPS Office program, project, or activity contain a monitoring component developed pursuant to guidelines established by the Attorney General. In addition, the COPS program regulations specify that each grant is to contain a monitoring component, including periodic financial and programmatic reporting and, in appropriate circumstances, on-site reviews. The regulations state that the guidelines for monitoring are to be issued by the COPS Office. COPS Office grant-monitoring activities during the first 2-1/2 years of the program were limited. Final COPS Office monitoring guidance had not been issued as of June 1997. Information on activities and accomplishments for COPS-funded programs was not consistently collected or reviewed. Site visits and telephone monitoring by grant advisers did not systematically take place. COPS Office officials said that monitoring efforts were limited due to a lack of grant adviser staff and an early program focus on processing applications to get officers on the street. According to a COPS Office official, as of July 1997, the COPS Office had about 155 total staff positions, up from about 130 positions that it had when the office was established. Seventy of these positions were for grant administration, including processing grant applications, responding to questions from grantees, and monitoring grantee performance. The remaining positions were for staff who worked in various other areas, including training; technical assistance; administration; and public, intergovernmental, and congressional liaison. According to the COPS Office, in January 1997, it began taking steps to increase the level of its monitoring. It developed monitoring guidelines, revised reporting forms, piloted on-site monitoring visits, and initiated telephone monitoring of grantees’ activities. process of hiring up to this level. In commenting on our draft report, COPS officials also noted that they were recruiting for more than 30 staff positions in a new monitoring component to be exclusively devoted to overseeing grant compliance activities. COPS Office officials also said that some efforts were under way to review compliance with requirements of the Community Policing Act that grants be used to supplement, not supplant, local funding. In previous work, we reported that enforcing such provisions of grant programs was difficult for federal agencies due to problems in ascertaining state and local spending intentions. According to the COPS Office Assistant Director of Grant Administration, the COPS Office’s approach to achieving compliance with the nonsupplantation provision was to receive accounts of potential violations from grantees or other sources and then to work with grantees to bring them into compliance, not to abruptly terminate grants or otherwise penalize grantees. COPS Office grant advisers attempted to work with grantees to develop mutually acceptable plans for corrective actions. Also, in our 1997 report on grant design, our synthesis of literature on the fiscal impact of grants suggested that each additional federal grant dollar resulted in about 40 cents of added spending on the aided activity. This means that the fiscal impact of the remaining 60 cents was to free up state or local funds that otherwise would have been spent on that activity for other programs or tax relief. In April 1997, COPS Office officials said that they were discussing ways to encourage grantees to sustain hiring levels achieved under the grants, in light of the language of the Community Policing Act regarding the continuation of these increased hiring levels after the conclusion of federal support. Law enforcement agencies in small communities were awarded most of the COPS grants for fiscal years 1995 and 1996. Our work showed that 6,588 grants—49 percent of the total 13,396 grants awarded—were awarded to law enforcement agencies serving communities with populations of fewer than 10,000. Eighty-three percent—11,173 grants—of the total grants awarded went to agencies serving populations of fewer than 50,000. Large cities—with populations of over 1 million—were awarded about 1 percent of the grants, but these grants made up over 23 percent—about $612 million—of the total grant dollars awarded. About 50 percent of the grant funds were awarded to law enforcement agencies serving populations of 150,000 or less, and about 50 percent of the grant funds were awarded to law enforcement agencies serving populations exceeding 150,000, as the Community Policing Act required. In commenting on our draft report, the COPS Office noted that these distributions were not surprising given that the vast majority of police departments nationwide are also relatively small. The COPS Office also noted that the Community Policing Act requires that the level of assistance given to large and small agencies be equal. Of the grants awarded in fiscal years 1995 and 1996, special law enforcement agencies, such as those serving Native American communities, universities and colleges, and mass transit passengers, were awarded 329 hiring grants. This number was less than 3 percent of the 11,434 hiring grants awarded during the 2-year period. As of the end of fiscal year 1996, after 2 years of operation, the COPS Office had issued award letters to 8,803 communities for 13,396 grants totaling about $2.6 billion. Eighty-six percent of these grant dollars were to be used to hire additional law enforcement officers. Other grant funds were to be used to buy new technology and equipment; hire support personnel; and/or pay law enforcement officers overtime, train officers in community policing, and develop innovative prevention programs, including domestic violence prevention, youth firearms reduction, and antigang initiatives. As of June 1997, a total of 30,155 law enforcement officer positions funded by COPS grants were estimated by the COPS Office to be on the street. COPS Office estimates of the numbers of new community policing officers on the street were based on three funding sources: (1) officers on board as a result of COPS hiring grants; (2) officers redeployed to community policing as a result of time savings achieved through technology and equipment purchases, hiring of civilian personnel, and/or law enforcement officers’ overtime; and (3) officers funded under the Police Hiring Supplement Program, which was in place before the COPS grant program. According to COPS Office officials, the office’s first systematic attempt to estimate the progress toward the goal of 100,000 new community policing officers on the street was a telephone survey of grantees done between September and December, 1996. COPS Office staff contacted 8,360 grantees to inquire about their progress in hiring officers and getting them on the street. According to a COPS Office official, a follow-up survey, which estimated 30,155 law enforcement officer positions to be on the street, was done between late March and June, 1997. The official said that this survey was contracted out because the earlier in-house survey had been extremely time consuming. The official said that, as of May 1997, the office was in the process of selecting a contractor to do three additional surveys during fiscal year 1998. Mr. Chairman, this concludes my prepared statement. Again, I wish to emphasize that my statement is based primarily on a report issued at about the mid-point of the COPS program implementation, and that facts and circumstances relating to the program would likely have changed since then. I would be pleased to answer any questions that you or other members of the Subcommittee may have. Contacts and Acknowledgment For future contacts regarding this testimony, please contact Richard M. Stana at (202) 512-8777. Individuals making key contributions to this testimony included Weldon McPhail and Dennise R. Stickley. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch- tone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed the implementation of the Community Policing Act, focusing on statutory requirements for implementing the Community Oriented Policing Services (COPS) grants. GAO noted that: (1) the Public Safety Partnership and Community Policing Act authorizes $8.8 billion to be used from fiscal years (FY) 1995 to 2000 to enhance public safety; (2) it has the goals of adding 100,000 officer positions, funded by grants, to the streets of communities nationwide and promoting community policing; (3) among other things, the act required that half the grants go to law enforcement agencies serving populations of 150,000 or less; (4) the Attorney General created the Office of Community Oriented Policing Services to administer community policing grants; (5) at the end of FY 1997, GAO reported on the Department of Justice's implementation of the act and progress toward achieving program goals; (6) GAO found that grants were not targeted to law enforcement agencies on the basis of which agency had the greatest need for assistance, but rather to agencies that met COPS program criteria; (7) previous work had shown that overall, the higher crime rate, the more likely a jurisdiction was to apply for a COPS grant; (8) the primary reasons contacted jurisdictions chose not to apply for a grant were cost related; (9) GAO reported that the COPS Office provided limited monitoring to assure compliance with the act during the period reviewed; (10) COPS officials said they were taking steps to increase the level of monitoring; (11) the majority of the 13,396 grants awarded in FY 1995 and FY 1996 went to law enforcement agencies serving populations of fewer than 50,000; (12) communities with populations of over 1 million were awarded less than 1 percent of the grants, although they were awarded over 23 percent of the total grant dollars; and (13) as of June 1997, the COPS Office estimated that a total of 30,155 law enforcement officer positions funded by COPS grants were on the streets.
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Initially created in 1968, the Office of Enforcement was then headed by an Assistant Secretary of the Treasury. The Under Secretary (Enforcement) position was created as a result of Treasury’s fiscal year 1994 appropriation in which Congress directed that the Secretary of the Treasury establish the Office of the Under Secretary (Enforcement) to give increased prominence to the law enforcement activities and responsibilities of Treasury’s law enforcement bureaus. In July 1994, the first Under Secretary (Enforcement) was sworn in. The Under Secretary’s staff includes an Assistant Secretary and three Deputy Assistant Secretaries. The Under Secretary reports to the Secretary of the Treasury through the Deputy Secretary of the Treasury and is responsible for the following functions: coordinating all Treasury law enforcement matters, including the formulation of policies for all Treasury enforcement activities; ensuring cooperation and proper levels of Treasury participation in law enforcement matters with other federal departments and agencies; directly overseeing the Assistant Secretary (Enforcement) and DAS (Enforcement Policy); and, through the Assistant Secretary (Enforcement), overseeing the DAS (Law Enforcement) and the DAS (Regulatory, Trade and Tariff Enforcement); providing departmental oversight of Customs; the Secret Service; ATF; and FLETC and, through the Assistant Secretary (Enforcement), monitoring the activities of FinCEN, OFAC, and EOAF; and conducting policy guidance for the Internal Revenue Service’s Criminal Investigation Division (IRS/CID); negotiating international agreements on behalf of the Secretary of the Treasury to engage in joint law enforcement operations and for the exchange of financial information and records useful to law enforcement; and supervising the Director of the Office of Finance and Administration (OF&A). Enforcement’s performance goals, as described in its fiscal year 2000 performance plan, were to (1) develop and implement policies to facilitate achievement of strategic goals in Treasury’s enforcement mission and (2) provide effective oversight of law enforcement bureaus. The fiscal year 2000 budget for the Treasury law enforcement bureaus, as enacted, totaled about $3.3 billion, with about 27,300 FTEs. As of September 30, 2000, Enforcement had 42 staff on board, consisting of 24 mission-related and 18 mission-support staff. In addition to these staff, Enforcement also had on board six detailees and one employee for whom Enforcement was reimbursed. Four of the five top Enforcement management positions and one bureau head position are political positions that are subject to turnover with a change in administration. Figure 1 shows an Enforcement organization chart as of September 2000. We focused our work on those offices within Enforcement that are responsible for providing oversight, policy guidance, and support to Treasury’s law enforcement bureaus. These are the Offices of the Under Secretary (Enforcement), the Assistant Secretary (Enforcement), the DAS (Enforcement Policy), the DAS (Law Enforcement), the DAS (Regulatory, Tariff and Trade Enforcement), and Finance and Administration. To determine Enforcement’s resource availability and obligations and, where applicable, why obligations differed from what was available, we interviewed and obtained documentation from Enforcement and FMD officials. The documentation we obtained and reviewed included Enforcement’s financial plans and payroll runs and relevant portions of appropriations acts for fiscal years 1994 through 2000. We selected fiscal year 1994 as the starting point for these data because that was the year that the first Under Secretary (Enforcement) was sworn in. To determine the circumstances under which the law enforcement bureaus are required to interact with Enforcement, versus acting on their own, we interviewed Enforcement officials. Because there was no comprehensive source that indicated when the bureaus are required to interact with Enforcement, we asked Enforcement officials to compile a list of these circumstances and to provide copies of the documentation that spelled out these requirements. We reviewed these documents to determine the extent to which they described the required interaction between Enforcement and the bureaus, such as when and how the bureaus were to interact with Enforcement. To determine whether the bureaus generally have complied with these requirements, the role Enforcement is to play, and how Enforcement communicated its authority to the bureaus, we interviewed Enforcement and bureau officials and obtained and reviewed related documentation. We also interviewed Enforcement and bureau officials to (1) determine what Enforcement had done to provide oversight, policy guidance, and support to the law enforcement bureaus and (2) identify what factors, if any, have been viewed as barriers to Enforcement in performing its oversight, policy guidance, and support roles, and what actions Enforcement had taken in response to these factors. We summarized these factors and identified broad categories into which they fell. We did not determine to what extent, if at all, the barriers these officials cited have affected Enforcement’s ability to fulfill its roles. Lastly, we developed and administered a DCI to Enforcement officials to gather information on examples of projects in which Enforcement engaged from October 1, 1998, through June 30, 2000. Enforcement did not have an inventory of the projects or ongoing efforts related to its oversight, policy guidance, and support roles. Therefore, we requested that Enforcement officials identify and provide data on up to 5 projects or ongoing efforts that were related to each of the 10 strategic goals that either Enforcement or the bureaus it oversees supports. Because the projects and ongoing efforts on which we obtained information are not a statistical sample of all projects and ongoing efforts, the DCI responses may not be representative of all projects or ongoing efforts that Enforcement engaged in during this period. We received 49 completed DCIs. We did not verify the information provided in the DCIs. Appendix I provides (1) Treasury’s four missions and the strategic goals for which the Enforcement officials were to complete the DCIs and (2) data on each of the projects or ongoing efforts they described in their DCI responses. The Enforcement officials we interviewed included the Under Secretary; Assistant Secretary; the DAS (Enforcement Policy); the DAS (Law Enforcement); the DAS (Regulatory, Tariff and Trade Enforcement); and the Director, OF&A. The officials at each of the law enforcement bureaus that we interviewed were (1) generally the bureau heads or deputy directors, assistant directors, or deputy assistant directors and (2) the bureau liaisons. 17, 18 The bureau liaisons we interviewed were either the current or most recent former liaisons. Liaisons are individuals from the law enforcement bureaus who perform a liaison function between their bureaus and Enforcement. They serve as central points of contact for Enforcement by conveying information and collecting data, among other things. Our reference to law enforcement bureau officials includes those from IRS/CID. EOAF did not have a bureau liaison to Enforcement. We did our work in Washington, D.C., between April 2000 and February 2001 in accordance with generally accepted government auditing standards. We provided a copy of our draft report to the Secretary of the Treasury. The Acting Under Secretary (Enforcement) provided written comments on the draft and agreed with our recommendation. Enforcement’s basic operations are funded through Treasury’s annual appropriation for departmental offices’ salaries and expenses. Treasury distributes (or allots) this annual appropriation among various programs and offices, including Enforcement. For example, in fiscal year 2000, Congress appropriated about $134 million for the departmental offices’ salaries and expenses appropriation. Of this total, Treasury’s FMD allotted about $5.2 million to Enforcement for its annual operations, including its oversight, policy guidance, and support roles. FMD allots these annual operating funds to Enforcement through a financial plan. The initial financial plan indicates the amount of funds Enforcement has available for the fiscal year. The resources made available to Enforcement through its initial financial plans for fiscal years 1994 through 2000 ranged from about $2.3 million in fiscal year 1996 to $5.2 million in fiscal year 2000. Throughout the fiscal year, FMD can increase or decrease the financial plan for a variety of reasons, including the rate at which Enforcement has obligated its funds during the fiscal year and funding needs elsewhere in Treasury. For example, according to FMD officials, at the Secretary’s discretion, funds may be reallotted to support the Secretary’s priorities. For fiscal years 1994 through 2000, the percentage of funding from the initial financial plan that Enforcement obligated ranged from about 74 percent (in fiscal year 1997) to about 124 percent (in fiscal year 1996). Cumulatively, from fiscal years 1994 to 2000, about $28.3 million had initially been made available to Enforcement through FMD, and Enforcement obligated about $25.2 million of these funds. Figure 2 shows Enforcement’s initial financial plan, year-end financial plan, and actual obligations of its annual operating funds for fiscal years 1994 through 2000. In 5 of the 7 fiscal years from 1994 to 2000, Enforcement obligated fewer funds than it had available through its initial financial plan. In 3 of the 5 fiscal years—1995, 1997, and 1998—Enforcement obligated about three- quarters of its available funds. In the remaining 2 fiscal years—1999 and 2000—Enforcement obligated about 92 percent of its available funds. Enforcement and FMD officials said that a principal reason that Enforcement did not obligate all of its available funds was due to Enforcement’s not obligating all of the funds it had available for personnel expenses. According to an Enforcement official, Enforcement had not always hired staff quickly enough, which created a surplus of personnel funds and ultimately led to FMD’s reducing Enforcement’s financial plan. Enforcement officials cited a variety of issues they have faced relating to hiring staff. These issues included a lengthy hiring process, including the background and security investigations; difficulty in filling positions because qualified people were in high demand; length of time it took to get approval from the Office of Management to fill a position; Office of Management’s not approving the filling of a position; and Enforcement’s being slow in selecting candidates. Enforcement officials said that the major reason for underobligating available funds in fiscal years 1997 and 1998 was that Enforcement experienced major impediments in staffing its newly established Office of Professional Responsibility (OPR), which was funded by Treasury’s fiscal year 1997 appropriation. In the remaining 2 of the 7 fiscal years (1994 and 1996), Enforcement’s obligations were greater than its initial financial plan. Both personnel and nonpersonnel-related factors, such as equipment purchases, were the reasons for Enforcement’s obligating more that it had available through its initial financial plan. Figure 3 shows the number of FTEs authorized for Enforcement by the Assistant Secretary for Management and the number of FTEs that Enforcement had used as of the end of each fiscal year. For fiscal years 1994 through 2000, the number of FTEs that Enforcement was authorized ranged from 31 in 1996 to 51 in 2000. The number of FTEs used ranged from 23 in fiscal year 1995 to 51 in fiscal year 2000. No comprehensive source provided guidance to either Enforcement staff or the bureaus on the circumstances under which bureaus are required to interact with Enforcement. At our request, Enforcement officials compiled a list of those circumstances. The 29 circumstances they identified included personnel activities, such as awarding bonuses to senior managers; fiscal activities, such as reviewing annual budget submissions; and a wide variety of activities related to specific law enforcement programs of the bureaus, such as making payments to informants. For 12 of these circumstances, no established documentation existed that prescribed interaction requirements. For many of the 17 other circumstances, the documentation generally was broad in nature and did not provide explicit guidance to the bureaus on such things as when and how they were to interact with Enforcement. About one-half of the bureau officials we interviewed said that they either were not aware of written requirements for their bureaus’ interactions with Enforcement or that they knew when to interact through such factors as their professional responsibility, experience, judgment, or common sense. According to Enforcement officials, Enforcement’s role in these interactions depended on various factors, such as the particular issue or type of product to be generated and its level of importance. According to Enforcement officials, they used various methods, including Treasury orders and directives and regular meetings with the bureau heads and liaisons, to establish Enforcement’s authority and to communicate policies, procedures, and other information to the bureaus. With regard to interacting with the bureaus, Enforcement did not adequately meet the standards for internal control established by GAO.Documentation on the circumstances under which law enforcement bureaus are required to interact with Enforcement was not readily available from Enforcement officials. As a result, we asked Enforcement officials to compile a list of these circumstances. We also asked for the corresponding documentation that requires these interactions. The officials noted that Enforcement did not have a policies and procedures manual, and that all of these requirements may not be in writing. For example, they said that some requirements may be informal and have become practice over time. The data that these officials compiled are shown in table 1. Twelve of the 29 circumstances under which the bureaus are to interact with Enforcement lacked established documentation, as shown in table 1. According to Enforcement officials, however, documentation is created on a case-by-case or yearly basis in eight of these circumstances. For example, for major memorandums of understanding, review procedures are established as each memorandum is developed, according to Enforcement officials. In 11 of the 17 circumstances for which established documentation existed, the documentation was generally broad in nature and did not provide explicit information on the expected interaction between Enforcement and the bureaus. For example, some of the documentation consisted of Treasurywide documents, such as directives, that identified items that had to be cleared through the appropriate departmental offices (e.g., Enforcement) before being finalized. These documents were not specific to Enforcement and, therefore, did not provide specific guidance to the law enforcement bureaus on such things as the procedures that the bureaus should follow to clear items through Enforcement, who the bureaus should contact in Enforcement, and the necessary time frames for getting the clearances. The documentation for the remaining six circumstances provided more specific guidance to the bureaus. About one-half of the bureau officials we interviewed said that they either were not aware of written requirements for their bureaus’ interactions with Enforcement or that they knew when to interact through such factors as their professional responsibility, experience, judgment, or common sense. Two other liaisons said that they learned how to do their jobs by shadowing or getting an orientation from their predecessors. One of these two liaisons reported no receipt of documentation providing guidance, and the other reported having a “learn as you go” experience. GAO’s standards for internal control state that an agency’s internal control needs to be clearly documented, and that the documentation should be readily available for examination. Control activities include the policies, procedures, techniques, and mechanisms that enforce management’s directives for meeting the agency’s objectives. Furthermore, the standards say that, for an agency to run and control its operations, it must have relevant, reliable, and timely communications relating to internal and external events. The standards also say that pertinent information should be identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently. Enforcement needs to ensure that a clearly defined and documented set of policies and procedures, covering such issues as the circumstances under which the bureaus are to interact with Enforcement, are readily available for examination by Enforcement and bureau officials. Such documentation would help ensure that (1) these officials would know specifically when and how the bureaus are to interact with Enforcement and (2) Enforcement will receive relevant information in a timely manner. Lacking such information, Enforcement may not be able to perform its functions and meet its goals efficiently. Furthermore, as a part of a new administration, incoming Enforcement officials may find the transition to their new roles less cumbersome if clearly documented policies and procedures were available regarding when and how bureaus are required to interact with Enforcement. After reviewing the table 1 data on the circumstances under which the bureaus are required to interact with Enforcement, bureau officialsgenerally concurred that their offices would interact with Enforcement in these circumstances. Bureau officials cited examples of when they have complied with these requirements. For example, officials from FLETC stated that Enforcement was actively involved in the development of FLETC’s annual budget submission. The director said that FLETC would develop the first draft of the budget, and that Enforcement would review the draft for such things as whether it supported Treasury’s strategic plan. Similarly, an official from the Secret Service said that the Service sends its strategic and performance plans and its performance reports to Enforcement for review and comment. Another Secret Service official provided, as an example, a recent instance in which the bureau informed Enforcement of an inquiry the bureau had received to provide Secret Service protection to an individual involved in the recent presidential campaign. Several bureau officials further explained that they communicated with Enforcement on significant or major matters or events. These officials provided us with definitions of what they considered to be significant or major. Some examples that they provided to us related to issues that could invoke inquiries from the media or the Under Secretary; issues that could affect relationships with other bureaus or external stakeholders, such as OMB; and departures from the bureaus’ normal courses of action. According to Enforcement officials, Enforcement’s role in the circumstances in which the bureaus are to interact with Enforcement was dependent on such factors as the particular issue or type of product to be generated and its level of importance. For example, for some written products that would be incorporated into a report, Enforcement officials’ role may be limited to reading and editing the bureaus’ products and forwarding them to the office that is responsible for submitting the report. An area in which Enforcement was heavily involved, according to Enforcement officials, was the bureaus’ annual budget submissions. Enforcement’s involvement included reviewing the budgets to ensure that they reflected Enforcement’s priorities and advocating for the bureaus with Treasury’ Office of Management and OMB throughout the budget process. According to Enforcement officials, Enforcement uses a variety of methods to establish authorities and communicate policies, procedures, guidelines, reporting requirements, and information to the bureaus. Methods that these officials described to us as being used included the following: Bureau heads meetings: These meetings are to be held every other week between the Under Secretary and senior Enforcement officials and bureau heads. Individual bureau head meetings: These meetings are to be held every other week between the Under Secretary and individual bureau heads. The Assistant Secretary also is to hold regular one-on-one meetings with the Directors of FinCEN and OFAC. Monthly case briefings: These meetings are to be held monthly by the Under Secretary with bureau staff to get in-depth briefings on significant investigations. Significant case briefings: In addition to the monthly case briefings, as appropriate, bureaus are to brief the Under Secretary, Assistant Secretary, and staff on significant or high-visibility cases. Weekly written reports to the Under Secretary: These reports are to contain information on significant activities from bureau heads. Daily bureau liaisons meetings: Daily briefings by bureau liaisons to the Under Secretary in which various topics, such as press-worthy issues, arrests, seizures, and important events, are to be discussed. Informal staff-to-staff contacts: Daily interactions between Enforcement and bureau staff during which issues affecting the bureaus are to be discussed. Other methods of communication identified by Enforcement officials included Treasury orders and directives; ad hoc groups established to address budget, operational, or other issues that require a more intense focus for a short period of time; working groups established to address long-range or ongoing issues, such as the Treasury Enforcement Council working groups; and memorandums from Enforcement management or staff. Some of these methods were initiated after ATF’s 1993 raid of the Branch Davidian Compound, in Waco, TX, according to congressional testimony by a former Under Secretary (Enforcement) and a Treasury report reviewing the raid. These steps were taken, at least in part, to improve oversight and formal and informal communication between the bureaus and Treasury, according to the Under Secretary’s testimony. The methods initiated or reactivated at that time included (1) regular meetings between the Under Secretary’s office and the bureau heads and (2) the Treasury Enforcement Council working groups. Additionally, the former Under Secretary stated that he issued a directive in August 1993 requiring that Enforcement be informed of any significant operational matters that affect any of the bureaus’ missions, including major, high-risk law enforcement operations. Enforcement staff engaged in various activities to carry out Enforcement’s oversight, policy guidance, and support roles. These activities included projects and ongoing efforts (i.e., continuous projects with no fixed end date) that were related to a specific issue, according to Enforcement officials. We collected data on these projects and ongoing efforts through a DCI. Additionally, to fulfill its roles, Enforcement staff engaged in discrete functions on more limited efforts. Another important role that various Enforcement and bureau officials emphasized was Enforcement’s advocacy role for the bureaus, both within and outside of Treasury. Enforcement officials completed 49 DCIs that described projects and ongoing efforts undertaken by Enforcement from October 1, 1998, through June 30, 2000. Table 2 provides summary information from the DCIs on one project and one ongoing effort for each of Enforcement’s three roles. The responses for each of the DCIs that Enforcement completed are provided in appendix I. According to the responses to our DCI, 18 of the 49 example projects and ongoing efforts undertaken by Enforcement from October 1, 1998, through June 30, 2000, primarily supported Enforcement’s oversight role; 19 supported Enforcement’s policy development and guidance role; and the remaining 12 related to Enforcement’s support role. Twenty-three of the reported activities related to ongoing efforts—that is, continuous projects with no fixed end date. Of the 49 example projects and ongoing efforts, Enforcement initiated 14 and 21 were initiated as a result of statutory requirements, other congressional direction, a presidential initiative, or other factors, such as a request by the Deputy Secretary of the Treasury to initiate the project or effort. The remaining 14 projects and ongoing efforts were initiated due to a combination of the two reasons—that is, they were self-initiated and initiated due to statutory requirements, other congressional direction, a presidential initiative, or other factors. Enforcement’s involvement in these projects and efforts was usually due to multiple factors. Some frequently cited reasons why Enforcement became involved included the following: Treasury was directed to participate by congressional direction or presidential initiative. The effort involved high-visibility issues or major policy issues. The issue was broader than one bureau. Enforcement was able to provide a broader perspective than a single bureau could provide. The effort required coordination with or outreach to multiple entities, such as multiple Treasury bureaus and offices; federal departments or agencies; state and local entities; foreign governments; and/or private sector organizations. Almost all of Enforcement’s projects and ongoing efforts involved other federal departments or agencies. Most frequently identified were DOJ (30 DCIs), OMB (26 DCIs), the Federal Bureau of Investigation (22 DCIs), and the Department of State (19 DCIs). Forty-one of the projects and ongoing efforts involved Treasury offices other than Enforcement or the law enforcement bureaus, such as the Office of General Counsel (29 DCIs), the Office of Management (23 DCIs), and the Office of Legislative Affairs (12 DCIs). Enforcement officials identified the various functions that Enforcement staff performed on each project and ongoing effort. The following are the functions that were identified most frequently (i.e., the function was performed on at least 39 of the 49 projects or efforts). Briefing officials, such as the Secretary or Deputy Secretary of the Treasury; Members of Congress or their staff; the Under Secretary or Assistant Secretary (Enforcement); and staff from OMB and DOJ, including the Attorney General. Collecting data from the Treasury law enforcement bureaus or other entities associated with the particular project. For example, the Five-Year Counterterrorism Plan project involved Enforcement’s gathering, reviewing, organizing, and providing information on the bureaus’ current counterterrorism activities and proposals for new programs. Coordinating with entities such as the Treasury law enforcement bureaus and other federal departments and agencies, including DOJ, OMB, and the Office of Personnel Management. Preparing background materials for, among others, senior Treasury officials, including the Secretary or Deputy Secretary of the Treasury; the Under Secretary or Assistant Secretary (Enforcement); and various committee members, such as members of the money laundering strategy interagency group. Overseeing or monitoring such things as law enforcement bureaus’ and other entities’ implementation of programs or action items. For example, on a North American Free Trade Agreement Working Group project, Enforcement oversaw the United States’, Mexico’s, and Canada’s implementation of regulations related to Customs. Developing or drafting programs, initiatives, and strategies. For example, for the National Church Arson Task Force project, Enforcement worked in coordination with ATF, DOJ, and others to develop guidelines and strategies for federal law enforcement agencies’ investigation of church arson incidents. In addition to the work that Enforcement staff performed on specific projects or ongoing efforts, they may perform similar, discrete functions on more limited efforts throughout the year, according to Enforcement officials. These functions included the following: collecting data (e.g., from bureaus/offices); preparing briefing or background materials; briefing officials; developing or drafting such things as reports, programs, initiatives, strategies, policies, directives, standards, and regulations; overseeing or monitoring such things as programs, activities, and reviewing written products, such as drafts, testimonies, and plans, and developing or reviewing budget proposals or seeking funding; coordinating with other agencies, bureaus, or other entities or mediating writing correspondence or speeches; and delivering speeches or testifying. For example, one Enforcement official said that the Office of Policy Development receives requests on a daily basis to provide Enforcement’s comments on draft or proposed legislation, testimonies, press releases, or other material. Several officials in Enforcement and the bureaus said that Enforcement has a key role as an advocate for the bureaus, both within and outside of Treasury. In particular, various officials cited the importance of Enforcement’s being an advocate for the bureaus’ budgets before the Secretary of the Treasury, Office of Management, and OMB. During interviews, we asked Enforcement and bureau officials for their views on what, if anything, were barriers to Enforcement’s fulfilling its oversight, policy guidance, or support roles. We interviewed 24 Enforcement and bureau officials, 17 of whom cited at least 1 factor that they considered a barrier to Enforcement. We did not determine to what extent, if at all, these cited barriers affected Enforcement’s ability to fulfill its roles, but rather, we summarized the testimonial information provided to us by interviewees. In discussing the cited barriers with Enforcement officials, they said they generally understood the views presented even though they did not always concur with them. These officials identified two issues that affected their ability to fully address the cited barriers— lack of control over the barrier and lack of resources. Enforcement and bureau officials cited a variety of factors as having been barriers to Enforcement in fulfilling its roles. These factors tended to fall into two categories—factors that related to Enforcement’s internal operations, such as a need for better internal communications, and factors related to operations or resources outside of Enforcement’s control. Lengthy processes within Treasury and the need for more resources for oversight are examples of barriers in the latter category. The liaisons tended to cite internal factors, while Enforcement and other bureau officials tended to identify external factors. Table 3 shows our categorization of the factors identified by the officials. With the exception of the factor concerning Enforcement’s needing more resources, none of the 24 other factors were cited by more than 3 officials. The need for more resources was cited as a barrier by seven officials. Enforcement officials indicated that Enforcement had taken actions to try to mitigate some of the barriers that were identified. For example, regarding the view that the Under Secretary does not seem to have enough clout, an Enforcement official said that each Under Secretary has tried to raise the profile of the office and to reach out and develop relationships with his counterparts in other departments. The official agreed that Treasury processes can be lengthy, particularly the clearance processes. The official said that Enforcement tries to identify the highest priority items and that Enforcement staff ensure that others in Treasury understand the priority and process the items as quickly as possible. Regarding the belief that there is a lack of continuity between administrations, Enforcement officials noted that Enforcement has increased the number of career staff in its office to ensure that there are staff who have a historical knowledge of how Enforcement works and what the bureaus do. Enforcement officials provided us with other examples of Enforcement’s taking actions to mitigate some of the cited barriers. Related to the view that Enforcement needs more effort from the Office of Legislative Affairs, an Enforcement official said that in the past, Enforcement has detailed bureau staff to the Office of Legislative Affairs and has offered to give this office one of Enforcement’s FTEs. Additionally, the official said that Enforcement has invited the Office of Legislative Affairs staff to attend the Enforcement staff meetings. Regarding Enforcement’s lack of control over bureaus’ budgets, the official discussed Enforcement’s advocacy efforts both within Treasury and at OMB, which includes educating the Office of Management on the bureaus’ needs. No comprehensive source provided guidance to either Enforcement staff or the bureaus on the circumstances under which bureaus are required to interact with Enforcement. In addition, established documentation did not exist for 12 of the 29 circumstances under which the bureaus are required to interact with Enforcement, and when it did exist, the documentation was generally broad in nature and did not provide explicit information on the expected interaction between the bureaus and Enforcement. About one-half of the bureau officials we interviewed said that they were not aware of written requirements for their bureaus’ interactions with Enforcement or that they knew when to interact through such factors as their professional responsibility, experience, judgment, or common sense. An agency’s internal control needs to be clearly documented and that documentation should be readily available for examination. Without a clearly defined and documented set of policies and procedures covering operational and communications activities, Enforcement runs the risk of not being able to perform its functions and meet its goals efficiently. Furthermore, since a number of Enforcement and bureau positions are political appointments that are subject to turnover with a change in administration, a clearly defined and documented set of policies and procedures could smooth transitions. We recommend that the Secretary of the Treasury direct the Under Secretary (Enforcement) to strengthen internal control by developing a policies and procedures manual to ensure that the policies and procedures on the circumstances under which the bureaus are to interact with Enforcement are clearly defined, documented, and readily available for examination by bureau officials and others. We requested comments on a draft of this report from the Secretary of the Treasury. On February 22, 2001, the Acting Under Secretary (Enforcement) provided written comments conveying Enforcement’s agreement with our recommendation. This letter is reproduced in appendix III. The Acting Under Secretary stated that Enforcement has initiated a project to plan and develop an Enforcement policies and procedures manual, and that Enforcement is working with bureau personnel to ensure that the end product is a meaningful document. He noted that the proposed manual would contain a subsection with specific direction and guidance for the liaisons assigned to Enforcement from each bureau. We are providing copies of this report to the Honorable Paul H. O’Neill, Secretary of the Treasury, and James F. Sloan, Acting Under Secretary (Enforcement). We will also make copies available to others upon request. The major contributors to this report are acknowledged in appendix IV. If you or your staff have any questions concerning this report, please call Weldon McPhail or me on (202) 512-8777. To determine what projects or activities the Department of the Treasury’s Office of Enforcement had undertaken to provide oversight, policy guidance, and support to law enforcement bureaus, we administered a data collection instrument (DCI) to Enforcement officials. We asked these officials to provide information on the projects and ongoing efforts (i.e., continuous projects with no fixed end date) that Enforcement staff had engaged in to carry out its responsibilities from October 1, 1998, to June 30, 2000. We specifically asked Enforcement officials to complete a DCI for up to five projects or ongoing efforts that were related to each of the strategic goals supported by either Enforcement or the bureaus it oversees. The DCI responses may not be representative of all projects or ongoing efforts that Enforcement engaged in during this period. The DCIs were completed between October 2, 2000, and November 9, 2000, and the data are current as of the date each DCI was completed and returned to GAO. Office of Management and Budget (OMB) Private sector OE oversaw this project to search for funding solutions. The Customs Commissioner saw his responsibility as identifying the need and technology for automation enhancement rather than becoming involved in finding funding solutions. Collected data on use of Customs automated commercial system in order to evaluate options for funding a new system with support from users. Options for funding a new automated system with user support were revised at Treasury with no bureau involvement. All briefing materials were prepared by Enforcement staff. Briefed OMB, Congressional staff, and Treasury officials. Developed strategies for informing and seeking approval of funding proposals. Committee reports are prepared by committee members and submitted to Congress. Long term monitoring of and involvement in Customs’ use of automated systems to process commercial transactions quickly and to maintain high levels of compliance with trade laws. Reviewed all testimony and most correspondence with Congress on the development of a new automated system. In addition to development of legislature proposals for funding ACE with user support, reviewed all Customs budget submissions to assure that Customs’ case was stated most effectively. Coordinated with OMB on funding issues. Handled virtually all correspondence for Secretary on Customs automation problems. Frequent speaker to trade groups in support of funding for Customs automation. Start date: January 1997 No fixed end date 1 staff member who spent 10 to less than 25 percent of his/her time on the project. Trade groups have pinned their hopes on persuading Congress to fund a new automated system entirely out of appropriated funds. The appropriation for FY 2000 is zero, the expected appropriation for FY 2001 is $130 million. But this is $80 million less than requested in the President’s budget and well below the amount needed to complete ACE in a reasonable time frame. Consequently, the trade community is increasingly willing to agree to provide direct funding support through some user fees. 2. Treasury Advisory Committee on the Commercial Operations of the Customs Service (COAC) Economic mission: Promote domestic economic growth Assistant Secretary (Enforcement) Policy development and guidance To assure that there is an active channel of communication between the Treasury and businesses affected by Customs’ operations. Self-initiated and statutory requirement: the Advisory Committee was initially established by legislation and subsequently continued by Treasury initiative. None Private sector—twenty members of the Committee are from the private sector The Chairman of the Senate Finance Committee concluded that the Customs Service was not responding to the private sector views, and established a Federal advisory committee to be chaired by Treasury. Information on Customs programs is collected in order to respond to Committee questions and comments. With assistance from Customs, briefings and background papers are prepared for agenda items for each quarterly Committee meeting. Papers are presented to all committee members as appropriate. Assistant Secretary (Enforcement) and occasionally other government officials are briefed prior to meetings. Agenda for meetings are developed by Enforcement staff. Oversee activities of Advisory Committee. Review Committee reports to Congress, briefing papers, speeches prepared for Treasury officials, and other information concerning activities of the Committee. Depending on the issue, other agencies may have an interest in Committee topics. When this occurs, OE often coordinates with those agencies. For example, OE and the Committee were instrumental in resolving a dispute between the private sector, Customs Service, and Census Bureau over the design for a new automated export system. OE prepared speeches and remarks for Treasury officials on activities of Committee. OE staff also drafted Assistant Secretary remarks for each Committee meeting. The Secretary and Deputy Secretary have provided remarks, prepared by OE staff, to the Committee. Assistant Secretary (Enforcement) and other Enforcement staff are invited to speak at trade events held in conjunction with committee materials. OE performs staff work of Advisory Committee, including scheduling arrangements for Committee meetings, preparing agenda, arranging for guest speakers, preparing reports of meetings, etc. Start date: September 1988; No fixed end date 5 or 6 staff members who spent 10 to less than 25 percent of their time on the project. The Advisory Committee has improved communication among businesses, Customs, and Treasury on Customs issues. Given the length of time the Committee has been in existence, it is not practical to list all of its accomplishments. Biennial reports are submitted to the Committee on Ways & Means, and the Committee on Finance. These reports detail the activities of the Committee. Among other things, the Advisory Committee has had a substantive role in Customs’ reorganization, on the design for the Automated Export System (AES), and on Customs’ policies and procedures for compliance assessment audits. Department of Defense, Department of Transportation, Coast Guard, Drug Enforcement Administration (DEA), Immigration and Naturalization Service (INS), OMB, Department of Agriculture, Department of Commerce, Department of the Interior, Department of Health and Human Services, USITC Private sector Customs attempted to lead an interagency effort, but failed to win the support of the other agencies involved. In early 1995, the other agencies communicated to the Office of Management and Budget their disinclination to continue the project under Customs leadership. In September of 1995, the leadership responsibility was assigned to Treasury’s Office of Enforcement in a memorandum from the Vice President to all departments and agencies. Prepared briefing materials to explain purpose of project and briefings on the status of design and implementation plans. Conducted briefings for Executive Office of the President, Treasury, and other executive branch officials, and for members of Congress and staffs. Substantial amount of time spent in planning for ratification of International Trade Data System (ITDS) by participating agencies and the private sector, and for obtaining support from Congress. As chairman of interagency board, DAS, RT&T was responsible for monitoring progress of ITDS project office toward achievement of goals set by the board. Reviewed draft proposals for project design and implementation, as well as briefing materials to seek broad support for project. Participated in preparation of annual budgets for ITDS project. ITDS is an interagency project with implications for almost 100 government agencies that regulate international trade or collect statistics on international trade. Considerable coordination was necessary among the involved agencies. Required to negotiate with other agencies on ITDS design and implementation plans. Prepared correspondence for members of Congress and private sector parties who were seeking information about the ITDS; wrote speeches for DAS, Regulatory Tariff & Trade to present to trade groups. Speeches to several trade groups between 1995 and August 1999. Start date: September 1995 Anticipated end date: December 2001 2 staff members who spent 25 to less than 50 percent of their time on the project. The interagency ITDS Board successfully completed the government-wide trade data system project design architecture. The work on developing the prototype is on-going; however, progress has been delayed by automation problems at the Customs Service. DAS (RT&T), Customs Service FBI State and/or local government—Texas Department of Public Safety, private sector— Mexican government officials requested assistance from Treasury Enforcement to coordinate with Customs and the FBI come to a solution to resolve problem. Collected VINS for cars smuggled into Mexico. Prepared background materials for Under Secretary on issue. Under Secretary briefed Secretary on Mexican government request for assistance. Worked with the FBI, U.S. Customs, and Mexican Customs to develop procedures for the transfer of FBI stolen car data to Mexican Customs in a manner satisfactory to the FBI. Resolved differences between FBI and Customs as to procedure for addressing problem. Also coordinated with Mexican Customs to analyzing Mexican data on smuggled cars and with the Texas State Department of Public Safety. Negotiated with Mexican government to obtain their concurrence with Enforcement program proposals for addressing both stolen and smuggled cars. Start date: April 1998 Anticipated end date: December 2000 1 staff member who spent less than 10 percent of his/her time on the project. Results of program will be seen within next 90 days. Results will include data on cars stolen in U.S. and stopped by Mexican customs, as well as penalty actions against U.S. parties involved in smuggling cars into Mexico. OE efforts in this project have had a positive influence on Treasury and Customs relations with Mexican government officials and we expect future cooperation and assistance from Mexico on a number of issues of concern to Treasury. Department of State, Department of Labor, USTR, National Economic Council, and Foreign governments, private sector—committee members include private sector At the Departmental level, OE is able to bring to the issue a higher visibility both within the Administration and with the private sector. This issue is broader than just a Customs Service issue and OE is able to provide a broader perspective. Working with the White House and Congress, OE was able to help Customs get increased funding for its child labor enforcement efforts. OE staff collected data/material on potential suspect imports from USCS as well as other general data from private sector and other agencies. Prepare background material for senior Treasury officials and members of the Advisory Committee. Brief senior Treasury, Congressional, and White House officials, as well as member of the Advisory Committee on Administration, Treasury and Customs child labor efforts and committee progress. Produced Child Labor “Red Flags” Advisory for the import community and others with information on the issue of forced or indentured child labor. Worked with Customs and counsel to revamp Customs regulations with regard to seizure of goods made with ‘slave labor’, including child slave or indentured labor. Draft reports, advisories, and informational materials for senior officials, business community, and concerned citizens. Chair and oversee activities of the Advisory Committee. Review draft testimony by Customs and other agencies on child labor issues. Senior OE officials also reviewed red flag advisory drafted by OE staff. Assisted with, reviewed and supported proposals for increased finding for USCS Child Labor Enforcement efforts. Regular coordination and consultation with Labor, State, NEC, USTR and congressional staff. Negotiate with officials of foreign country agencies to enforce Child Labor Import standards. Prepared speeches for senior Treasury officials, including the Secretary and Deputy Secretary, dealing with Child Labor. OE staff has participated in outreach efforts with business community. OE performs staff work of Advisory Committee, including scheduling arrangements for Committee meetings, preparing agenda, arranging for guest speakers, preparing reports of meetings, etc. Enforcement staffing level on the project Project results 7 staff members who spent 10 to less than 25 percent of their time on the project. Since this project began two years ago, there have been a number of successes: - Production of Red Flag Advisory - Increased Child Labor Enforcement Budget for Customs Service: - $10,000,000 in President’s budget for FY 2002 - $ 5,000,000 for FY 2000 - $ 3,000,000 for FY 1999 - Increased attention to Child Labor Issues - Enhanced USCS Child Labor Enforcement - Promoted understanding of opposing positions between Industry and Advocates - Revamped Customs regulations with regard to seizure and forfeiture of goods made with ‘slave labor’, including child slave or indentured labor. Economic mission: Maintain U.S. leadership on global economic issues DAS (RT&T) Policy development and guidance To simplify and standardize Customs Service electronic reporting of data. Self-initiated Assistant Secretary (Enforcement), DAS (RT&T), Customs Service Department of Transportation, Department of Commerce, US Trade Representative Foreign governments, private sector OE was able to bring to this effort a broader perspective than Customs could by itself and OE is in a better position to coordinate and negotiate inter-Departmental and multilateral issues. Collected information on reporting data from Customs and other federal agencies. Prepared briefing materials for senior Treasury officials. Briefed senior Treasury officials, private sector, and USCS. Developed strategy for advancing this project with G7 country participants. Coordinated proposed data requirements with Customs, Commerce, Transportation, and USTR. Negotiated with other G7 countries as well as World Customs Organization and European Commission. Prepared correspondence and communications with other Federal agencies and with representatives of other G7 Countries. Delivered speeches to private sector organizations on new data requirements. Start Date: March 1997 Anticipated end date: June 2001 2 staff members who spent 25 to less than 50 percent of their time on the project. The G7 Standardization Initiative Project is still underway. However, OE expects to achieve standardized reporting requirements for electronic data and EDIFACT Customs messages. Department of State, OMB, Department of Commerce, International Trade Commission Foreign governments, private sector OE leads Treasury’s efforts with regard to NAFTA implementation, as this is an extremely high visibility issue that requires considerable coordination and consultation with other Federal agencies and foreign governments. Prepared briefing materials on NAFTA implementation efforts. Briefed senior Treasury officials, members of Congress, and the private sector on efforts. Developed regime for simplifying NAFTA rules of origin and Customs procedures. Developed Treasury policies and subsequent regulations regarding implementation of NAFTA. OE oversaw the United States, Mexican, and Canadian implementation of NAFTA regulations related to Customs. OE reviewed draft policies, implementation strategies, and draft regulations relating to NAFTA implementation. The Office coordinated with the Departments of Commerce and State, the USTR, and other agencies with an interest in NAFTA implementation. Considerable consultations with Mexican and Canadian counterparts on NAFTA implementation procedures. Start date: January 1998 No fixed end date 2 staff members who spent 10 to less than 25 percent of their time on the project. OE coordination efforts led to a simplification of NAFTA chartered rules and rules of origin and a liberalization of related rules. OE ensured the smooth implementation of new rules, regulations, and customs procedures. OE officials also developed successful working relationships with officials in other Federal agencies, as well as Canada and Mexico, to resolve disputes and implement NAFTA policies. Department of Justice, FTC Foreign governments, private sector OE is able to provide a broader perspective, particularly on crosscutting issues that require outreach with private sector organizations and other Federal agencies. Prepared background and briefing materials on health labeling and other regulatory issues. Briefed senior Treasury officials. OE developed revised policy and substantially drafted the amended regulations for regulation of Business Practices/Competition in the beverage alcohol industry. Oversaw process for publication in the Federal Register and implementation of new regulations by ATF. Coordinated with FTC and Justice in review of the business competitive policy. Also, considerable consultation and negotiation with industry representatives. Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, DEA, FBI, INS, National Security Council, OMB, Office of National Drug Control Policy (ONDCP), Department of Commerce, Joint Chiefs, EPA, Department of Agriculture, Department of Labor, CIA, Department of Health and Human Services, U.S. Congress State and/or local governments, private sector A Presidential Order directed the Departments of the Treasury, Justice and Transportation to develop and oversee a Commission on Crime and Security in US Seaports. Treasury, through Enforcement, took the lead in coordinating the establishment of the Commission. Gathered information about the cost of establishing the Commission, staff available to support the Commission, the points of contact for the other lead agencies, and identified possible Commission members. Briefings and public hearings were held at numerous locations around the United States to obtain input from affected groups. Briefing materials were prepared for the Secretary to explain the establishment of the Commission, and later to obtain approval of the Commission’s final report. The Assistant Secretary, who was a member of the Commission, received briefing materials in preparation for meetings of the Commission, to analyze the Commission’s proposed recommendations, and to summarize the material in the final report. The Assistant Secretary and Under Secretary were briefed about the proposal to establish the Commission, the proposed structure and organization of the Commission and its staff, the progress of the Commission, and the Final Report of the Commission. The Assistant Secretary also participated in briefings for members of Congress on the work of the Commission. Initiatives and recommendations were developed for the Assistant Secretary to recommend to the Commission. Much of the work of the Commission was performed by its staff. Throughout the one- year operation of the Commission, Enforcement monitored the progress and activities of the staff to ensure that the work remained on course. The Assistant Secretary also attended all Commission meetings, since she served as a member of the Commission. Numerous drafts of the report, as well as the Final Report of the Commission were reviewed and edited. In leading the process of establishing the Committee, Enforcement had to determine the costs to operate the Commission and find funding to cover these costs. The recommendations contained in the Final Report have budget implications. Treasury is currently working with OMB regarding funding for these recommendations. The Office of Enforcement coordinated with the NSC regarding the development and wording of the Presidential Order that established the Commission, the press release announcing the Order, as well as the subsequent clearance and announcement of the Commission’s report. The Commission was organized and established by representatives of the Departments of Justice, Transportation, and the Treasury under the lead of the Office of Enforcement. This involved numerous telephone calls, chairing many organizing sessions, harmonizing positions, and reaching consensus on the membership, operation, procedures and plan of action of the Commission. The Assistant Secretary served as a member of the Commission, which involved reviewing numerous background documents, attending monthly meetings, visiting three seaports for on-site briefings and meetings, participating in public hearings, and coordinating with the other Commissioners to develop the recommendations contained in the Commissions’ Final Report. Findings and recommendations were negotiated by the members of the Commission during Commission meetings. Letters were drafted from the three cabinet officials to the others departments and agencies named in the Presidential Order to solicit their participation in the Commission. Enforcement staff attended Commission meetings, coordinated comments from all components of Enforcement and Treasury on the draft Commission Report, coordinated transmission of the Report to the White House, and provided information to Treasury Public Affairs and Legislative Affairs Offices. Enforcement is currently considering implementation plan for the recommendations contained in the report. Start date: November 1998 End date: October 2000 5 staff members who spent less than 10 percent of their time on the project. The final report of the Commission was prepared, reviewed and approved by the three lead Departments, transmitted to the White House, and is now at OMB for review and adoption of the Commission’s recommendations. The recommendations of the Commission will significantly improve the security of the nation’s seaports while also enhancing information and revenue collection capabilities. Department of Justice, FBI, OMB, Federal Trade Commission, Social Security Administration, U.S. Postal Inspection Service, Federal Deposit Insurance Corp., White House/OMB, U.S. Sentencing Commission, Federal Reserve Board, Office of Thrift Supervision State and/or local governments, foreign governments, private sector The President directed Treasury to organize the Summit. The Secret Service is the Treasury bureau most involved in the issue, given its mission of combating financial crime. Enforcement took the lead role since the issues involved more than the Secret Service’s law enforcement perspective. The Secret Service provided information on its identity theft cases and programs. In addition to regular decision and information briefings for the Under Secretary, staff developed memoranda for the Secretary and Deputy Secretary. Staff briefed Deputy Secretary Eizenstat, who ultimately was not able to participate in the Summit. Enforcement coordinated the development of initiatives for the Summit, including not only the announcement of Secret Service database programs and cooperation with industry, but also pressuring the credit reporting bureaus to change their ways of doing business. The credit bureaus issued a press release on the eve of the Summit, promising to ease the process for identity theft victims. Edit contractor’s draft summary of Summit proceedings and publish on Treasury web site. Enforcement worked with management to hire and interact with the contractor selected to run the invitation process and space arrangements. Enforcement staff reviewed counsel’s drafts of correspondence to the U.S. Sentencing Commission, and Public Affairs’ draft press releases and press plans. Staff and counsel reviewed testimony and legislative proposals. Reviewed budget proposals developed by the Office of Management for funding Summit. A large interagency group organized the Summit. Enforcement coordinated all the logistics and hired the contractor to serve as a liaison with the hotel and to handle invitations, and was in charge of one of five separate panels. In three follow-on workshops scheduled for early FY 2001, Enforcement is coordinating with other agencies, including Secret Service who is planning one workshop as co-host with DOJ. Enforcement staff prepared invitation materials, agenda, and drafts of remarks by the Secretary and Under Secretary for the Summit. Thereafter, we drafted an interagency memorandum about the workshops. Under Secretary Johnson was a panelist at the Summit, and Assistant Secretary Bresee introduced the Secretary before his opening remarks. Deputy Assistant Medina hosted many of the Summit’s sessions. Start date: May 1998 Anticipated end date: November 2000 4 staff members who spent 25 to less than 50 percent of their time on the project. In the months leading up to the Summit, staff and the DAS (Enforcement Policy) spent at least 75 percent of their time on the Summit. Successful National Summit on Identity Theft, involving over 300 attendees over a day and a half of sessions, receiving significant media coverage. Summit allowed sharing of public and private sector views, experiences, ideas, and technological solutions leading to follow-on workshops. Proceedings available on web site, and in hard copy if requested. Follow on workshops to be held by FTC and SSA as announced in Federal Register Supported changes to federal sentencing guidelines for identity theft which will go into effect in November. Secret Service initiatives announced at Summit, including skimming and check fraud databases, pilot project with Citicorp on e-commerce data collection. Before the Summit, developed and coordinated Administration positions on privacy vs. consumer convenience, emphasizing assistance to victims through prevention and remediation after the crime occurs. Law enforcement mission: Combat financial crimes and money laundering Under Secretary (Enforcement) Policy development and guidance The purpose of the project is to work toward universal implementation of the 40 Recommendations of the Financial Action Task Force (FATF), including maintaining active participation in the development, promotion, and implementation of these standards; maintaining the United States’ leadership role in the FATF; furthering the establishment and development of FATF-style regional bodies; and, providing assistance to jurisdictions seeking to bring themselves into compliance. Other: In 1989, the G-7 Economic Summit established the FATF to develop anti-money laundering standards and to promote worldwide implementation of those standards. Department of Justice, Department of State, DEA, FBI, National Security Council, State and/or local governments, foreign governments, private sector This project involves major policy issues and entails high level policy development implications. Treasury’s Office of Enforcement (OE) has the lead within the U.S. government regarding anti-money laundering efforts; additionally, OE heads the U.S. Delegation to the FATF, which is the international body called upon by the G-7 and G-8 to take the lead in pursuing this initiative on a global basis. Extensive interagency coordination is required to reach consensus within the U.S. on the various issues involved and as to what action should be taken with regard to each, as well as in determining the nature and content of bilateral contacts to be made relative to these issues. OE has collected data (and continues to collect data) as required to accomplish the objectives of this project. Data collection is coordinated with the Departments of Justice and State, U.S. law enforcement and financial institution regulatory agencies, other agencies, relevant international organizations and bodies, and the foreign governments involved. OE prepares briefing materials for members of the U.S. interagency group involved in this initiative, as well as for Secretary Summers and other members of Treasury management, to facilitate the decision making process on the various issues involved. Secretary Summers, Deputy Secretary Eizenstat, and others are briefed by OE on the status and progress of this high priority initiative, as well as on specific issues. OE devises programs, initiatives, and strategies as needed to accomplish the goals of this project. Policies and standards are developed and drafted as required to accomplish U.S. objectives relative to this project. OE drafts and prepares various reports and other submissions pursuant to specific issues, taskings, and requirements to achieve the project goals. OE monitors the establishment, development and progress of the various FATF-style regional bodies, as well as the work of the FATF itself. Additionally, progress made by individual countries and governments around the world is monitored in terms of the effectiveness of their anti-money laundering regimes and the extent to which they meet international anti-money laundering standards. Reports, statements, policy papers, legislation, regulations, guidelines, and other relevant written products and documents are reviewed. Funding is sought to conduct assessments of the anti-money laundering regimes of various governments, and to provide training and technical assistance to aid governments in making necessary changes to bring them in line with international anti- money laundering standards. Funding is also sought for contributions to the FATF and the regional FATF-style bodies to enable them to continue their work to accomplish the goals of this project. The interagency process is used to develop the U.S. position and make decisions relative to issues, proposals, action plans, reports, and policies to be advanced as a result of this initiative. OE has the lead in this process. Within the FATF, the U.S. negotiates with other member governments to determine policies and standards to be established and promoted, as well as in development of the process and policies for taking forward this effort. As Head of the U.S. Delegation to the FATF, OE takes the lead in conducting these negotiations for the U.S. The U.S. has established and maintains a leadership role within the FATF in formulating the policies of, and actions taken by, the FATF. Further, extensive bilateral contact is conducted with various jurisdictions (both FATF members and non-members) regarding specific issues to obtain support, encourage action, assess deficiencies, and/or to provide assistance. Again, OE has the lead regarding these contacts with respect to this initiative. OE prepares extensive correspondence relative to this project. Correspondence is maintained with the FATF, member governments of the FATF, the FATF-style regional bodies, members of the regional FATF-style bodies, and non-member governments, as well as with the U.S. agencies and departments involved in the interagency group participating in this initiative. Speeches, talking points, press statements, and presentation remarks are prepared for Secretary Summers, Deputy Secretary Eizenstat, and others as needed relative to this project. The Head of the U.S. Delegation to the FATF and other members of the U.S. delegation make substantial interventions during meetings of the FATF and regional FATF-style bodies, as well as giving presentations at various meetings, conferences, and other international events. In addition, Secretary Summers, Deputy Secretary Eizenstat, the Under Secretary (Enforcement), and others have testified relative to this initiative. Start date: June 1989 No fixed end date 2 OE staff, plus 5 detailees from other agencies, 1 intern, and 1 administrative assistant who spent 75 to 100 percent of their time on the project. Within the FATF, all 29 member governments now have comprehensive anti-money laundering legislation in place. Prior to the establishment of the FATF, only a few governments in addition to the U.S. had established adequate anti-money laundering regimes. OE has taken a leadership role in the FATF and spearheaded efforts to work with other governments to adopt anti-money laundering regimes. Largely due in part to these efforts, over the past ten years, member and non-member governments around the world have taken steps and continue to progress in establishing effective anti-money laundering regimes consistent with the 40 recommendations of the FATF. Although substantial progress has been made, a number of jurisdictions continue to fall short of the standards. Through the work of the OE Money Laundering Task Force, efforts continue within this project to effect universal implementation of the international anti-money laundering standards. Law enforcement mission: Combat financial crimes and money laundering Under Secretary (Enforcement) Policy development and guidance The purpose of this project is to identify jurisdictions that pose a money laundering threat to the United States, support the efforts of the Financial Action Task Force (FATF) to identify non-cooperative jurisdictions based on its 25 criteria, take appropriate action with respect to identified financial crime havens, and to prompt reforms by the identified jurisdictions to bring them into compliance with international anti-money laundering standards. Self-initiated and other: as a leader within the G-7, the U.S. Treasury Department, and OE in particular with respect to money laundering policy, was critical to formulating the initiative. OE continues to lead developments within relevant multilateral fora. Initiated by G-7 Finance Ministers at the Birmingham Economic Summit to accelerate reforms in important financial centers. Department of Justice, Department of State, National Security Council, ONDCP Foreign governments This project involves major policy issues and entails high level policy development implications. Treasury’s Office of Enforcement (OE) has the lead within the U.S. government regarding anti-money laundering efforts; additionally, OE heads the U.S. Delegation to the FATF, which is the international body called upon by the G-7 and G-8 to take the lead in pursuing this initiative on a global basis. Extensive interagency coordination is required to reach consensus within the U.S. on which jurisdictions should be identified as problematic in this context and as to what action should be taken with regard to each, as well as in determining the nature and content of bilateral contacts to be made relative to this issue. OE collected data (and continues to collect data) on each jurisdiction reviewed or yet to be reviewed to determine to what extent it meets the 25 criteria of the FATF for identification as a non-cooperative. This data includes, but is not limited to, laws, regulations, and practices of each jurisdiction relative to its anti-money laundering regime, supervision/regulation of its financial services sector, and level of cooperation with foreign law enforcement and financial regulatory entities. Data collection is coordinated with the Departments of Justice and State, U.S. law enforcement and financial institution regulatory agencies, relevant international organizations and bodies, and the foreign governments involved. OE prepares briefing materials for members of the U.S. interagency group involved in this initiative, as well as for Secretary Summers and other members of Treasury management, to facilitate the decision making process on the various issues involved. Secretary Summers and Deputy Secretary Eizenstat are briefed regularly by OE on the status and progress of this high priority initiative. OE devises programs, initiatives, and strategies as needed to accomplish the goals of this project. Advisories to U.S. financial institutions are drafted, cleared through the interagency process, and issued on jurisdictions identified as non-cooperative. Jurisdiction reports are prepared for submission to the FATF on jurisdictions under review. These reports discuss in detail to what extent each jurisdiction meets the FATF’s 25 criteria and are the basis for determining whether a jurisdiction is identified as non-cooperative. This project monitors progress made by identified non-cooperative countries or territories (NCCTs) in addressing identified deficiencies in their anti-money laundering regimes. It also monitors the actions taken by other jurisdictions under review or previously reviewed to determine the current status of each jurisdiction relative to the 25 FATF criteria. Reports, statements, legislation, regulations, guidelines, and other relevant written products and documents are reviewed. The U.S. position is developed and decisions are made through the interagency process relative to proposals, reports, advisories to be issued, and policies to be advanced as a result of this initiative. OE has the lead in this process. Within the FATF, the U.S. negotiates with other member governments to determine which jurisdictions will be reviewed by the FATF, which jurisdictions will be listed as non-cooperative, as well as in development of the process and policies for taking forward this effort. As Head of the U.S. Delegation to the FATF, OE takes the lead in conducting these negotiations for the U.S. Further, extensive bilateral contact is conducted with the various jurisdictions with regard to their laws, regulations, and anti- money laundering regimes. Again, OE has the lead regarding these contacts with respect to this initiative. OE prepares extensive correspondence relative to this project. Correspondence is maintained with the FATF, member governments of the FATF, the jurisdictions under review or previously listed, as well as the U.S. agencies and departments involved in the interagency group participating in this initiative. Speeches, talking points, press statements, and presentation remarks are prepared for Secretary Summers, Deputy Secretary Eizenstat, and others as needed relative to this project. The Head of the U.S. Delegation to the FATF has been invited to speak on this initiative on various occasions and has given several presentations. Secretary Summers and Deputy Secretary Eizenstat have also given speeches and testified before the Congress on the subject. Start date: June 1998 No fixed end date 2 OE staff plus 5 detailees from other agencies, 1 intern, and 1 administrative assistant who spent 50 to less than 75 percent of their time on the project. In June 2000, the FATF published a list identifying 15 jurisdictions as non-cooperative based on its 25 criteria. The U.S. Treasury Department/FinCEN issued Advisories to U.S. financial institutions on all 15 NCCTs in July 2000. Not only the listed NCCTs, but numerous other countries and territories have taken considerable action to change their laws, regulations, and practices to bring them in line with international anti-money laundering standards as a direct result of this initiative. Jurisdictions have been and are currently taking concrete steps to correct deficiencies in their systems in an effort to be de-listed or to avoid being included on the NCCT list in the future. Law enforcement mission: Combat financial crimes and money laundering Under Secretary (Enforcement) Policy development and guidance The purpose of this project is to outline a comprehensive, integrated approach to combating money laundering, both domestically and globally; and, to provide a clear, detailed plan for government action, which is updated annually. The Strategy is organized around four broad goals: strengthening domestic enforcement; enhancing the measures taken by banks and other financial institutions; building stronger partnerships with state and local governments; and bolstering international cooperation. Self-initiated and statutory requirement: the Office of Enforcement (OE) worked with Congressional staff on drafting the Money Laundering and Financial Crimes Strategy Act of 1998, signed by the President in October 1998, which requires the National Strategy. OE has taken the lead within Treasury and the U.S. government in producing the Strategy and in preparing the five annual reports called for by the Act. Department of Justice, Department of State, DEA, Executive Office for U.S. Attorneys (EOUSA), FBI, National Security Council, OMB, ONDCP, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, Office of Thrift Supervision, United States Postal Inspection Service, United States Securities and Exchange Commission None This project involves major policy issues and entails high level policy development implications. Treasury’s OE has the lead within the U.S. government regarding anti- money laundering efforts; additionally, OE’s broader perspective was needed, such that no other individual bureau, agency, or office could provide. Extensive interagency coordination is required to develop the annual Strategy, which is cleared through OMB and issued jointly by the Attorney General and the Secretary of the Treasury. OE has collected data and continues to collect data as required to accomplish the objectives of this project. Data collection is coordinated with the Departments of Justice and State, U.S. law enforcement and financial institution regulatory agencies, and other offices within Treasury. OE prepares briefing materials for members of the U.S. interagency group involved in this initiative, as well as for Secretary Summers, Deputy Secretary Eizenstat, and other members of Treasury management, relative to this initiative. During the drafting of the Act, OE staff briefed Congressional staff on OE plans for implementation. Since the Act’s passage, OE briefs Secretary Summers, Deputy Secretary Eizenstat, Congressional staff, and others on the status and progress of this high priority initiative, as well as on specific issues. The purpose of the project is to produce annual national strategies, including programs and initiatives to counter money laundering, both domestically and globally. OE drafted two comprehensive National Money Laundering Strategy documents that were issued within the past year; three additional annual strategies are statutorily required to be produced. The Strategy calls for development and issuance of policies, directives, standards, regulations. OE is involved in the process of accomplishing those items and works directly with other agencies and departments involved in achieving the Objectives and implementing the Action Items contained within the Strategy concerning these issues. The Office of the Under Secretary oversees and OE staff participates in drafting the annual National Money Laundering Strategy and other reports relative to the Strategy. OE monitors progress by all agencies and departments involved in implementation of the Objectives and Action Items contained within the Strategy. OE maintains a spreadsheet that reflects the current status of each Action Item. A significant number of Action Items are assigned to OE officials for implementation. Drafts, reports, statements, legislation, and other written products are reviewed. OE participated in and reviewed budget proposals for Treasury and the bureaus to implement the Strategy. The interagency process is used to collect information needed to develop the strategy; draft Strategies are reviewed and cleared through the interagency process; the annual Strategies are issued jointly by Treasury and Justice; and coordination continues into the implementation stage. OE coordinates extensively with other departments, agencies, and offices, while maintaining the lead throughout the entire process. Within the drafting and review process of the annual strategies, OE negotiates with the other agencies involved regarding priority items and specific Objectives and Action Items to accomplish Strategy goals. OE has the lead in this process. OE prepares correspondence, speeches, talking points, press statements, and presentation remarks for Secretary Summers, Deputy Secretary Eizenstat, and others as needed relative to this project. Correspondence is maintained with the U.S. agencies and departments involved in the interagency group participating in this initiative. Secretary Summers, Deputy Secretary Eizenstat, Under Secretary (Enforcement) Johnson, and others have testified relative to this initiative. Start date: October 1998 Anticipated end date: 2003 2 OE staff, plus 5 detailees from other agencies, 1 intern, and 1 administrative assistant (Money Laundering Task Force) who spent 75 to 100 percent of their time on the project. Significant progress has been made. Two comprehensive National Money Laundering Strategies were issued within the past year and a number of Strategy Objectives and Action Items have already been achieved. For example, in implementing the Objective to “Apply increasing pressure on jurisdictions where lax controls invite money laundering” and the related Action Items, OE played a critical role in action taken in June 2000 by the Financial Action Task Force (FATF) when it published a list identifying 15 jurisdictions as non-cooperative based on its 25 criteria. Further, the U.S. Treasury Department/FinCEN issued Advisories to U.S. financial institutions on all 15 non-cooperative countries and territories (NCCTs) in July 2000. Not only the listed NCCTs, but numerous other countries and territories have taken considerable action to change their laws, regulations, and practices to bring them in line with international anti-money laundering standards as a direct result of this initiative. Jurisdictions have been and are currently taking concrete steps to correct deficiencies in their systems in an effort to be de-listed or to avoid being included on the NCCT list in the future. The Act also required the designation of High Intensity Money Laundering and Related Financial Crime Areas (HIFCAs) that concentrate law enforcement efforts at the federal, state, and local levels to combat money laundering. OE, through its support of the Money Laundering Task Force and interface with FinCEN, helped monitor the implementation of the HIFCA program and the process that designated four new HIFCAs in the 2000 Strategy. In addition, the Act called for the establishment of a federal grant program, the Financial Crime-Free Communities Support Program (C-FIC) to provide seed capital for emerging state and local counter-money laundering efforts. Treasury and Justice signed an MOU to govern the administration of the C-FIC and solicit applications from eligible candidates. The goal for 2000 is to award $2.5 million in C-FIC grant funds. Department of Justice, Department of State, DEA, FBI, Office of the Comptroller of the Currency, National Drug Information Center, U.S. Postal Service State and/or local governments, foreign governments, private sector The BMPE is considered by many money laundering experts to be the largest money laundering system in the Western Hemisphere. To effectively combat a system of its magnitude requires an aggressive, integrated, and coordinated effort involving federal, state, local, international law enforcement as well as cooperation of the business community. The Office of Enforcement, with its law enforcement resources and its direct ties to the business community, was uniquely positioned to establish and lead this initiative. OE staff collected trade data, law enforcement BMPE case summaries, and other data necessary to prepare briefings and testimony related to the BMPE. Briefing materials were prepared for meetings with officials and background papers were prepared for use by the Attorney General, Deputy Secretary of the Treasury, and foreign officials engaged in the attack on the BMPE. Please briefly explain. Briefings were made to the Attorney General, Deputy Secretary of the Treasury, and foreign officials. For example, officials of Aruba, Colombia, Panama, and Venezuela are participating in a working group with the U.S. to further combat BMPE in the Western Hemisphere. The Working Group developed a BMPE Action Plan which included strategic objectives to be met in coordinating the fight against the BMPE and ensuring the cooperation of the business community. As part of its efforts, it has also developed and established an international BMPE Working Group and a domestic government/industry outreach program that will lead to the creation and adoption of an anti-money laundering compliance program and best practices guidelines. Through the government/industry outreach program, the Working Group is facilitating the development of standards and best practices that will be adopted by business and industry to combat the BMPE. As participants on the Working Group, OE staff draft input for Working Group reports, proposals, standards, etc. The Under Secretary of Enforcement established and oversees the activities of the Working Group, and OE staff participate as members of the Group. In addition to preparing written products associated with the efforts of the Working Group, Office of Enforcement staff reviews reports, proposals, and initiatives developed by the Working Group. The BMPE Working Group is a large interagency program with a number of cross cutting initiatives. Among other things, Treasury Office of Enforcement directs the efforts of the Working Group and serves as a clearinghouse and coordinator for a number of those initiatives. The BMPE money laundering system is a global problem. Outreach programs have been developed and implemented to engage the international community in the attack on this system. In establishing these programs, members of the Working Group, and OE staff, have on occasion had to meet and negotiate with international law enforcement and government officials. A key component of the BMPE strategy is education of the national and international business communities on the BMPE process and measures that can be taken to avoid BMPE activity. To accomplish this objective, speeches have been written to increase the awareness of the business community to this money laundering system and steps that can be taken to avoid business involvement in it. A key component of the BMPE strategy is education of the national and international business communities on the BMPE process and measures that can be taken to avoid BMPE activity. To accomplish this objective, the Under Secretary of Enforcement has made a number of speeches to trade associations to increase the awareness of its members to the BMPE. In addition, advisories have been published by the U.S. Customs Service and the Financial Crimes Enforcement Network. The Working Group has held seminars and workshops for the business community to educate on the operations of the BMPE system and to provide information on how to avoid becoming involved in the system. Start date: February 1998 No fixed end date 3 staff members who spent 25 to less than 50 percent of their time on the project. A BMPE Action Plan was developed and is being implemented by OE. Some of the results of the Working Group include: 1. An enhanced understanding of the BMPE process by the federal, state, local, and international law enforcement communities has resulted in improved coordination and effectiveness of federal law enforcement BMPE investigations, data collection, and information sharing. 2. The aggressive and successful domestic outreach program has resulted in a heightened awareness of the BMPE process and an increased level of cooperation of the Business community in developing anti-money laundering compliance programs. 3. Development and implementation of an international Black Market Peso Exchange Working Group to examine the BMPE on a global scale will lead to the development of specific actions to be taken by member countries to attack the BMPE money laundering system. 4. Mutual agreements and training programs with international partners have resulted in a dramatic improvement in the ability to detect and deter BMPE. 5. Both FinCEN and Customs have issued Advisories alerting the financial community and the trade community to the warning signs of BMPE activity. Law enforcement mission: Reduce the trafficking, smuggling, and use of illicit drugs DAS (Enforcement Policy) Policy development and guidance The General Counterdrug Intelligence Plan (GCIP) is designed to enhance the Nation’s critical counterdrug intelligence structure to ensure counterdrug activities of the law enforcement and intelligence communities are prepared for the new century. The GCIP is intended to ensure that departmental policymakers, intelligence systems, and law enforcement professionals are able to act in a coordinated and efficient manner to curtail the activities of criminal drug organizations. Other: the review that produced the GCIP was commissioned by the Attorney General, Director of Central Intelligence, Secretary of the Treasury, and Director of ONDCP, and supported by the Secretaries of Defense, Transportation, and State. This review was an extension of and expansion on recommendations made by a White House Task Force that studied national counterdrug intelligence in response to a requirement in the 1998 Treasury and General Government Appropriations Act. Department of Defense, Department of Justice, Department of State , Department of Transportation, Coast Guard, DEA, FBI, National Security Council, ONDCP, Intelligence Community None As the GCIP was commissioned at the Cabinet level, Departmental level participation was necessary from the beginning of the project. The goal of the GCIP is extremely broad, establishing an interagency architecture that supports agents and intelligence analysts in the field; improves Federal, State, and local relationships; promotes international cooperation; and responds to the needs of Departmental policymakers as they formulate counterdrug policies and resource decisions. Led Treasury efforts to gather data from the various bureaus in support of interagency review of counterdrug activities. Prepared numerous reports and background papers for the GCIP review team on bureau missions, positions on issues, relationships among enforcement agencies, foreign presence, sharing and disseminating information, etc. Also prepared written briefings for Treasury officials on the status of GCIP progress. Provided periodic briefings for Enforcement and bureau officials on the status of GCIP plans, objectives, progress, etc. As a member of the interagency review team, developed plans and drafted initiatives and strategies for GCIP action items. Drafted proposed standards for future law enforcement and intelligence community action covering the gamut of GCIP topics, including information technology, training, State and local relationships, foreign government cooperation, national intelligence centers, and cross-jurisdictional coordination. Drafted reports for use by the GCIP review team and drafted portions of the final GCIP. Oversaw input by bureaus and, at the DAS level, oversaw progress of GCIP review team. In addition to participating as a working member of the GCIP review team, Treasury Enforcement served on the Deputy Assistant Secretary/Assistant Commissioner of Assistant Director-level Counterdrug Intelligence Coordinating Group (CDICG) which reviewed and monitored objectives, progress, and written product of the review team. As both a member of the GCIP review team and the CDICG, Enforcement coordinated with 13 Federal agencies and departments to develop a consensus on the GCIP findings and initiatives. Much negotiations to ensure that issues of importance to Treasury law enforcement were included in the final plan. As a member of the GCIP review team, prepared correspondence on behalf of team and the CDICG. Prepared remarks for Under Secretary to present at formal interagency press roll-out of the GCIP. The Under Secretary delivered remarks at formal interagency press roll-out of the GCIP. Start date: September 1997 End date: February 2000 5 staff members: spent 25 to less than 50 percent of their time on the project. The direct result of the project was the issuance of the GCIP in February 2000, which provided an integrated, strategically oriented counterdrug intelligence framework to enhance future counterdrug operations. The framework included a series of 73 concrete action items to achieve the plan and established a new cooperative coordination mechanism consisting of agencies in the law enforcement and intelligence communities. Law enforcement mission: Reduce the trafficking, smuggling, and use of illicit drugs DAS (Enforcement Policy) Oversight In response to Congressional directive in the 1999 Treasury-Postal Appropriation, working with USCS, ONDCP, and DOJ to provide a report on efforts to improve coordination among federal law enforcement agencies on the US Southwest Border. Other Congressional direction: language in the 1999 Treasury-Postal Appropriation Act (Sec 629) directed the report. Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, DEA, EOUSA, FBI, INS, OMB, ONDCP None Congressional language directed that the Secretary (in conjunction with the Attorney General and the Director of ONDCP) submit the report. Since the substance of Congressional concerns dealt with interdicting drugs, Enforcement was tasked. Collect and organize data from USCS, INS, and ONDCP. Prepare update briefings for Under Secretary, Secretary and Deputy Secretary on project status. Brief Secretary, Deputy Secretary and Under Secretary on project status. The project consists of preparing a written report for submission to Congress. Treasury (Enforcement) took responsibility as the principal drafter of the report, ensuring coordination with the other agencies as required. Review and incorporate (as appropriate) USCS and INS implementation plans for the Border Coordination Initiative, DOJ and EOUSA submissions, and field office strategy documents. Evaluate program results from BCI as provided in monthly reports for inclusion in the report to Congress. The principal effort of this office since it developed the first draft of the report has been to mediate disputes between various concerned parties (INS, Border patrol, EOUSA, ODAG, HIDTA, ONDCP/Supply Reduction, ONDCP/State & Local, USCS), and to negotiate changes to text as requested by each. Prepare correspondence from Treasury officials to counterparts (Assistant Secretary and Under Secretary level). Draft and coordinate within Treasury and the interagency joint memoranda from the Secretary, the AG, and ONDCP Director to Congressional leaders. Start date: February 1999 Anticipated end date: October 2000 2 staff members who spent 25 to less than 50 percent of their time on the project. Unknown. The final interagency-approved draft of the report was completed in May, 2000. Secretary Summers and Attorney General Reno signed the transmittal to Congress in June and August, 2000 respectively. Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, DEA, FBI, National Security Council, OMB, ONDCP, CIA, HHS Foreign governments Narcotics certification, including the money laundering component, involves over-arching government policy-making in an interagency context. OE is the best place to coordinate all of the bureaus’ input into that decision-making process. Collect data on narcotics seizures, money laundering, and foreign governments’ financial systems and cooperation with Treasury bureaus. Preparation for interagency certification meetings including information described above. Prepare updates for Secretary and Deputy Secretary on certification process; prepare decision memorandum for final certification recommendations. Review demarches to foreign governments. Participate in interagency certification strategic decisions, recommend Departmental concurrence in these decisions. Participate in drafting of annual INCSR. Review INCSR drafts, review certification demarche drafts. Participate in interagency certification decision process using Treasury bureaus’ input. Advocate Treasury’s position as to specific countries’ certification in interagency process. Some years, Treasury has been required to testify before Congress as to certification recommendations. Law enforcement mission: Reduce the trafficking, smuggling, and use of illicit drugs DAS (Law Enforcement) Oversight The purpose of the project is to implement the 73 action items in the General Counterdrug Intelligence Plan (GCIP). The GCIP is designed to enhance the Nation’s critical counterdrug intelligence structure to ensure counterdrug activities of the law enforcement and intelligence communities are prepared for the new century. The GCIP is intended to ensure that departmental policymakers, intelligence systems, and law enforcement professionals are able to act in a coordinated and efficient manner to curtail the activities of criminal drug organizations. Presidential Initiative: the GCIP has been an Administration initiative that builds on the National Drug Control Strategy. Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, DEA, FBI, National Security Council, OMB, ONDCP, Intelligence Community State and/or local governments, foreign governments The GCIP is an Administration initiative. The goal of the GCIP is extremely broad, establishing an interagency architecture that supports agents and intelligence analysts, in the field; improves Federal, State, and local relationships; promotes international cooperation; and responds to the needs of Departmental policymakers as they formulate counterdrug policies and resource decisions. Gather data from bureaus on existing and proposed efforts to implement GCIP action item, including data on personnel, recruitment, training, information technology, etc. Prepare background materials and briefing papers on the objectives of the GCIP, and on funding for the Counterdrug Intelligence Secretariat (CDX). The CDX is the staff arm of the Counterdrug Intelligence Coordinating Group (CDICG), the interagency coordinating body overseeing the overall Federal implementation of the GCIP. To date, briefings have been made to staff of various Congressional committees and to the CDICG. Develop strategies for implementation of GCIP action items by Treasury bureaus. Oversee implementation of GCIP action items by Treasury enforcement bureaus. Prepared proposals seeking waiver of appropriations statutory language prohibiting reprogramming of agency funds for interagency committees. Due to the issuance of the GCIP so late in the fiscal year, no funding was included in FY 2000 appropriations for the CDX activities. A waiver was required to permit agencies to reprogram funds to the Department of Justice (which provides administrative services for CDX) for FY 2000. Funding for future years is included in ONDCP appropriations. Coordinate with Treasury enforcement bureaus, the CDX, and with other CDICG members on implementation of GCIP action items. Certain GCIP action items relate to coordination with foreign governments on counterdrug intelligence. Since formal operations under the GCIP were initiated in February 2000, the CDICG and the CDX have already stepped in to resolve a potentially serious problem relating to the sharing of U.S. counterdrug alert information among foreign nation liaison officers participating in the Joint Interagency Task Force (JIATF). Start date: February 2000 No fixed end date 3 staff members who spent 10 to less than 25 percent of their time on the project. The GCIP action items focus on six broad areas: a policy-level coordination mechanism; coordination among the four national intelligence centers; regional, state, and local coordination; foreign coordination; intelligence analyst development and training; and information technology. The policy-level coordinating mechanism—the CDICG—has been established, and a relationship has been formed among the four national intelligence centers. The agencies represented on the CDICG, as well as many other Federal agencies, are working together to achieve progress in implementing the action items addressing all the GCIP initiatives. Law enforcement mission: Reduce the trafficking, smuggling, and use of illicit drugs Assistant Secretary (Enforcement) Oversight To oversee the development of Treasury’s position and coordinate the Administration’s response to the Kingpin Act prior to its passage by the Congress in December 1999; and to monitor the implementation of the Kingpin Act by the Office of Foreign Assets Control through the first Presidential designations in June 2000. OE will continue to monitor the Kingpin program implementation in the future. Self-initiated and statutory requirement: the Assistant Secretary (Enforcement) took the lead in developing Treasury’s position and coordinating with other agencies on the proposed Kingpin bill. Enforcement worked with OFAC on the process to prepare, in coordination with other agencies, the first Presidential designations of narcotics kingpins, as required by the legislation. Department of Defense, Department of Justice, Department of State, DEA, FBI, National Security Council, ONDCP, Intelligence Community None Enforcement took the lead because of the policy-level decisions to be made and due to the extensive coordination required, not only among offices within the Treasury, but with agencies outside of Treasury. Collected data on resources required by OFAC and other Treasury bureaus to implement the Kingpin Act and on the type of information that would be needed by OFAC to develop designations. Prepared briefing materials and talking points for high-level Treasury and other government officials on the Act provisions, procedures for implementation, and impact of bill. Enforcement and OFAC briefed Treasury, Justice, ONDCP and State officials, including embassy personnel. Worked with OFAC to develop implementation strategies in response to changes as the legislation progressed in the Congress and for the final Kingpin Act. In coordination with other Treasury offices, developed Treasury policy and positions for the Secretary on the Kingpin Act. Monitored OFAC’s coordination with other agencies in the development of the first narcotics kingpin designations by the President under the new Act. Reviewed drafts of proposed legislation, briefing materials, and program implementation plans. Worked with OFAC to develop proposals to seek funding for OFAC implementation of the Kingpin Act through emergency supplementals and through the FY 2001 appropriations request. The Assistant Secretary coordinated with Justice officials on plans and procedures for Kingpin Act implementation. Enforcement and OFAC briefed Mexican officials and Mexican business community on the Kingpin Act provisions. OE, working with OFAC, drafted talking points on the Act’s provisions for use by Administration officials in meetings with foreign officials. Reviewed correspondence, testimony, and briefing materials responding to inquiries and questions on the Kingpin Act. Enforcement staffing level on the project Project results 4 staff members who spent 10 to less than 25 percent of their time on the project. On June 1, 2000, the President designated 12 narcotics kingpins from four countries pursuant to the Foreign Narcotics Kingpin Designation Act. The designations were jointly recommended to the President by the Departments of Treasury, Justice, State, and Defense, and the CIA. The effect of the June 1 designations is to impose sanctions against the 12 kingpins that target their financial and business operations. There will be additional designations of narcotics kingpins and their front companies and individuals at least yearly, as required by the Act. OE will continue to monitor the future implementation efforts and required reports to Congress of this highly visible program. Policy), DAS (Law Enforcement), ATF, Customs Service, FinCEN, IRS/CID, OASIA Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, DEA, FBI, INS, National Security Council, CIA, HHS, USMS Foreign governments Departmental participation was mandated by the Presidential directive. Enforcement, as the lead for issues related to US counterdrug activities within Treasury, coordinates Treasury and bureau participation in the HLCG process. Collect investigative data, and information on current counterdrug activities in the US and Mexico. Prepare briefings for Under Secretary’s and Assistant Secretary’s use at multiple Core Group and Steering Committee meetings. Prepare background, briefing materials, and presentations for Under Secretary’s use at HLCG plenaries. Brief Secretary and Deputy Secretary on HLCG status and specific issues, also brief Under Secretary in preparation for Core Group, Steering Committee meetings. Develop USG proposals for bilateral actions against money laundering and firearms trafficking. Draft those portions of the Binational Drug Strategy, and coordinate within Treasury and the US interagency. Participate in drafting USG policy on cooperative efforts with Mexico (e.g. The US- Mexico Alliance Against drugs signed by Presidents of both countries, the Brownsville- Merida agreements signed by Attorneys General of both countries, and the bilateral Memorandum of Agreement on Cross Border Monetary Instrument Reporting signed by Under Secretary for Enforcement and his Mexican counterpart). Developed and coordinated within Treasury and the US interagency performance measures of effectiveness for the Binational Drug Strategy and negotiated with Mexican officials the final adopted version of those measures. As US chair of the bilateral working groups on money laundering and firearms trafficking, prepare periodic reports on the mission, goals, and activities of the working groups for the Secretary as well as the HLCG principals. HLCG is both bilateral and interagency. Treasury equities require extensive interagency coordination to develop USG positions and action plans, as well as negotiating positions and tactics for dealing with Mexican counterparts. Prepare speeches and presentations for use at HLCG plenaries as well as at bilateral Steering Committee and technical working group meetings. Make presentations to Cabinet level officials and media at HLCG plenary sessions. Start date: March 1996 No fixed end date 2 staff members who spent 25 to less than 50 percent of their time on the project. At times this has risen to as much as 80 to 100 percent. Improved coordination between the US and Mexico on counterdrug issues. Specific accomplishments are detailed in the US-Mexico Alliance Against drugs signed by Presidents of both countries, the Binational Drug Strategy and the related performance measures. Among other things, specific areas of increased cooperation enhanced under Treasury Enforcement’s leadership include: the bilateral Memorandum of Agreement on Cross Border Monetary Instrument Reporting signed by Under Secretary for Enforcement and his Mexican counterpart, adoption by Mexico of regulations implementing its anti-money laundering law, U.S. assistance to Mexico through ATF on tracing firearms used in crimes in Mexico, Mexico undertaking the required steps to join the Financial Action Task Force (the leading international anti-money laundering organization), enhanced cooperation between Treasury law enforcement and the Government of Mexico on money laundering and illegal firearms trafficking cases. Law enforcement mission: Reduce the trafficking, smuggling, and use of illicit drugs DAS (Enforcement Policy) Policy development and guidance Working with bureaus, propose projects for assisting government of Colombia in its counter-narcotics efforts. Following Congressional passage of supplemental funding package for numerous program areas, refine bureau implementation plans and negotiate funding from justice sector funds with DOJ and other agencies. Other: Colombian President Pastrana approached the USG and requested our assistance with his $7.5 billion Plan Colombia program. The Administration proposed a package to support Mr. Pastrana, and the Congress ultimately approved $1.3 billion in funding to assist Colombia and other regional governments with counter-narcotics efforts including equipment and training for Colombian military and law enforcement, eradication, and alternative development. A Presidential Decision Directive laid out areas of responsibility for agency involvement. Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, DEA, FBI, National Security Council, OMB, ONDCP, CIA Foreign governments, IMF, World Bank, human rights NGO’s Enforcement coordinated the input of all the bureaus into the Department’s proposals from the initial Administration package, and continuing through the current negotiations with other agencies as to implementation plans. Collect proposals, organize implementation planning package for transmission to other agencies, collect information on current activities in Colombia and surrounding countries. Prepare briefings for multiple Deputies’ Committee meetings at NSC, also for Under Secretary’s use at Executive Committee meetings, and for Secretary and Deputy Secretary on project status. Brief Secretary on project status, also brief Deputy Secretary and Under Secretary in preparation for Deputies Committee and Executive Committee meetings on project. Develop complete package of proposals and implementation plans for Department’s Plan Colombia activities. Participate in drafting Presidential Decision Directive, implementation plans for Congress, strategy documents outlining goals and plans. Once implementation begins, Enforcement staff will oversee and monitor bureau projects, as well as coordinate them with other participants in justice sector areas Review PDD, implementation plans, strategy documents, bureaus’ proposals and implementation plans. Entire project deals with seeking funding for assistance to Plan Colombia. Project is interagency, also represent Treasury interest in planning process for particular sectors of project. Work within DOJ-led process to plan implementation of justice sector programs. Start date: March 1999 No fixed end date 2 staff members who spent 25 to less than 50 percent of their time on the project. At times, this has risen to as much as 80-100 percent. The Colombia funding supplemental included $68 million for Customs radar upgrades, $1 million for Customs’ Americas Counter Smuggling Initiative, involving outreach to business; $2 million for Customs police training, $1 million for OASIA/Office of Technical Assistance (OTA) for banking supervision assistance, and $500k for OASIA/OTA for tax revenue enhancement. Treasury’s bureaus and the Office of Enforcement have sought $5.3 million in funding from several sources in a justice sector planning process for other training and equipment for the government of Colombia. Law enforcement mission: Fight violent crime Under Secretary (Enforcement) Policy development and guidance Implementation of President Clinton’s three-part strategy to combat the scourge of arsons at our nation’s houses of worship—particularly African American churches in the South. Other: in response to the President’s directive to address the issue of church arsons, the Departments of Treasury and Justice established the National Church Arson Task Force. Department of Justice, EOUSA, FBI, Department of Housing and Urban Development, State and/or local governments, private sector The interagency National Church Arson Task Force is a Presidential initiative. The Assistant Secretary (Enforcement) was designated Co-chair of the Task Force, and has continued in that capacity as Under Secretary (Enforcement). ATF maintains data on incidents of church arson. The Department of Justice maintains data on prosecutions and convictions of the arsonists. In preparing reports, testimony, speeches and other materials, Enforcement staff gather relevant information from ATF and DOJ. Background and briefing materials have been prepared for high-level Treasury and Justice officials, Task Force members and for the public on Task Force efforts. Oral briefings have been presented to Treasury officials and to Task Force members. In coordination with ATF, DOJ and others, developed guidelines and strategies for investigation by Federal law enforcement agencies of church arson incidents. Developed a list of best practices for interagency coordination. Coordinated with ATF on the development of recommendations for the public on preventing church arsons. Also, in coordination with ATF, DOJ and others, developed operational protocols and guidelines for operations of Task Force. Prepare Task Force reports to the President. An interim report and four annual reports have been submitted to the President since creation of the Task Force. In coordination with the Department of Justice, monitor progress of ATF investigations and DOJ prosecutions of church arsons. In conjunction with preparation of reports to the President and other documentation, review ATF reports of arson investigation results. In 1996, additional funding was requested (and obtained) to support ATF investigations of church arsons. Coordinate regularly with other agency members of the National Church Arson Task Force. Prepare correspondence, draft speeches and testimony for then Assistant Secretary (Enforcement) and now Under Secretary (Enforcement) on ATF efforts and progress of Task Force. The Under Secretary (Enforcement) has delivered numerous speeches and presented testimony on Task Force efforts and the highly successful ATF investigation and of church arsons. The Chief of Staff (Enforcement) has made presentations on the work of the Task Force at workshops sponsored by the Department of Housing and Urban Development. Start date: June 1996 No fixed end date 4 staff members who spent less than 10 percent of their time on the project. Successful results of the National Church Arson Task Force include: a decline in the number of reported church arsons; a rate of arrest for church arsons that is more than double the national average for arsons generally; an increased focus on fire prevention at churches; financial support for rebuilding of houses of worship destroyed by arson; and preparation and distribution of a threat assessment guide for churches. Department of Defense, Department of Justice, FBI, National Security Council, Federal OE provides direction and leadership to the two Treasury bureaus mentioned in PDD-62, the Secret Service and the Customs Service. OE provides a broader perspective on each bureau’s assigned roles and assists in exploring alternative funding for these events. Additionally, OE is aggressively spearheading a more concrete understanding of the criteria and process for the designation of an event to the NSSE level. Collected data on specific events proposed and on proposed security plans. Collected informational data for resources and funding purposes. Data collected to respond to Congressional and Executive inquiries. Prepare informational materials for the Secretary and his Staff within Treasury as part of process to obtain approval to designate an event as an NSSE. Briefings for Secretary and his Staff and the Attorney General. Briefings for other officials directly affected by the event. (e.g. Mayors and Police Chiefs in Los Angeles and Philadelphia for both National Political Conventions). Draft initiatives to amend program processes for strengthening the standards for the designations of NSSEs. Develop new standards and criteria for designating NSEEs. Extensive meetings and “table top” security exercises with the bureaus and outside entities relating to NSSEs. Trips to event sites and participation at the events to support the bureaus and to provide ongoing reports to Treasury officials of event activities. Reviewed reports from the perspective bureaus and the Counter-Terrorism and Security Group (CSG) Developed, reviewed budget proposals, proposed, and continued to seek and explore alternative sources of funding for NSSEs through the Legislative and Executive Branches. Coordinate and mediates among all respective parties on issues, including air interdiction, funding proposals, and the actual designation of an event. Problem solving with DOJ. Responding to correspondence from the National Security Council relating to designation. Congressional testimony (appropriations) relating to NSSEs. Start date: May 1998 No fixed end date 4 staff members who spent 25 to less than 50 percent of their time on the project. The PDD was drafted and cleared with the White House and ultimately approved. OE led effort to develop and implement processes for designating events as NSSEs. OE has been able to achieve some limited funding for events. The relationship of Treasury bureaus with state, local, and Federal law enforcement has been strengthened as the result of the cooperation exhibited in participating in the events. There were five NSSEs designated in FY 2000. All were successfully completed. It is estimated that about three events per year will be designated NSSEs in the future. The Presidential Inauguration in 2001 and the 2002 Winter Olympics also were designated as NSSEs. Law enforcement mission: Fight violent crime DAS (Law Enforcement) Oversight To develop and implement a unified government-wide plan to combat terrorism. Other Congressional direction: the FY 1998 Appropriations Bill required that the Department of Justice lead an inter-agency process to develop a comprehensive five-year counter-terrorism plan. Department of Defense, Department of Justice, Department of State, Department of Transportation, Coast Guard, EOUSA, FBI, INS, National Security Council, OMB, CIA None The initial project was led by DOJ, so it was appropriate that Treasury respond at the Departmental level. Additionally, the Department could provide a broader, more coordinated, and more comprehensive approach than the individual bureaus. The implementation of the plan requires the oversight of the Department. Information regarding the current counter-terrorism activities of the bureaus, as well as proposals for new programs was gathered, reviewed, organized, and provided to DOJ. Prepared briefing materials for the Under Secretary, Secretary and other senior officials. Briefed Congressional staff. Worded with bureaus to develop proposals to address emerging terrorist threats. Held coordinating meeting to develop a unified Treasury position. Organized representation on the various working groups that developed the Plan. Reviewed and corrected all written submission, all draft versions of the Plan, coordinated the clearance of the Plan through Treasury. Determined the cost of new initiatives identified in the Plan, proposed funding for these initiatives as part of the budget process. Continue to advocate for funding for these initiatives. Participated as the representative of the Department at senior level meetings, coordinated closely with DOJ on the elements of the Plan, vigorously defended the bureaus’ initiatives and programs, mediated disputes that arose. Drafted letters to senior DOJ officials to obtain representation in the coordinating group, and regarding areas of disagreement with the draft Plan. Enforcement continues to coordinate the implementation of the Treasury action items contained in the plan, and provide information for inclusion in the yearly update of the Plan. Start date: Early 1998 No fixed end date 2 staff members who spent 75 to 100 percent of their time on the project for 8 months, then 25 to 50 percent for about 3 months, and then about 10 percent. A comprehensive interagency Plan, which contained many of the ideas and initiatives proposed by Treasury and its bureaus, was developed and has been updated each year. Department of Defense, Department of Justice, Department of State, FBI, INS, National Security Council, OMB None In late March 2000, at the request of OMB, Treasury was requested to submit proposals for a possible counterterrorism supplemental. OE met with all Treasury law enforcement bureaus to discuss, review and evaluate each bureaus counterterrorism programs. Each bureau was requested to submit supplemental funding requests to enhance these programs. OE coordinated these funding requests with OMB. All bureaus submitted supplemental funding requests to OE. OE collected and “packaged” these requests for submission to OMB. At the request of OMB, OE was required to prioritize these submissions. OE prepared voluminous briefing and background materials on Treasury-wide counterterrorism programs. OE briefed Treasury officials and OMB officials on our counterterrorism supplemental requests on a number of occasions. OE also briefed Congressional appropriators on our request. In addition to our efforts to enhance existing bureau programs, OE proposed a new Treasury terrorist asset tracking initiative. This new initiative was applauded by OMB and efforts are underway to fund this new program. The DAS (LE) and OF&A prepared extensive budget-related reports for submission to OMB in conjunction with the supplemental appropriations process. OE continues to monitor the progress of this counterterrorism initiative. Develop or review budget proposals, seek funding—as previously mentioned, this project is specifically related to a supplemental funding request pertaining to our counterterrorism efforts. At the request of OMB, OE submitted this proposal as a consolidated Treasury counterterrorism request. Extensive coordination was required with all bureaus. Each bureau was required to submit its draft counterterrorism funding request to OE. After consultation with each bureau and an internal OE review, a Treasury Counterterrorism supplemental funding request was submitted to OMB approximately 4 weeks after this initiative began. Appropriate correspondence prepared for OMB regarding the supplemental funding initiative. Start date: March 2000 Anticipated end date: October 2000 9 staff members who spent 10 to less than 25 percent of their time on the project. A supplemental budget proposal was developed and approved within Treasury and sent to OMB. The Treasury proposal was approved by OMB and forwarded to Congress. Funds for counterterrorism were included in the approved 2001 budget. Law enforcement mission: Fight violent crime Under Secretary (Enforcement) Policy development and guidance The purpose of this project is fourfold: (1) to oversee the establishment of an ARF annual report of firearms regulatory-related statistics (Commerce in Firearms) usable by agency personnel, government personnel, Congress, and interested experts, modeled on the Council of Economic Advisors annual report, which includes an ongoing statistical series for the United States and topical introductory essays by the agency, in order to centralize USG publication of these statistics, inform the public of vital firearms-related statistics, and make ATF’s regulatory enforcement activities transparent to oversight agencies and other interested parties; (2) to support, invigorate and focus ATF’s regulatory enforcement activities by providing a publicly understood, rational basis for a firearms regulatory program, based on identifying Federally licensed firearms dealers that were likely sources of crime guns, to determine if they were violating federal firearms laws; (3) to ensure that ATF would take appropriate regulatory and/or criminal enforcement action based on these findings (Feb.4, 2000) and to require follow up reporting to the Secretary on that regulatory enforcement program (Fall 2000), consisting of: conducting intensive inspections of the small percentage of federal firearms licensees (FFLs) who (a) accounted for over half of all crime guns traced to current dealers in 1999, (b) were uncooperative with ATF trace requests in 1999, and to collect firearms transaction records from uncooperative dealers and used gun records from dealers who had 10 or more crime guns with time-to-crime of three years or less traced to them in 1999 (An ancillary benefit of the program is the improvement of ATF’s ability to conduct comprehensive crime gun tracing of used firearms used in crime by obtaining firearms transaction records of the uncooperative and high-trace, short time-to-crime dealers); and (4) to inform Congress and the public about the problem of corrupt Federal Firearms Licensees. Self-initiated and presidential initiative: the project was self-initiated by the OE, then announced by President Clinton as well as the Secretary of the Treasury. Department of Justice None OE conceived of the idea of an annual compilation of vital ATF firearms statistics, assisted in developing and drafting the first annual CIF report. OE worked with ATF to develop the related regulatory enforcement program and required follow up reporting to the Secretary, and participated in reviewing that report and its findings. OE continues to be involved in assisting ATF to establish an authoritative annual firearms statistical report, and in drawing out the regulatory enforcement and other policy implications of the data. OE brought in the Office of Economic Policy to assist in developing and interpreting ATF statistical data on U.S. firearms entering commerce and in coordinating with the Office of the Census. OE worked with ATF, academic contractors, and the DOJ Bureau of Justice Statistics to develop and analyze the data underlying the initial regulatory enforcement plan and in the CIF report itself, then received monthly status reports from ATF, summarizing the number of inspections conducted and various results to date, and reporting on the entry and use of firearms records for comprehensive tracing purposes. OE prepared materials relating to the development of the report, the regulatory enforcement program, and oversight of this project for the Under Secretary’s meetings with ATF’s director, and for the White House. OE briefed White House officials, the Secretary, Deputy Secretary, and Under Secretary at various points on the progress of the project. OE helped ATF design both the annual statistical report using the Council of Economic Advisors annual report as a model, and the regulatory enforcement program itself that drew from the data published in that report as well as other investigative information. OE assisted ATF in developing the enforcement policy of focusing on high crime indicator FFLs and making this policy a matter of public commitment and knowledge, and supported the development of new regulations requiring FFLs to conduct annual inventory and report guns lost in shipment and collecting information on FFL transaction numbers. OE assisted in the design and drafting of the initial CIF Report , is similarly involved in preparing the implementation report to the Secretary, and is engaged with ATF in planning the 2001 Firearms Commerce report. OE’s regulatory oversight responsibility prompted the request for the invigorated regulatory enforcement program, and after this was announced, OE received monthly reports on implementation of the focused inspection project and of receipt and use of FFL records for crime gun tracing purposes. OE also is involved in overseeing the final implementation report to the Secretary, and in developing and analyzing enforcement and other policy implications of the project. OE is involved in supporting and monitoring the development of the 2001 Firearms Commerce report, together with the Office of Economic Policy. OE was significantly involved in reviewing drafts of the report, related memorandum, and regulations, has been involved in reviewing the monthly reports and in preparing the final report. OE will also help prepare and review guidelines for continuing a targeted inspection program and review next years Firearms Commerce report. Based on the improved targeting and accountability of ATF’s regulatory enforcement resources, Treasury sought and won support for an additional 200 ATF firearms inspectors in FY2001, and based on the success and importance of this project, OE will help ATF seek funding for addition inspection resources for FY2002. OE sought and obtained the assistance of the authoritative Bureau of Justice Statistics in designing and establishing ATF’s annual compilation of firearms statistics. Deputy Secretary, Secretary and President offered remarks in connection with the initial CIF report. Start date: Fall 1999 No fixed end date 3 staff members who spent less than 10 percent of their time on the project. As a result of OE’s efforts, ATF published the first annual compilation of U.S. firearms statistics, provided a comprehensive explanation to the public of the role of Federal firearms licensees in the supply of crime guns and conducted intensive, focused inspections of approximately 1,012 licensed dealers; identified more than 400 suspected firearms traffickers and nearly 300 prohibited purchasers, and referred 691 cases to special agents for further investigation; conducted a demand letter initiative obtaining firearms records from uncooperative dealers and 10-trace, short time-to-crime dealers; resolved 75 percent (1,336) of the unsuccessful crime gun traces associated with the inspected licensees; identified 13,271 missing firearms; discovered 3,927 NICS criminal background check record keeping errors; initiated license revocation proceedings for 20 FFLs; issued proposed rules to require FFLs to conduct at least one physical inventory each year and to report to ATF any firearms missing from their inventory, and to require the shipper or sender to report losses of firearms that occur in shipment; revised its license renewal form to verify the number of transactions the FFL engaged in, in order to help determine whether the FFL is engaged in the firearms business and qualifies for renewing the license; and established policy guidelines for providing tracing data to importers and manufacturers. This and other information on the project’s results and their policy implications will be provided in a final implementation report to the Secretary, which is in the process of being prepared. Preparation of the 2001 Firearms Commerce report is underway. 27. National Criminal Instant Background Check System (NICS) FBI None The Under Secretary wanted an independent review of the ATF NICS operations. Collected data from ATF on NICS denials and firearms retrievals that were pending and those completed. Briefed Under Secretary on status of ATF’s NICS operations. Monitoring of all NICS operations, procedures followed by ATF, statistics on denials and retrievals, resolution of problems in implementation. Encouraged ATF to find funding to create interface between NICS database and ATF’s general enforcement database (NFORCE). OF&A supported future funding to achieve upgrades to ATF information systems. Discussions with FBI and ATF on NICS background check procedures and regular meetings/conference calls to discuss issues of interest to both ATF and FBI. Start date: January 2000 No fixed end date 2 staff members who spent 10 to less than 25 percent of their time on the project. OE role identified problems hindering effective ATF implementation of NICS and recommended solutions. OE efforts helped ATF reduce its backlog of delayed denial retrievals and recognize the need to create an interface between its NICS database and NFORCE to meaningfully track retrievals. NICS tracking data is now available at ATF. Department of Justice, White House Domestic Policy Council State and/or local governments, private sector This was a White House policy initiative, carried out by OE, to develop information, policy analysis, and new firearms legislation, drawing on ATF information, legal and enforcement knowledge, experience of the gun world, and firearms expertise. OE collected extensive gun show, gun crime, and enforcement related data with the assistance of ATF in preparing both the Presidential directive itself and the follow-up report (Gun Shows: Brady Checks and Crime Gun Traces). Extensive briefing and background materials were prepared for Treasury and White House officials in connection with the directive, issuance of the report, and announcement of the legislation resulting from the report. Extensive briefings of Treasury and White House officials in connection with the directive, report, and legislation. Drafted legislation to require background checks at gun shows and documentation permitting crime gun tracing. Gun Shows: Brady Checks and Crime Gun Traces, January 1999. Co-authored with DOJ. ATF/Treasury had the main pen, DOJ editorial role. Monitored report and legislation preparation. Reviewed drafts of report materials and report itself, as well as related legislation, testimony, press information. Worked with ATF and OE budget office to develop budget estimates for additional enforcement efforts. Gun show report co-authored with DOJ, ongoing discussions. Wrote routine correspondence and a number of speeches including references to this report. Mentioned in various speeches and testimony by officials. Start date: November 1998 End date: February 1999 3 staff members who spent 10 to less than 25 percent of their time on the project. Development of authoritative empirical information about gun shows, for the benefit of Congress, the media, and the public; New federal legislation on gun shows drafted and partially enacted (pending in House- State legislative initiatives on gun shows in various stages; Heightened public understanding of the role of gun shows in supplying guns to criminals and juveniles (as at Columbine) as reflected in the media and local initiatives; Built public and Congressional support for revived gun show enforcement by ATF (resulting in removal of internal ATF restrictions); Further developed public understanding of the role of the illegal market generally in supplying guns to criminals and juveniles and the need for corrective enforcement, legislative and regulatory actions. Law enforcement mission: Fight violent crime Under Secretary (Enforcement) Policy development and guidance To determine the appropriateness of barring so-called sporterized semi-automatic assault rifles form importation and to take appropriate action. Self-initiated and presidential initiative: OE discussed the possibility of an import ban on sporterized rifles with the Domestic Policy Council, to follow up on the 1994 legislation (the assault weapons ban). This resulted in a Presidential directive. Department of Justice, OMB State and/or local governments, private sector This was a Presidential policy initiative to reexamine ATF importation practice of applying regulation to particular firearms. Extensive data on sporterized assault weapons collected through survey made a part of the final report. OE and ATF worked closely together, with academic experts, to prepare the report. Prepared briefing on directive, and progress and results of report. Treasury and White House officials briefed extensively. Report and its adoption by Secretarial memorandum constituted a new policy application that resulted in regulatory action by ATF. Extensive report prepared in conjunction with ATF and General Counsel, Department of Treasury Study on Sporting Suitability of Modified Semiautomatic Assault Rifles, April 1998. Oversaw implementation of Administration initiative. Reviewed draft report materials, legislation needed to deal with after-effects among importers. The report resulted in the need for legislation to compensate certain firearms importers. Worked with Congress, OMB, and DOJ to provide compensation. Worked closely with ATF to prepare report. Provided input for speeches by Secretary and White House officials. Start date: August 1993 End date: December 1998 2 staff members who spent 10 to less than 25 percent of their time on the project. The final report produced by the project resulted in regulatory action by ATF to ban the importation of 29 types of assault weapons. Law enforcement mission: Fight violent crime Under Secretary (Enforcement) Support (1) Focus ATF agent and inspector enforcement resources on reducing juvenile and youth violence at a time when juvenile homicides were spiking and public concern was and remains high; (2) Expand use of crime gun tracing and trace analysis (including mapping) to solve gun crimes and reduce the illegal market in guns, especially those supplied to criminals and juveniles; (3) Support ATF’s development of and build public support for an integrated firearms enforcement policy and strategy that optimized ATF’s expertise and authority and did not rely exclusively on incarcerating individual violent offenders, but also looked at illegal sources of guns fueling community violence and “hot spots”; (4) Make ATF expertise and information more available to State and local law enforcement to strengthen enforcement of Federal, State and local gun laws; (5) Expand law enforcement, media, and public understanding of the illegal market in guns —by teaching them to ask the question “where did the crime gun come from?”—as a foundation for new regulation and laws that further reduce illegal market access to guns; (6) Build public trust of ATF and expand public and Congressional support for ATF’s firearms enforcement mission and an integrated firearms enforcement strategy; (7) Integrate DOJ, including US Attorney, and OMB views of firearms enforcement with those of Treasury and ATF. OE self-initiated the project in September 1995, and it was adopted as a Presidential initiative in Summer 1996. OMB also took significant budget action for FY 96 that required that ATF enforcement policy be re-focused away from a sole focus on incarcerating individual violent offenders. Department of Justice, OMB, National Partnership for Reinventing Government State and/or local governments, law enforcement organizations, and academic experts OE responded to President Clinton’s priority of reducing gun violence (as evidenced by the Brady law and the Assault Weapons Ban) and the White House interest in reducing youth violence generally, as evidenced by Mrs. Clinton’s focus on children. Since Treasury oversees ATF, we looked for a way to fulfill the President’s agenda within the appropriate scope of our authority. Thus, this was an Administration initiative building on and drawing from ATF resources, expertise, and ideas. YCGII is an example of a product of OE-ATF teamwork. Numerous planning meetings involving data collection in initial stages of project to develop, explain and justify the initiative. Key data involved budget, FTE, gun crime, and gun tracing information. Many volumes of briefing materials over the five-year period, for principals, hearings, announcements, and media interviews. Three White House events. Regularly briefed Treasury, OMB, DOJ, White House, Congressional staff and principals in conjunction with plans, budgets, reports and appropriations requests. OE and ATF worked together to draft this program, which began as an initiative funded by the Treasury Asset Forfeiture Fund, and as the program developed, new actions and strategies to further the project’s objectives enumerated above. Drafted or prepared three YCGII Crime Gun Trace Reports: 1997, 1999, 2000 (hereafter anticipated to be annual); YCGII Performance Report 1999 (by request of Congressional appropriators); and, Following the Gun: Enforcing Federal Laws Against Firearms Traffickers, June 2000 (indirectly related to YCGII). Some monitoring of program implementation by DAS (Law Enforcement) and AS (Enforcement) following computer crisis in connection with the 1999 Crime Gun Trace Reports; similar type of oversight effort following 2000 IG report. Most written products associated with this program, internal or external, have been drafted, reviewed, or commented on by OE. These included briefing papers, testimony, reports, and media background papers. Developed Administration/ATF firearms enforcement initiatives from 1996 through FY 2001. Assisted in developing ATF annual budget proposals. Responsible for major budget initiative, beyond that initially sought by the agency, but developed with the assistance of bureau, OE, and Treasury budget officers. Ongoing discussions and coordination with Justice, including cooperative work with the Bureau of Justice Assistance, Bureau of Justice Statistics, and National Institute of Justice. Plenty of disputes arose because this was, from the perspective of DOJ, a bottom up initiative, that is, an investigator initiative rather than a prosecutor initiative and also involved State and locals, usually considered DOJ “turf.” Ongoing negotiations and compromise with DOJ (main DOJ and program/funding agencies), OMB, and the Hill, all normal program development and funding type of activities and disputes. Drafted language on YCGII and illegal market enforcement strategy for speeches presented by Treasury and White House officials as well as routine public correspondence. YCGII and illegal market enforcement strategy included in speeches by Treasury and White House officials. OE also provided annual testimony that addressed YCGII initiative. Start date: September 1995 No fixed end date 1 staff member who spent 10 to less than 25 percent of his/her time on the project. For some weeks, full-time. Most significant results: Establishment of systematic field focus by ATF agents and inspectors on illegal sources of guns, especially to young people, and use of field data to expand information and feed it back into investigations and strategy, resulting in strategically focused cases, and acceptance of broadened enforcement strategy complementary to incarceration of individual violent offenders; Major increase in crime gun tracing nationwide; improved investigative methods at ATF such as deployment of online LEAD promoted through YCGII; and establishment of new analytic unit at ATF, the Crime Gun Analysis Branch, to analyze crime gun data for investigations, service ATF offices and State and local law enforcement agencies, and provide public reporting; Annual YCGII Crime Gun Trace Reports now a major law enforcement tool and tool for informing the public, on a city by city and national basis, of crime gun trends. Unlike many crime reports, these provide not just numbers as reported by localities, but analysis, that is, they take raw information from States and localities, and return it with Federal value added, based on information that only the Federal government has (in this case, results of trace requests); Additional reports, e.g., Following the Gun, using research techniques developed in YCGII, illuminate the illegal market in guns for policy and political level, making public dialogue about new gun laws and enforcement more informed; Achievement of the acceptance by law enforcement, the Congress, public, and the media of the need to know where the crime gun comes from, especially where juveniles get their guns, and the need for strong enforcement action and preventive measures (like closing the gun show loophole) against illegal suppliers of guns to criminals and juveniles and not just against criminals and youth after they have used the guns; Significant prosecutor, public, media, OMB, and Congressional acceptance of attacking the illegal market, reducing illegal diversion and possession of firearms, and interdicting gun trafficking, with media now educated to ask, “Where did the crime gun come from?”, much better public understanding of how criminals and juveniles get guns; Improved coordination with DOJ on firearms issues, including new DOJ investment in illegal market research (by NIJ) and improved joint understanding of the need to balance prosecution of armed offenders with prosecution of their illegal suppliers and focus on preventing illegal diversion. Law enforcement mission: Fight violent crime Under Secretary (Enforcement) Policy development and guidance Presidential initiative to develop new firearms legislation to improve firearms enforcement and prevent firearms crimes. Self-initiated and presidential initiative: OE had developed firearms legislation proposals with ATF over a two year period and violence reduction legislation with all bureaus as a matter of normal legislative development. White House requested list of initiatives in connection with the development of a second “Crime bill.” In April 1999, President Clinton submitted firearms legislation to Congress. Department of Justice, OMB, White House Domestic Policy Council Law enforcement organizations OE coordinated Administration initiative to develop new firearms legislation. Also coordinated Administration FY 2001 Firearms Enforcement (Budget) Initiative. OE drew on ATF expertise and expressed enforcement needs. Data collected from ATF to develop and support legislative proposals and “section-by- section” analysis and factual support for the proposals. Briefing materials prepared on the legislation. Briefed Treasury, DOJ, and White House officials on proposals and progress of project. Legislative strategies developed for gun proposals and the funding initiative for ATF. Helped draft White House report on early version of legislation. Continual review of legislative proposals and many descriptions of them used on the Hill. Developed and reviewed budget proposal seeking funding for ATF. Coordinated with DOJ and White House to resolve a number of contested provisions in legislation. Drafted input for numerous speeches for Treasury and White House officials. OE provided testimony on firearms enforcement initiative funding request. Start date: 1997 No fixed end date 2 staff members who spent 10 to less than 25 percent of their time on the project. Major firearms legislation submitted to Congress. Significant portions of the legislation passed both chambers. Significant increase in public and media awareness of key proposals. Unprecedented funding increase of $93 million for gun enforcement achieved for ATF in FY2001. OMB, Congressional Advisory Committee State and/or local governments, private sector By statute (18 USC 3056 (a) (7)), the Secretary of the Treasury has the authority to decide which candidates receive USSS protection and when the protection begins. OE briefs the Advisory Committee which the Secretary is required by statute to consult prior to authorizing protection. OE also coordinates all requests for protection and makes recommendations to the Secretary. The USSS could not play a role in this process because of the potential of a conflict of interest. OE plays a critical role in the campaign budget process. The USSS normally needs extra funding to support a presidential campaign. These funds are not needed annually. Some funds for equipment and services are needed two years prior to the campaign due to procurement lead time requirements. The majority of the funding is needed during the campaign year to support the costs directly associated to the campaign. OE also collects manpower data from the other bureaus who support the USSS during the campaign. Numerous briefing and background materials are required to brief high-ranking Treasury officials, OMB and congressional appropriators. Brief officials—A number high level Treasury, OMB and Congressional appropriators request briefings on this issue. The Advisory Committee which the Secretary is required to consult, must receive an in-depth briefing on the entire process. The Advisory Committee is made up of the Speaker of the House, Minority Leader of the House, the Majority and Minority leaders in the Senate plus one additional member selected by the committee. The Advisory Committee guidelines must be reviewed and adopted by the Advisory Committee prior to the campaign. OE is responsible for reviewing and updating the guidelines. These guidelines serve as a baseline for approving requests for USSS protection by major presidential and vice presidential candidates. Develop or draft policies, directives, standards, regulations—The Advisory Committee guidelines are critical to evaluation process and making decisions concerning to requests for USSS protection. The reporting requirements relating to the campaign are as follows: A letter from the Secretary to each member of the Advisory Committee inviting them to participate in this process must be prepared. When a request for USSS protection from a candidate is received at DO, the following A memorandum from the Enforcement Policy Officer to the Under Secretary is prepared. A memorandum from the Under Secretary to the Secretary is prepared. A letter from the Secretary to the candidate is prepared. If the request is authorized, a memorandum from the Secretary to the Director-USSS is prepared. The Under Secretary (Enforcement) who has oversight of the USSS, oversees the protective mission of the Secret Service. Review documents, such as assessments of eligibility of candidates for protection and threat assessments of candidates. In addition to what has previously been mentioned, numerous budget-related materials are reviewed in conjunction with funding required to support the campaign. Review funding proposals by Secret Service and other bureaus who are required to support protection of candidates. OE coordinates manpower requests with the other Treasury bureaus who are directed to support the USSS during campaign years. As previously mentioned, letters are written to candidates who have requested protection. In addition, letters are written to members of the Advisory Committee. Due to the budgetary concerns pertaining to a presidential campaign and the history of assassinations in this country, this is a high profile project that requires testimony to OMB and Congressional appropriators. Start date: October 1999 Anticipated end date: March 2001 5 staff members who spent 25 to less than 50 percent of their time one the project. Project results in determinations of eligibility, etc., for protection of candidates. Eligible candidates receive comprehensive protective details provided throughout the campaign. Law enforcement mission: Protect our nation’s leaders and visiting world leaders Assistant Secretary (Enforcement) Support To analyze the issues and demands that were driving staffing problems in the Secret Service, the Office of Enforcement established a Secret Service Working Group on Workforce Retention and Workload Balancing, which was overseen by an Executive Committee of Assistant Secretary (Enforcement), Assistant Secretary (Management) and the Secret Service Director. The Office of Management and Budget also participated in the working group. Secret Service was having increasing difficulty retaining agents, due in part to significant increases in the amount of travel and overtime. The purpose of the Working Group was to examine staffing and other quality of life issues facing the Secret Service agent population and develop recommendations to address these issues. Self-initiated: the project was initiated by OE after Secret Service raised issues regarding staffing levels and agent retention. OMB was supportive of a review as part of any staffing increase request by Secret Service. OMB None OE undertook this project in conjunction with the Secret Service, Treasury’s Office of Management, and OMB. OE sought to support the Secret Service as it worked to address staffing and quality of life issues in its agent population. OE support was critical to Secret Service being successful in getting an increased number of agent FTE. OE staff collected data from Secret Service regarding staffing and quality of life issues. Data included—overtime, travel time, attrition, staffing, and other relevant information. OE staff prepared memoranda for Treasury officials reporting the working group’s findings and recommendations. OE staff provided briefings to Treasury and OMB officials on the working group’s findings. OE staff developed recommendations for improving the quality of life of agents in the Secret Service. OE staff drafted an action plan and a report on the working group’s findings and OE staff, in conjunction with other members of the Executive Committee, monitored the work of the working group. OE staff reviewed the working groups Action Plan and draft working group report (done by other OE staff). Working with other working group members, OE staff helped prepare a proposal to increase Secret Service staffing, including the related budget request. OE coordinated the proposed staffing increase and related budget request with OMB. Start date: October 1999 End date: December 1999 6 staff members who spent 50 to less than 75 percent of their time on the project. As the result of the project, Secret Service is expected to receive a significant increase in agent FTE (approximately 228 new agents can be hired in FY 2000 and approximately 454 new agents can be hired in FY 2001). Additionally, a number of administrative and management changes were made to improve agent quality of life. Law enforcement mission: Protect our nation’s leaders and visiting world leaders Assistant Secretary (Enforcement) Support The Secret Service’s mission has grown progressively more difficult and complex with increasing demands on both its agent and uniformed workforce. In 1999 an interagency working group reviewed staffing issues among the agent workforce and developed recommendations designed to assist the Secret Service in improving retention and enhancing worklife. As the result of the agent review, Secret Service is expected to receive a significant increase in agent FTE (approximately 228 new agents can be hired in FY 2000 and approximately 454 new agents can be hired in FY 2001). Additionally, a number of administrative and management changes were made to improve agent quality of life. Given the success of the agent working group, an interagency working group was convened to conduct a similar review of Secret Service’s Uniformed Division (UD). Attrition has become a significant issue for the UD for a number of reasons, including a significant increase in the amount overtime leading to cancelled days off and annual leave. Self-initiated: the project was initiated by OE after consulting with Secret Service. OMB None OE undertook this project in conjunction with the Secret Service, Treasury’s Office of Management, and OMB. OE was able to provide a broader, third-party perspective, and sought to support the Secret Service as it worked to address staffing and quality of life issues in its Uniformed Division. OE’s involvement in a similar agent review was critical to getting the Secret Service additional resources. OE and Secret Service have sought to duplicate the success of the agent review. OE staff collected data from Secret Service regarding pay, staffing levels, attrition, overtime, travel, and other information. OE staff have briefed other Treasury officials on the status of the review. OE staff developed recommendations to improve quality of life for Secret Service Uniformed Division Officers. OE staff took the lead in drafting the working group’s Action Plan and is the lead drafter of the report of the working group’s findings and recommendations. OE staff monitored the progress of the working group (which also included other OE staff). OE staff reviewed the working group’s Action Plan and is currently reviewing the draft working group report (both of which was prepared by other OE staff with help from other working group members). OE staff, in conjunction with staff from Treasury Management and Secret Service, is developing a proposal to increase the number of uniformed officers and the related budget request. OE is coordinating the working group’s efforts with OMB. Start date: June 2000 Anticipated end date: October 2000 6 staff members who spent 25 to less than 50 percent of their time on the project. We anticipate that the working group will make a number of recommendations to improve the quality of life and career development of Uniformed Division Officers, including a significant increase in Officer staffing. As the result of a similar review done for agents, Secret Service is expected to receive a significant increase in agent FTE (approximately 228 new agents can be hired in FY 2000 and approximately 454 new agents can be hired in FY 2001). Additionally, the agent review led to a number of administrative and management changes to improve agent quality of life. Law enforcement mission: Protect our nation’s leaders and visiting world leaders Assistant Secretary (Enforcement) Oversight The IMF/World Bank annual meeting was held in Washington, DC, from April 15 to 17, 2000, and hosted by the Department of the Treasury. OE’s responsibility was to maintain oversight of the security arrangements for the event. Self-initiated and other: the initial request for Secret Service protection of the event was received in a letter dated January 18, 2000 from the IMF/World Bank. OE supported the request. The Treasury Secretary directed OE to provide close oversight of operations. The adverse intelligence received by law enforcement and the recent civil unrest experienced in Seattle, Washington, during the World Trade Organization meetings brought increased attention to this matter. The Secret Service had provided security for the Fall IMF/World Bank meetings in previous years, however, this was the first year where substantial protest activity was anticipated. As this event was hosted by the Department of the Treasury and the Secretary (a Secret Service protectee), OE was heavily involved in the decision to provide Secret Service security for the event. Department of Defense, Department of Justice, Department of State, FBI State and/or local governments OE provided direction and leadership to the Secret Service. Additionally, the OE played a major role in a liaison capacity between law enforcement and the IMF/World Bank and Treasury Management. In particular, OE arranged for a meeting between the Secretary and the Mayor DC and the Chief of the Metropolitan Police Department in order to discuss the security concerns in greater detail. OE also worked with high level officials at the IMF/World Bank, as well as with the Attorney General to ensure our efforts were coordinated. Collected data on event activities. Informational data for resources and funding purposes. Data collected to respond to Congressional and Executive inquiries. Prepared informational materials and status briefings for the Secretary, the Deputy Secretary, and their staffs. Briefings for Secretary and Treasury officials, and for other organizations in and out of the Federal Government, directly affected by the event. Also briefed the Attorney General and officials at the Justice Department. Strengthened standards for aggressive oversight of cooperation between Federal and local law enforcement. Drafted or prepared informational and briefing reports of actions as events occurred throughout the period of the IMF/World Bank meetings. Extensive meetings and “table top” security exercises with the bureaus and outside entities relating to the event. Reviewed reports from the Secret Service, FBI and local law enforcement. OE oversaw the coordination among all law enforcement entities involved in the preparations for this event. Wrote correspondence to IMF/World Bank regarding the requested security for the event. Enforcement staffing level on the project Project results 5 staff members who spent 25 to less than 50 percent of their time on the project. Security for the IMF/World Bank Spring meetings was a complete success. Relationships between the Secret Service and state, local, and Federal law enforcement have been strengthened because of the cooperation exhibited in preparation for the event. In addition, the IMF/World Bank meetings took place as scheduled and were not disrupted due to the coordinated relationship of law enforcement. Members of the Range/Training Working Group: U.S. Park Police, U.S. Capitol Police, and Metropolitan Police, District of Columbia State and/or local governments The Under Secretary wanted to ensure quality training was being provided for all personnel: law enforcement, professional, administrative, technical and support. The US wanted to monitor the International Law Enforcement Officer training provided by the Treasury Bureaus, through ILEA, to ensure proper utilization of resources. Overall, the objective was to ensure the quality, cost effectiveness and timeliness of training, and to ensure the policy of Best Practice as it relates to training programs is available and followed by all Treasury law enforcement bureaus. Conducted an assessment of the firearms requirements of Treasury law enforcement officers. Briefing materials were provided to the Under Secretary. Briefings were provided for the Under Secretary and senior officials of the Treasury. bureaus, other Federal law enforcement bureaus, local law enforcement, and members of Congress. Prepared an assessment report providing recommendations to the Under Secretary. A firearms assessment report was prepared. The training provided by the law enforcement bureaus, both through FLETC and through their own bureau training programs, is overseen and monitored. Reviewed FLETC submission to the Appropriations Committees on the need for a consolidated firearms requalification training range in the greater Washington, DC area. Work closely with Treasury and other law enforcement bureaus on the development of projects, such as the firearms range in the Washington, DC area. Start date: February 1998 No fixed end date 1 staff member who spent 10 to less than 25 percent of his/her time on the project. The training group has exchanged ideas and information on training issues relevant to all of the Treasury law enforcement bureaus to determine the feasibility of establishing a consolidated training facilities for Treasury bureaus in the Washington area. On one project, the firearms requalification range, the group conducted a review and feasibility study. As a result of that study, a site was located in the metropolitan area that is now being considered for development. 37. Map of the World (MTW) Law enforcement mission: Provide high-quality training for law enforcement personnel DAS (Law Enforcement) Oversight The Department of the Treasury’s Map of the World (MTW) is a collection of the international criminal justice activities and enforcement priorities of all Treasury enforcement agencies in all regions of the world. The ultimate objective for MTW is to develop a plan to address international crime through the administration of international justice assistance programs. After Treasury’s plan is complete, it will be consolidated with the priorities of Justice, State, and AID to form a combined strategy for providing international law enforcement assistance. Other: the Department of Justice, through the Attorney General, provided the Department of the Treasury with a copy of its MTW. That report concludes, that the MTW is a work in progress and that it will require periodic updates to ensure that it reflects evolving international issues, and accurately expresses current priorities of Justice. The Deputy Secretary of the Treasury asked the Office of Enforcement to develop a complementary Treasury MTW plan and to work with Justice and State to coordinate programs. Department of Justice, Department of State, DEA, FBI, Agency for International Development (AID) None Office of Enforcement was able to bring all interested parties to the table in order to share information regarding training needs and priorities to form a Treasury MTW. Such a universal approach that could only be provided by OE. Each bureau provided information, by region, which was reviewed and analyzed. Meetings were held weekly to discuss the information and the goals of the Treasury law enforcement bureaus. Briefing materials were prepared to advise the Under Secretary, the Deputy Secretary, and other senior Treasury officials of the progress on MTW. OE provided status reports to the Deputy Secretary. OE, after collecting data from the Treasury bureaus, reviewed, prioritized and drafted the strategies provided in the MTW. The Department of the Treasury will provide to the Departments of State and Justice, its version of the MTW upon completion. Coordinated with Treasury bureaus and Justice on the development of Treasury’s MTW. Enforcement staffing level on the project the issue with the interested parties. Normally, those parties were the Treasury law enforcement bureaus. Start date: October 1999 No fixed end date 5 staff members who spent 25 to less than 50 percent of their time on the project. Treasury’s Office of Enforcement coordinated and compiled Treasury’s MTW. Two principal areas are addressed by the MTW: 1. MTW recommends specific training, institution building, and technical assistance activities which, Treasury components believe, should be emphasized as part of the budget cycle. 2. MTW represents a comprehensive statement of Treasury’s international perspectives believed to serve as a cornerstone on which Treasury is to build an institutional mechanism for policy level discussions and collaborative efforts. The MTW is a work in progress that will require periodic updates to ensure that it reflects evolving international issues, and accurately expresses current priorities. Further, MTW will also be used to provide information that will enable the Department of Treasury and participating agencies to collaborate in planning the international training and assistance programs. The MTW is organized by geographic region. Each regional section: - provides an overview that briefly assesses the prominent criminal activities and justice systems that affect U. S. interests; - identifies key countries believed to be representative of the most serious crime challenges throughout the region and which warrant immediate action; - outlines multilateral organizations and initiatives; - describes Treasury components’ overseas presence and their current activities; and - identifies the principal challenges and goals of strategic planning. Department of Justice, Department of State, DEA, FBI Foreign governments The International Law Enforcement Academies (ILEA) are a cooperative effort between the Departments of State, Justice and Treasury. By ILEA Charter, the Under Secretary for Enforcement is a member of a Policy Board, comprised of members from each Department appointed by the Secretary of State, the Attorney General and the Secretary of the Treasury that guides all ILEAs. As such, the Under Secretary brings the overall Treasury view to the Board not just individual Treasury law enforcement bureaus views. Collect data on training that should be conducted in each ILEA region. Provide to the bureaus suggested agenda for upcoming Policy Board meetings and then prepares the Treasury position taking into consideration all the bureaus concerns. Provides to the Treasury law enforcement bureaus guidance from the Policy Board. Developed concept of Policy Board and leadership at ILEAs. Identifies sites and propose final selected locations for ILEAs. Develops proposals for training courses. After consultation with the Departments of State and Justice, provides policies and directives on the operations and activities of the ILEAs to all Treasury law enforcement bureaus. Oversees and monitors the operation of all ILEAs as a member of the Policy Board. Directly oversees FLETC operations at ILEAs. Supervises Treasury employees detailed to the ILEAs. Reviews budget, policy, operations and ILEA program results. Obtains funding and FTE for Treasury to participate as Director or Deputy Director of ILEAs. Develops MOUs with State Department to obtain funding for ILEA operations. Participates in steering group that discusses working-level issues related to the ILEAs. Coordinates positions with Treasury bureaus and consults with Justice and State regarding all ILEA issues. As a member of the Policy Board, identifies area of concern for Federal law enforcement, determines the need for a new ILEA, and if approved, provides a team to negotiate with the host government on the establishment of an ILEA in the region. Enforcement participates on all negotiation teams. Responds to inquiries from members of congress, international community and law enforcement. Enforcement staffing level on the project Project results 4 staff members who spent 25 to less than 50 percent of their time on the project. The United States has undertaken several initiatives to address the challenges of international crime. One of the most important is the establishment of regional law enforcement academies to train foreign law enforcement and criminal justice personnel. The mission of these academies is to support emerging democracies, help protect U. S. interests through international cooperation and promote social, political and economic stability by combating crime. ILEAs also encourage strong partnerships among regional countries to address common problems associated with criminal activities. The success of the ILEA Budapest led President Clinton, at the San Jose, Costa Rica Summit in May of 1997, to announce that an ILEA for Latin America would be established in that region. To deliver on the commitment made by the President, and as a matter of policy and process, courses were conducted in both Panama and Costa Rica during 1998 and 1999. The Policy Board is currently working on establishing a Western Hemisphere ILEA in Costa Rica. Further, the ILEA Policy Board, after an initial assessment of four countries, has decided to establish an ILEA for Southern Africa in Botswana. Negotiations (MOUs) with the Government of Botswana (GOB) were conducted in Gaborone, Botswana from February 14 through February 18, 2000. The negotiating team consisted of representatives from the Departments of Justice, State and the Treasury. The MOU between USG and GOB should be signed at the end of September 2000. The ILEA philosophy and intent is to encourage nations in a particular region to develop institutions, support the concepts of regional participation, and share financial and programmatic responsibilities for law enforcement training. 39. Federal Law Enforcement Training Center (FLETC) Department of Justice, OMB, Members of FLETC’s Board of Directors (in addition to OE, members are: Department of Justice, Department of Interior, GSA, OPM, OMB, and the House of Representatives Sergeant at Arms) were briefed on the project, as well as Congressional staff None The review was done as part of OE’s oversight responsibility, it was done by an outside management consultant, and included a review of FLETC senior management. As noted above, one of the factors that lead to the review was a number of employee complaints regarding EEO and FLETC management. Because of the nature of the review, FLETC was not in a position to do the review itself. OE staff worked to ensure that the contractor received all materials it requested from FLETC. OE staff prepared memoranda for Treasury officials on the status and results of the review and implementation of the recommendations. OE staff participated in briefings for Treasury officials regarding the status and results of the review and implementation of the recommendations. OE staff also briefed members of FLETC’s board of directors and Congressional staff. OE staff worked with FLETC and other Treasury offices to develop a plan to implement the Assessment’s recommendations and then helped FLETC implement the recommendations. OE staff oversaw the work being done by the contractor on the report, including weekly conference calls and periodic briefings. OE staff also reviewed status reports and draft reports. Additionally, to ensure implementation of report recommendations, OE formed an implementation working group chaired initially by the DAS (Law Enforcement) and then by the Assistant Secretary (when the former DAS became A/S). Other OE staff also supported the working group. OE staff reviewed status reports and drafts of the final report by the contractor. OE staff also reviewed status reports on implementation from FLETC. OE staff worked w/IRS procurement and the Executive Office of Asset Forfeiture to fund the contract for the Organizational Assessment. OE staff briefed other FLETC stakeholders on the Organizational Assessment. OE staff also prepared letters for members of Congress on the report. OE staff prepared letters for members of Congress on the Assessment and implementation. Start date: July 1997 End date: April 2000 5 staff members who spent 10 to less than 25 percent of their time on the project. The former Director of FLETC retired after receiving a copy of the draft report and discussing it with the former Under Secretary. Working with OE, the new Director has implemented a wide range of initiatives and improvements relating to the areas covered by the Assessment, including strengthening its EEO system and its environmental controls. OE staff have made repeated site visits to FLETC facilities and have interviewed employees and participating organizations. These interviews indicate a significant improvement in morale of employees and increased satisfaction of participating organizations. 40. Establishment of the Office of Professional Responsibility (OPR) Management mission: Improve management operations Under Secretary (Enforcement) Oversight To establish an Office within Enforcement to provide advice to the Under Secretary and oversee operational issues relating both to the individual law enforcement bureaus and offices, and to cross-cutting jurisdictional areas, such as training, equal opportunity and personnel practices, internal affairs, and inspection. Self-initiated and other Congressional direction: in Fiscal Year 1997 Appropriations Bill, Congress directed the establishment of the Office of Professional responsibility. Then Under Secretary Kelly was also exploring the options for expanding Enforcement staff to permit more in-depth assessment of the bureaus’ activities. OMB, OPM None This was inherently an Office of Enforcement function. However, the Bureaus were consulted regarding the mission and composition of the office. OE staff collected information to prepare position descriptions and determine appropriate grade levels for the new employees. Numerous briefings were prepared to explain the need for the office, outline the proposal, present options, and identify the necessary staffing level. Officials within Treasury, OMB, OPM and Congress received briefings. A plan, organizational chart, position descriptions, and vacancy announcements were developed. Congress was provided with information regarding Enforcement’s progress in establishing OPR. The progress of obtaining all the necessary approvals for the office, staff, funding and space were monitored to ensure that they were moving forward as expeditiously as possible. The cost of staffing, office space, equipment, travel and expenses, etc was calculated and funding was sought within the Department, at OMB, and from Congress. Enforcement coordinated with the Office of the Inspector General to ensure that there was no duplication in the missions of the two offices. It was necessary to negotiate with Management and OMB to obtain approval for the establishment of the office. Letters to members of Congress, OPM, OMB were drafted, reviewed and approved. Progress on the establishment of OPR and accomplishments of OPR have been reported to Congress each year in Appropriations testimony. Start date: October 1996 Anticipated end date: when funding is available 4 staff members who spent less than 10 percent of their time on the project. OPR was established and the first staff members hired in early 1998. Since that time, additional staff members have been recruited, brought on board and integrated into the office. While OE has not been allowed to staff the office as it would have liked due to funding constraints, it has been able to assemble a staff with specific bureau expertise, as well expertise in subject matter areas that cross bureau jurisdictional lines. Numerous efforts have been made, or are underway, by the OPR staff to support and enhance operations of the Treasury bureaus. Examples include the assessment of the vulnerabilities to corruption and effectiveness of the Customs Service Office of Internal Affairs; Treasury/Justice funding parity review; assessment of the Customs passenger processing enforcement targeting program; efforts to obtain a firearms requalification range to serve law enforcement in the Washington, DC area; implementation of the Fairness in Law Enforcement Executive order; oversight of ATF’s implementation of the National Criminal Instant Background Check System; review of OFAC document destruction; Secret Service agent Review; Secret Service Uniform Division review; and Treasury’s Map of the World international law enforcement training plan. Management mission: Improve management operations Finance and Administration Support Schedule B authority equipped our bureaus with recruitment and hiring tools similar to other major federal law agencies; and thereby enabled us to hire the brightest and most skilled. Self-initiated Under Secretary (Enforcement), Assistant Secretary (Enforcement), Finance and Administration, ATF, Customs Service, FLETC, IRS/CID, Secret Service, Office of Management None This project affected several bureaus and required direction at a higher level. Once the Office of the Under Secretary (Enforcement) made this need a high priority, he led/held numerous senior level meetings with OPM Director LaChance, OMB, etc. He even engaged White House staff. Personnel data was collected from each law enforcement bureau regarding race, national origin, grade, gender, etc. Briefing and background memoranda prepared for written briefings and oral presentations. Briefings were held for Treasury and bureau policy officials and for OPM and OMB officials. Strategy and program for achieving Schedule B Authority developed by the Office of Enforcement. Program developed for implementing once authority obtained. The Offices of Enforcement and Management worked closely to draft an Executive order for the President to sign granting the Schedule B Authority. Enforcement coordinated and oversaw the entire project to gain hiring relief through Schedule B Authority. Project impetus was assisted by such Congressionally mandated studies as the earlier Hay Group Report that also looked at hiring difficulties for the Treasury law enforcement bureaus. Enforcement’s role in leading all these efforts was a benefit and helped achieve Schedule B Authority. Written products reviewed included memoranda, draft testimony, and the draft Executive order. Enforcement coordinated with OPM, OMB, and the enforcement bureaus as they all had equities or jurisdiction in the granting of Schedule B Authority. Negotiated with OPM and OMB. Draft testimony prepared for Under Secretary to address the Schedule B Authority issue. This issue was part of the testimony of Office of the Under Secretary (Enforcement) regarding FY00 and FY01 Appropriations. Start date: Summer 1998 End date: Summer 2000 1 staff member who spent 10 to less than 25 percent of his/her time on the project. From start to finish at least 4 to 6 months on a full-time basis. This project was a clear winner. Treasury Enforcement now has direct hiring authority. The Office of Enforcement’s role in coordinating all of the recent hiring, recruitment, and retention studies for law enforcement bureaus has helped to propel the movement to achieve Schedule B Authority. Among the anticipated benefits of the new hiring authority are: (1) maximum flexibility to target recruiting on much-needed skill sets; (2) greater ability to achieve diversity goals: (3) increased ability to focus on the large number of intangible skills and personal characteristics needed for successful law enforcement performance; and (4) faster and more efficient processes to search out and hire the best candidates for special agent positions. Management mission: Improve management operations Finance and Administration Support Treasury was concerned that its enforcement bureaus were going to lose 50% of its agents over a five-year period, due to retirement. As mandated in House Report 105-592, Treasury was instructed to analyze the impact of potentially large numbers of criminal investigator retirements that would occur over the next several years. Enforcement designed and chaired a working group to formulate a solid statement of work and, in turn, let and managed the contract to study the issue. Self-initiated and other Congressional direction: the Office of Enforcement had recognized a disproportionate number of retirements occurring and the potential for significant more numbers in a short period. In House Report 105-592, Congress also recognized the potential problem and mandated a review. OMB, OPM Private sector—contractor HuMMRO The Office of Enforcement was able to provide a broader perspective on a problem that had an impact on all the Treasury enforcement bureaus. At the same time, Congress required Treasury to conduct an analysis. The Office of Enforcement captured data from OPM and the Department’s database for the preliminary assessments. Briefing materials were prepared on the work plan and final report to Congress. The Under Secretary and enforcement bureau heads were briefed on the progress and final report prepared by the group. Recommendations and strategy for addressing the problem were outlined in the final report. Reports of progress were prepared and group produced final report. The Office of Enforcement chaired the working group, managed the contract, and oversaw progress of the effort. The final report to Congress and numerous memoranda were among written products reviewed. Enforcement coordinated with OPM, OMB, Treasury law enforcement bureaus, and the Office of Management to complete the project. Testimony was drafted by Enforcement staff. The Under Secretary presented testimony at appropriations hearings. Start date: Fall 1998 End date: Spring 1999 3 staff members who spent less than 10 percent of their time on the project. The final report objectively quantified Treasury enforcement bureau critical resource needs to address the large number of agents approaching retirement. Both parties on the Appropriations Subcommittee expressed concern about our needs. Management mission: Improve management operations Finance and Administration Support The purpose of the project is to establish an innovative performance pay plan Demonstration Project for Treasury’s law enforcement scientific and technical personnel that will improve the recruitment, retention, development, and performance of employees in critical occupations. Self-initiated and other: the FBI had earlier received Congressional authorization to conduct a demonstration project. When Treasury Enforcement learned of the FBI authorization, it requested similar authorization for Treasury. On November 26, 1997, the President signed the Commerce, Justice and State Appropriation Bill (Public Law 105- 119) which authorized Treasury to conduct a three-year personnel management demonstration project. This was a new statutory authorization, not a requirement. OMB, OPM Private sector—contractors Booz Allen and Hummro-Mercer The Office of Enforcement was able to provide a broader perspective as well as oversight largely because the three major enforcement bureaus were involved. Enforcement established the Demonstration Project Working Group and the contract for the project was executed by the Office of Enforcement. The Demonstration Project Working Group collected data from the bureaus on job series and number of employees in each category that would participate in the project. The Working Group analyzed and provided data to the contractor for all participants in the demonstration and control groups, including data on organization, work location, background data (race, gender, veteran status, handicapped status). Briefing memoranda were prepared for the Under Secretary and bureau personnel. The Demonstration Project Working Group conducted briefings for OMB, OPM, the Under Secretary (Enforcement), bureau heads, personnel officers, the National Treasury Employee Union, and bureau employees. An operating plan was developed and submitted to Congress. Treasury also prepared an implementation plan and a training plan. The Treasury Working Group developed operating procedures, charters for the Treasury Personnel Policy Review Board and Bureau Advisory Board overseeing the Working Group and the project, and governing bylaws. Reports prepared for Congress included an Operating Plan, and Evaluation Report (required by legislation), and a Baseline Report that summarizes the status of ATF and Secret Service prior to the demonstration project. Treasury provides oversight of the Demonstration Project Working Group. Written products prepared and reviewed include the Operating Plan, Evaluation Plan, Baseline Report, and operating procedures for ATF. Budget projections/estimates were submitted for the first year of operation and for five outyears. Treasury Enforcement coordinated with OPM, OMB, and the law enforcement bureaus. The Under Secretary issued a press release and additional news articles were prepared with ATF management officials announcing the demonstration project. The Under Secretary also sent out an explanatory memorandum to the Treasury bureaus on the demonstration project. Press interviews and Congressional testimony addressed the demonstration project. Treasury Enforcement established an on-site Demonstration Project Working Group to manage the demonstration project and oversight boards to monitor progress. Start date: October 1998 Anticipated end date: October 2001 6 staff members who spent 75 to 100 percent of their time on the project. The expectations for the demonstration project are to enhance the bureaus’ abilities to improve the recruitment, retention, development, and performance of employees in critical law enforcement occupations. The demonstration project is still underway and an evaluation report is due to Congress late in the Spring 2001. Management mission: Improve management operations Finance and Administration Support To ensure that Treasury enforcement bureaus are on a competitive level (regarding career development) with other major Federal law enforcement entities (regarding SES allocation). Other Congressional direction and other: the House Conference Report 106-319 that accompanied the Treasury Appropriations bill directed the Treasury to review and report on the apparent disparity in SES allocations for law enforcement components at Treasury and Justice. A review was also requested by OMB/OPM to ‘justify’ Treasury’s request for additional SES positions. Department of Justice, OMB, OPM Private sector Treasury was directed to conduct the review. Also, the Office of Enforcement was able to provide a broader perspective, especially because this effort involved all of the law enforcement bureaus. Data was collected on the total numbers of FTE and SES positions for each of the Treasury law enforcement bureaus and offices, as well as for comparable agencies such as FBI, DEA, INS, US Marshals Service, and Bureau of Prisons. Briefing memoranda prepared on extent of problem for Treasury bureaus and comparison ratios among other agencies. Senior Treasury and Enforcement bureau, and office officials were briefed on the review, as well as OPM and OMB officials. Criteria and an SES allocation formulation were drafted by Enforcement in conjunction with the Office of Management. The Office of Enforcement negotiates revisions and critical points with Management, OMB and OPM as the project develops. Criteria and allocation model for SES and proposal to senior policy officials reviewed by the Office of Enforcement. Significant coordination was necessary among the Office of Enforcement and the Office of Management, OMB and OPM. Start date: June 1999 Anticipated end date: Spring 2001 3 staff members who spent less than 10 percent of their time on the project. From start to finish at least 4 to 6 months on a full-time basis. There have been several Congressionally directed reviews of Treasury enforcement’s SES allocation. Each study has given our appropriators sufficient concern to direct further in-depth reviews. This purpose of the current review is not to acquire more SES for the Enforcement bureaus, but to develop a new, more equitable basis for SES allocation at Enforcement bureaus and offices that seeks to ensure parity with other law enforcement agencies in the Federal government. Management mission: Improve program performance DAS (Law Enforcement) Oversight To conduct an assessment of the vulnerabilities to corruption and of the effectiveness of the Customs Service Office of Internal Affairs. Statutory requirement: the Treasury and General Government Appropriations Act, FY 98, directed the Under Secretary (Enforcement) to conduct a comprehensive review of the potential vulnerability of the Customs Service to corruption and to examine the efficacy of the Customs Office of Internal Affairs. Although mandated by statute, the former Under Secretary had earlier expressed to Treasury appropriators that one of his reasons for proposing the establishment of OPR was to conduct just such an assessment. Department of Justice, FBI, INS State and/or local governments, private sector The Under Secretary (Enforcement) was directed by Treasury appropriators to conduct the assessment. Further, the review was performed in an oversight capacity and was not a self inspection. Collected data and statistics from Customs on case investigative files and internal policies and procedures. Prepared briefing papers to Treasury officials on the progress and findings of the review. Regularly provided oral briefing for Treasury officials. Provided oral briefings for staff of various Congressional committees, including the Senate Finance Committee, the Narcotics Caucus, and Appropriations Committees of both houses. Developed strategies for future consideration to improve Customs procedures. Developed recommendations in the final report to amend existing Customs policies, directives, and standards. The final report was published in February 1999. This report was submitted to the Congress and issued publicly. OE continues to oversee implementation of the report recommendations. There were several Congressional hearings following issuance of the report. OE reviewed testimony prepared for those hearings. OE reviews Customs budget proposal to ensure they are adequate to implement the report’s recommendations. Prepared written testimony and responses to Congressional correspondence concerning the report. Delivered oral testimony before Congressional committees on the report’s findings and recommendations. The OPR staffer who was the principal drafter of the report testified at two of those hearings. Start date: March 1998 End date: February 1999 6 staff members who spent 50 to less than 75 percent of their time on the project. After an extensive study, a comprehensive report was issued of the assessment. Every recommendation in the final report was adopted and is being implemented by the Customs Service. Management mission: Improve program performance Assistant Secretary (Enforcement) Oversight Review of circumstances surrounding the destruction of certain Iran files at OFAC that may have been responsive to a subpoena received by the Treasury Department. Self-initiated and other:The project was initiated jointly by the General Counsel and the Assistant Secretary (Enforcement) and conducted by staff of both offices. Department of Justice None OE felt that it was important to formally record the circumstances surrounding the document destruction in the event that the matter arose sometime in the future. Further, since it was decided to provide the report to the U.S. District Court judge, it was also important that the Court understand that the review was performed by employees outside of OFAC. Data on the type and number of documents destroyed and information on records retention and destruction procedures were collected from OFAC. In addition, many OFAC employees were interviewed by the review team. The Deputy General Counsel and the Assistant Secretary (Enforcement) were briefed on the status of the review as it progressed. A final report was prepared on findings of the review into circumstances surrounding destruction by OFAC of certain Iran documents. That report was also filed in U.S. District Court on July 25, 2000. The review looked at existing OFAC policies and procedures for records destruction, determined what process was followed in this particular document destruction event, and described what documents were destroyed. As this was a joint project, OE coordinated closely with the Office of General Counsel. OFAC also cooperated fully in the review. Start date: June 2000 End date: July 2000 1staff member who spent 75 to less than 100 percent of his/her time on the project. The report produced for the Assistant Secretary (Enforcement) and the General Counsel found that the document destruction was inadvertent and occurred in the context of a major office-wide renovation. Personnel involved were not aware of the subpoena or did not have it in mind at the time (subpoena had been pending for two years awaiting further action). The report was submitted to the court who subsequently found that the Department did not act in bad faith in destroying some of the documents that may be covered by the subpoena and commended the Department in taking quick action to remedy the situation. None None The former Under Secretary for Enforcement received several allegations that Customs Service Inspectors were targeting minorities for more intrusive personal searches at several airports of entry. In addition, there was extensive Congressional interest and media coverage on the Customs Service alleged activities. OPR’s review methodology included on-site interviews with personnel at the Port of Miami, the Customs Academy in Glynco, Georgia, inspectors assigned to the Analytical Unit and Rover Teams, and with Customs Passenger Service Representatives. OPR did a comprehensive review of documentation and Passenger Processing Policies. Also, OPR conducted site visits to Miami, Florida and Glynco, Georgia. During the course of the assessment, the OPR review team prepared briefing papers, statistical charts to be used in briefings with the Under Secretary for Enforcement, the Assistant Secretary for Enforcement and the Deputy Assistant Secretary for Law Enforcement. During the course of the assessment, the OPR review held briefings with the Under Secretary for Enforcement, the Assistant Secretary for Enforcement and the Deputy Assistant Secretary for Law Enforcement to inform them on the progress on the review. As a result of the OPR’s assessment, the U.S. Customs Service enhanced its communication with passengers by establishing a Customer Satisfaction Unit and displaying passenger notification signs in the airports of entry. OPR issued a report that was transmitted from the Under Secretary to the Commissioner of Customs. The report recommended that the U.S. Customs Service increase its standards in the area of professionalism. OPR prepared a Report of Findings and Conclusions, and Recommendations for the Under Secretary for Enforcement and the Commissioner, United States Customs Service. The Customs Commissioner embraced, adopted and enhanced the Office of Enforcement’s recommendations. OE monitored the implementation of the recommendations. OPR reviewed the Customs Commissioner’s Congressional testimony on this issue, as well as other reports prepared by Customs. Due to the increased media coverage and Congressional interest on racial profiling, OPR prepared correspondence on its assessment and report. Enforcement staffing level on the project Project results 5 staff members who spent 25 to less than 50 percent of their time on the project. The Office of Enforcement’s, OPR issued a report on the Assessment of the United States Customs Service Passenger Enforcement Targeting to the Under Secretary (Enforcement). The Under Secretary (Enforcement) issued a copy of the report to the Commissioner, U.S. Customs Service and advised the Commissioner to provide the Office of the Under Secretary with Customs course of action to the implementation of the recommendations that were set forth in the report. The Customs Commissioner has made the following changes: Established two committees, one internal and one external, to review the procedures used in personal searches. The committees were tasked to review the criteria used to identify passengers for further inspections. Mandated that all Customs Inspectors receive extensive training on interpersonal communications, cultural interaction, confrontation management, personal search policy, and passenger enforcement selectivity. Established a Customer Satisfaction Unit (CSU) to receive and process complaints by passengers. The CSU ensures that complaints are correctly addressed and that passengers receive appropriate feedback. Also, the CSU provides current information to senior management and analyzes trends within the complaint system. Established a National Public Education Program that informs the traveling public of the authority and responsibilities of inspectors employed by the Customs Service which may result in a passenger being subjected to a personal search. Management mission: Improve program performance DAS (Law Enforcement) Support To present to OMB a comparative review of the parity in law enforcement funding between the Department of the Treasury and the Department of Justice. The review addressed certain programmatic and budgetary similarities and differences between the two departments, and stressed the need for a consistent approach to be instituted by OMB for annualizing Federal law enforcement programs. Self-initiated and other: OMB informed Treasury that it was planning a review of Treasury/Justice law enforcement funding and expressed interest in Treasury’s views concerning the parity issue. In addition to presenting its views on the subject, the Office of Enforcement initiated a more comprehensive comparative review to present to OMB that highlighted specific Treasury bureau programs of significance that have not been equitably funded. OMB None Due to the fact that the review of program funding covered programs in all Treasury law enforcement bureaus, OE was in a better position to coordinate input from all bureaus, provide a broader perspective of the issue, and provide support of bureau funding at the Under Secretary level. The Office of the Under Secretary collected data from all Treasury law enforcement bureaus and offices on past, existing, and necessary funding for significant programs, resources, equipment, and technology. Report reviewing Treasury law enforcement program funding prepared and sent under signature of Under Secretary to OMB. Reviewed past and existing funding for Treasury law enforcement programs and compared to funding for similar programs at DOJ. Enforcement coordinated with all bureaus to develop a position to best support Treasury law enforcement programs. Start date: May 1999 End date: July 1999 5 staff members who spent 25 to less than 50 percent of their time on the project. Enforcement provided a review of parity in law enforcement funding between Justice and Treasury, including illustrations of funding variations for specific programs. Enforcement recommended to OMB that a balanced and uniform approach be applied to funding all law enforcement programs. This approach would reflect similarities across agencies and the close coordination among law enforcement entities. The review stressed the increasing complexity of crime today and the reality that no single law enforcement agency has all the skills and authority to most effectively fight complicated criminal schemes. While OMB did not embrace the recommendations in the review, it agreed that all relevant agencies should participate in the formulation of law enforcement initiatives. OMB appreciated the input from Enforcement to its decision-making process and hoped to work closely with Treasury on specific proposals in future budget submissions. None None The law enforcement bureaus report to the Under Secretary. Therefore, it was the responsibility of the Office of Enforcement to oversee the selection process of the bureau heads and make a recommendation to the Secretary as to who should be selected. Information regarding appropriate candidates and their qualifications was obtained. Briefing materials and interview questions were prepared in preparation for the candidate interviews. After finalists were identified, the Secretary and Deputy Secretary were briefed and met with the candidates. Once a selection was made, OE officials notified appropriate Congressional staff and Members of Congress, as well as officials in the interagency law enforcement community. Information regarding the candidates qualifications were reviewed and analyzed. Interview schedules were developed, the timing of candidate interviews was coordinated with the various bureaus, and reference checks were conducted on the applicants. In addition, OE sought out potential candidates by speaking to officials at the Justice Department, state and local law enforcement, and the private sector. Letters to all candidates were prepared to announce the final selection. Extensive effort was involved in identifying, recruiting, interviewing and selecting the best possible candidates. Start date: 1996 End date: March 2000. There are currently no bureau head openings. 7 staff members who spent 10 to less than 25 percent of their time on the project. Eight excellent candidates were selected to lead the Treasury law enforcement bureaus: two Secret Service Directors, ATF Director, ATF Deputy Director, Customs Commissioner, FLETC Director, FinCEN Director, Asset Forfeiture Director. Their selection has resulted in significant change and improvement at all of the bureaus. In addition, the thorough and extensive selection process was viewed by the candidates, as well as by Treasury officials, as a fair yet challenging process designed to pick the best possible candidate for the position. Enforcement’s basic operations are funded through Treasury’s annual appropriation for departmental offices’ salaries and expenses. Treasury’s Financial Management Division (FMD) distributes (or allots) this annual appropriation among various programs and offices, including Enforcement. For example, in fiscal year 2000, Congress appropriated about $134 million for the departmental offices’ salaries and expenses appropriation. Of this total, Treasury’s FMD allotted about $5.2 million to Enforcement for its annual operations, including its oversight, policy guidance, and support roles. Information on the funds FMD allotted to Enforcement for fiscal years 1994 through 2000 has been previously shown in the letter (see fig. 2). In addition to these basic annual operating funds, Enforcement has received other funding, according to Enforcement and FMD officials. (These funds are not included in fig. 2.) This funding consisted of the following: Funds from the departmental offices’ salaries and expenses appropriation for special projects or purposes. Approximately $3.2 million were allotted to Enforcement for fiscal years 1994 through 2000, of which about 61 percent was to be passed through Enforcement to other Treasury accounts. The remaining 39 percent was available to and fully obligated by Enforcement. This included funds to perform a study of ATF’s 1993 raid of the Branch Davidian Compound, in Waco, TX. Multiyear or no-year funds that were appropriated by Congress or transferred from other Treasury bureaus or federal agencies to Treasury’s departmental offices for Enforcement for fiscal years 1994 through 2000. These totaled to about $267 million of which about 98.3 percent was to be passed through Enforcement to other Treasury accounts. The remaining 1.7 percent (or $4.6 million) was available to Enforcement for its operations. As of September 30, 2000, Enforcement had obligated about 72 percent (or about $3.3 million) of the multiyear or no-year funds available for its operations. Funds that Enforcement obligated out of its allotment from the departmental offices’ salaries and expenses appropriation and for which it was reimbursed. For fiscal years 1994 through 2000, Enforcement had obligated about $1.0 million of reimbursable funds. This included funds to perform a study of the White House security. In addition to those named above, Mary Lane Renninger, Nettie Y. Mahone, David P. Alexander, Michael J. Curro, Geoffrey R. Hamilton, and Charlotte A. Moore made key contributions to this report.
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This report discusses GAO's review of the Department of the Treasury's Office of Enforcement. The office was created to provide oversight, policy guidance, and support to Treasury's enforcement bureaus. GAO found that no comprehensive source provided guidance to either the office staff or to the bureaus on the circumstances under which bureaus are required to interact with the office. In addition, established documentation did not exist for 12 of the 29 circumstances under which the bureaus are required to interact with the office, and when it did exist, the documentation was generally broad in nature and did not provide explicit information on one-half of the expected interaction. About one-half of the bureau officials that GAO interviewed said that they were not aware of written requirements for their bureaus' interactions with the office or that they knew when to interact through such factors as their professional responsibility, experience, judgment, or common sense. An agency's internal control needs to be clearly documented and that documentation should be readily available for examination. Without a clearly defined and documented set of policies and procedures covering operational and communications activities, the office runs the risk of not being able to perform its functions and meet its goals efficiently.
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Federal agencies with a budget in excess of $100 million for extramural R&D are required to establish and operate an SBIR program. In fiscal year 2013, agencies participating in the SBIR program were required to spend at least 2.7 percent of their extramural R&D budgets on SBIR awards. Currently, 11 agencies participate in the SBIR program: the Departments of Agriculture, Commerce, Defense, Education, Energy (DOE), Health and Human Services (HHS), Homeland Security, and Transportation, and the Environmental Protection Agency, National Aeronautics and Space Administration, and National Science Foundation. Although each agency manages its own program, SBA plays a central administrative and oversight role. The SBIR program includes the following three phases: In phase I, agencies make awards to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase I awards normally do not exceed $150,000. For SBIR, work in phase I generally lasts 6 to 9 months. In phase II, small businesses with phase I projects that demonstrate scientific and technical merit and feasibility, in addition to commercial potential, may compete for awards of up to $1 million to continue the R&D for an additional period, normally not to exceed 2 years. Phase III is for small businesses to pursue commercialization of technology developed in prior phases. Phase III work derives from, extends, or completes an effort made under prior phases, but it is funded by sources other than the SBIR program. In this phase, small businesses are expected to raise additional funds from private investors, the capital markets, or from non-SBIR funding sources within the government. While SBIR funding cannot be used for phase III, agencies can participate in phase III by, for example, purchasing the technology developed in prior phases. SBA’s Office of Investment and Innovation is responsible for overseeing and coordinating the participating agencies’ efforts for the SBIR program by setting overarching policy and issuing policy directives, collecting program data, reviewing agency progress, and reporting annually to Congress, among other responsibilities. As part of its oversight and coordination role, SBA issued an updated SBIR Policy Directive in January 2014. The directive explains and outlines requirements for agencies’ implementation of the SBIR program. The policy directive includes information on program eligibility, proposal requirements, terms of agreement for SBIR awards, and responsibilities of SBA and participating agencies for the program. Each participating agency must manage its SBIR program in accordance with program laws, regulations, and the policy directive. Each participating agency has considerable flexibility to design and manage the specifics of the program, such as determining research topics, selecting award recipients, and administering funding agreements. All of the agencies follow the same general process to obtain proposals from and make awards to small businesses for the SBIR program. At least annually, each participating agency issues a solicitation requesting proposals for projects in topic areas determined by the agency. Each agency uses its own process to review proposals and determine which proposals should receive awards. Also, each agency determines whether the funding for awards will be provided as grants or contracts. The NDAA amended the SBIR program to permit agencies to allow participation by majority-owned portfolio companies, and the act imposes certain requirements on such companies and participating agencies. As discussed, before awarding SBIR funds to majority-owned portfolio companies, agencies must submit to SBA and Congress a written determination. The NDAA also imposes statutory caps on the percentage of participating agencies’ SBIR funds that may be awarded to majority- owned portfolio companies—25 percent for NIH, DOE, and the National Science Foundation, and 15 percent for the other participating agencies. If an agency awards more than the percentage of the funds set by the statutory cap, the agency must transfer any amount in excess of the cap from its non-SBIR R&D funds to the agency’s SBIR funds. Additionally, agencies may not use investment of venture capital or investment from hedge funds or private equity firms as a criterion for the award of contracts under the SBIR program. The NDAA also requires all majority- owned portfolio companies to register as such with SBA and indicate their majority-owned portfolio company status in any SBIR application. Finally, the NDAA required SBA to update the SBIR Policy Directive to conform to NDAA amendments, such as majority-owned portfolio company participation in the program. In 2013, HHS and DOE each provided a written determination to SBA and Congress prior to making SBIR awards to majority-owned portfolio companies. More specifically, HHS’s written determination covered one of its four SBIR subunits, NIH, which according to agency officials accounted for about 98 percent of the HHS SBIR funds in fiscal year 2013. DOE’s written determination covered one of its two subunits that participate in SBIR, the Advanced Research Projects Agency-Energy (ARPA-E), which according to agency officials accounted for about 4 percent of the DOE SBIR awards in fiscal year 2013.officials told us that by opening their SBIR programs to majority-owned NIH and ARPA-E portfolio companies, they would help ensure that they received the highest quality applications with the best scientific research, regardless of whether a small business has venture capital support. In addition, NIH officials said that allowing majority-owned portfolio companies to participate in SBIR would increase the flexibility for SBIR companies to seek additional investment sources that would help support SBIR’s goal of commercialization. As part of its written determination, NIH cited a 2009 National Academy of Sciences study, whose findings suggested that the most commercially promising companies were those that were repeatedly selected by both NIH for their promising technologies and by venture capital investors for their commercial potential. A few majority-owned portfolio companies have participated in SBIR since SBA’s final rule implementing the NDAA’s changes to the SBIR eligibility requirements took effect in January 2013. NIH and ARPA-E opened their solicitations to majority-owned portfolio companies in April 2013 and June 2013, respectively. through September 2014 (end of fiscal year 2014), these subunits issued 68 SBIR solicitations, of which 56 were open to majority-owned portfolio companies. More specifically, ARPA-E opened one solicitation to majority-owned portfolio companies that covered both fiscal years 2013 and 2014, and NIH opened 55 solicitations to majority-owned portfolio companies during fiscal years 2013 and 2014. From October 2012 (start of fiscal year 2013) NIH and ARPA-E, along with SBA, have used various means to inform majority-owned portfolio companies about the eligibility changes in their SBIR programs. On its SBIR website, SBA identifies the agencies that have opted to allow majority-owned portfolio companies to participate in their SBIR programs. According to NIH and ARPA-E officials, their solicitations now specifically state that majority-owned portfolio companies may participate. Further, NIH officials told us that they e-mailed approximately 15,000 subscribers, announcing the change in their agency’s eligibility requirements. awards made comprise less than 1 percent of NIH’s and ARPA-E’s SBIR applications and awards. ARPA-E and NIH collectively received a total of 20 applications from majority-owned portfolio companies in fiscal years 2013 and 2014, compared to 11,906 applications from applicants that were not majority-owned portfolio companies. In addition, these two subunits made 12 SBIR awards to majority-owned portfolio companies. Specifically, ARPA-E made 2 SBIR awards to two majority-owned portfolio companies, which included one phase I award to one company and another award that included multiple phases to another company.In addition, NIH made awards to 10 majority-owned portfolio companies that consisted of 7 phase I awards, and 3 phase II awards. ARPA-E and NIH officials told us that it was too early for them to evaluate the impact of including majority-owned portfolio companies in their SBIR programs—such as how the composition of applicants and awardees might change—but said that this change has not created any administrative problems or burdens. The officials from both subunits told us that they did not encounter any challenges completing their written determination, updating their data systems, and monitoring their compliance with the statutory cap. ARPA-E is the only DOE subunit using the majority-owned portfolio company funding option, and so under the statute, it could potentially award up to 25 percent of DOE’s total SBIR funds to such companies. DOE and ARPA-E officials told us they administer the cap at the subunit level—meaning that ARPA-E may award up to 25 percent of its SBIR funds to majority-owned portfolio companies. According to ARPA-E officials, for fiscal year 2013, ARPA-E made approximately $7 million in SBIR awards, of which about $1.7 million (or nearly 25 percent of its SBIR awards) was awarded to a majority-owned portfolio company. For fiscal year 2014, ARPA-E officials told us that the subunit was just under its fiscal year 2014 internal cap of 25 percent of its SBIR funds. NIH consists of 27 institutes and centers, and 24 institutes and centers participate in the SBIR program. NIH officials told us that they are applying the 25 percent statutory cap to each institute and center. Officials told us that NIH as a whole was not close to its 25 percent statutory cap for fiscal year 2014, having awarded about $4.5 million to majority-owned portfolio companies, which was about 0.68 percent of the agency’s $663 million SBIR award obligations for fiscal year 2014. Representatives from four majority-owned portfolio companies that received NIH or ARPA-E SBIR awards told us that their SBIR awards have allowed them to conduct new research that would otherwise not have been undertaken. For example, one representative said that venture capital firms often view R&D for new projects that they have not funded as a distraction from a firm’s focus on commercializing a product and his company would have faced difficulties conducting its research without SBIR funding. Additionally, representatives from these four companies we interviewed told us that receiving an SBIR award can be viewed as validating the merit of their research, which can attract additional venture capital funds and improve their ability to commercialize their SBIR research. The representatives said they did not encounter any significant problems applying for SBIR awards or receiving SBIR funds. Nine agencies have chosen not to open their SBIR programs to majority- owned portfolio companies, and therefore have not submitted a written determination to do so. Specifically, as of September 2014, the Departments of Agriculture, Commerce, Defense, Education, Homeland Security, and Transportation; Environmental Protection Agency; National Aeronautics and Space Administration; and National Science Foundation had not taken such action. The awards from these nine agencies, along with those from the programs within HHS and DOE that chose not to allow portfolio company participation, accounted for about 71 percent of the nearly $2.1 billion SBIR awards in fiscal year 2013. Officials from the nine agencies generally told us that the decision not to open their programs to portfolio companies was made at the program level for each agency. They said the decision was based largely on internal discussions among SBIR staff and, in some cases, staff from other departments, and did not involve any formal analyses. The explanations that agency officials told us during our interviews for not submitting a written determination were as follows. Department of Agriculture: An official said that the Department viewed other administrative changes mandated under the NDAA as a higher priority, given the low level of interest from majority-owned portfolio companies in their SBIR program.SBIR awards are smaller than other agencies’ awards, such as the Department of Defense and NIH, and majority-owned portfolio companies are most interested in the agencies offering the largest awards. They also said that the agency’s Department of Commerce: Officials said that they viewed other administrative changes—such as changes to its proposal evaluation process—as a higher priority than the majority-owned portfolio company funding option. Also, the officials stated that they were concerned that adopting the funding option could lead to a significant increase in the number of proposals, and if that happened, there would be a corresponding decrease in the percentage of proposals receiving SBIR awards, given the small size of the agency’s SBIR program compared to other federal agencies’ programs. Officials said the agency will be in a better position to understand the possible results of implementing the funding option and can better prepare the agency’s SBIR program once they see how the change impacts other agencies. Department of Defense: Officials said that the agency does not have the evidence to support that allowing majority-owned portfolio companies in SBIR would achieve the outcomes required to be specified in the written determination, such as substantially contributing to the agency’s mission. Officials also said they do not believe that there is much interest from venture capitalists in investing in firms that would be eligible to receive SBIR phase I and phase II awards. Department of Education: Officials said that the agency does not have an official reason why it did not elect to exercise the majority-owned portfolio company funding option. They told us that majority-owned portfolio companies have not approached the agency about its SBIR program for many years; thus, they did not see a reason to use the funding option. Department of Homeland Security: Officials said that they viewed other administrative changes mandated under the NDAA as a higher priority and that they had not yet conducted the research to provide evidence that majority-owned portfolio companies would achieve the outcomes required to be outlined in the written determination requirement. The officials also said that the agency’s SBIR topics are narrowly defined to respond to the technology gaps in the agency’s operating components. As a result, they said there is a lack of scalability for the general market; therefore, their SBIR program does not generally draw attention and interest from the venture capital community. The officials said, however, that they are working to gain greater partnership interest with industry to make these technologies more desirable in commercial markets, which may gain interest from the venture capital community. Department of Transportation: Officials said that they were concerned that opting in could increase the number of SBIR applications, which would impact the agency’s resources and ability to meet the SBIR award timelines. Officials need additional time to consider the potential impact of opening its SBIR program up to majority-owned portfolio companies and how the agency can best manage that impact. The officials also told us that the agency has not had any majority-owned portfolio companies express interest in its SBIR program, as of March 2014 when we held our interview, so officials did not see a pressing reason to immediately opt-in. Environmental Protection Agency: Officials said that the agency currently receives many SBIR proposals and can only fund a small number of them; thus, they did not need a new pool of applicants for the program, especially considering that majority-owned portfolio company applicants could be small businesses that have better funding since they are more than 50 percent owned by venture capital operating companies, hedge funds, or private equity firms. They told us that the agency would have to do a rigorous and detailed analysis to complete the written determination and do not know what factors they would consider to make the decision. National Aeronautics and Space Administration: Officials said that the agency does not have statistically verifiable evidence to support that allowing majority-owned portfolio companies into its SBIR program would achieve the outcomes required to be enumerated in the written determination. The officials told us that firms with majority ownership by venture capital may have a low level of interest in their SBIR program because of the long length of the research projects in this field. National Science Foundation: Officials told us that they generally did not believe they have the evidence to support that allowing majority- owned portfolio companies into its SBIR program would achieve the outcomes required to be enumerated in the written determination. For example, they told us that the agency already has an extensive relationship with the venture capital and the angel investor communities through SBIR, so they did not believe opting in would address the need for publicly funded research. Officials also said that the National Science Foundation is not an acquisition agency, so such action would not substantially contribute to the agency’s mission. Finally, the officials told us that majority-owned portfolio companies have not expressed interest in the agency’s SBIR program. All but one of the agencies told us they may reevaluate their decisions in the future, but generally did not have any specific plans for doing so. For example, officials at the Department of Transportation said they could not determine the specific factors they would review when they reconsider their decision, because it is too early in the implementation of the provision to see what factors would affect their decision. Officials at the Departments of Commerce and Transportation and the Environmental Protection Agency said they are waiting to see how the change in eligibility affected ARPA-E and NIH before they reconsider implementing the change at their own agency. SBIR program managers at the Department of Defense told us that they do not plan to reevaluate their decision as they do not see a benefit in allowing such companies to participate in SBIR. Although some agencies considered the potential interest of majority- owned portfolio companies in their SBIR programs in making their decision on whether to submit a written determination, gauging such interest can be difficult. Information on the degree of venture capital ownership in a company is confidential and proprietary and not reported to any public databases. Most participating agencies historically have not tracked whether applicants or awardees have venture capital funding. As specified in the Policy Directive, agencies must require awardees to certify their eligibility at the time of the award, including certifying whether they are majority-owned portfolio companies, but the agencies generally do not collect any detailed information on an applicant’s or awardee’s ownership. In 2009, the National Academy of Sciences reported that between 4 percent and 12 percent of the small businesses that won SBIR phase II awards from NIH between 1992 and 2002 were majority-owned portfolio companies; however, the study did not provide any information on majority-owned portfolio company participation at other agencies. Additionally, in 2006, we found that approximately 17 percent of NIH awards and 7 percent of the Department of Defense awards went to small businesses that had venture capital investment, but this study did not differentiate between majority- and minority-owned portfolio companies. SBA requires companies that apply for SBIR awards to register on its Company Registry and indicate whether they are majority-owned portfolio companies. As of September 2014, 153 majority-owned portfolio companies had registered with SBA and they accounted for less than 2 percent of the total number of small businesses registered with SBA. Data are not publicly available to gauge the interest of majority-owned portfolio companies in the SBIR program, but industry representatives indicated that such companies may not be aware of the program change and could be interested in the program. A representative from an industry association representing venture capitalists told us that because majority- owned portfolio companies have been unable to participate in SBIR previously, many of them may not be aware of the change in program eligibility at some agencies. Representatives from three industry associations told us that venture capital investment in R&D has diminished over the past decade, and representatives from two of these associations said the SBIR program is very attractive to majority-owned portfolio companies because it allows them to apply for SBIR awards to fill the gap in R&D funding. We selected a nonprobability sample and interviewed four of the majority-owned portfolio companies that registered with SBA but had not applied for an SBIR award. Officials from three of the firms said that they had not seen an SBIR solicitation that fit their type of research, while officials from one firm said they still were working to determine their eligibility for the program. In our discussions with the nine participating agencies that did not open their SBIR programs to majority-owned portfolio companies, we found that six agencies viewed the written determination as a potentially stringent requirement. The NDAA requires agencies to submit a written determination to SBA and Congress at least 30 days before making SBIR awards to majority-owned portfolio companies. Pursuant to the NDAA, the written determination must explain how the use of the authority to allow such companies to participate in the SBIR program will (1) induce additional venture capital, hedge fund, or private equity firm funding of small business innovations; (2) substantially contribute to the agency’s mission; (3) demonstrate a need for public research; and (4) otherwise fulfill the capital needs of small business concerns for additional financing for SBIR projects. According to SBA officials, the written determination is a notification letter, serving to inform SBA and Congress of the agency’s plans. SBA reviews these determinations, but it does not approve or deny them. Committee for Capitalizing on Science, Technology, and Innovation: Venture Funding and the NIH SBIR Program, 2009. have enough data to show that such companies would be interested in its SBIR program. Likewise, officials at the Department of Defense told us that they generally did not have the evidence to support that allowing majority-owned portfolio companies would achieve the written determination outcomes, and officials at the Environmental Protection Agency said they would need to conduct a rigorous analysis to make the determination. Officials at the National Science Foundation told us that they did not have the evidence to support the written determination outcomes, while a program manager at the Department of Agriculture said that the requirement is an administrative burden, and if the barrier was lower, the agency might allow majority-owned portfolio companies to participate in its SBIR program. The other three participating agencies did not discuss any issues with the written determination requirement. As required under the NDAA, SBA updated its SBIR Policy Directive in response to the NDAA’s reauthorization of, and amendments to, the SBIR program. Specifically, SBA revised the policy directive to include, among other things, the written determination requirement. The policy directive essentially uses the same language as the NDAA and does not provide any specific guidance on what evidence participating agencies may need to consider to comply with the written determination requirement. SBA officials told us that the agency’s role with the participating agencies is to provide a forum for all of the program managers to discuss SBIR, including the new majority-owned portfolio company funding option. The officials said that SBA has not tried to encourage or discourage agencies to adopt the new funding option. According to the SBA officials, SBA meets routinely with SBIR program managers, and no agency has raised concerns about the written determination requirement. Similarly, most SBIR program managers told us that they have not had any discussions with SBA about whether they should allow majority-owned portfolio companies to participate in their programs, and that they meet monthly with SBA and periodically communicate with SBA officials through telephone calls and e-mail. In its proposed and final rules implementing the NDAA provisions, SBA stated one potential benefit of the rule is to provide more businesses with access to the SBIR program, which would increase competition and the quality of proposals and spur innovation. Some agencies may be viewing the evidence required for the written determination differently, and may view the written determination as a potentially stringent requirement. SBA officials told us that they are not statutorily required to advise participating agencies on what evidence they should consider in their written determination. Nonetheless, by providing additional guidance on the requirement, SBA could better inform the agencies about the evidence that they may consider in the written determination to explain how making SBIR awards to majority-owned portfolio companies will, among other things, induce additional venture capital or similar funding of small business innovation and substantially contribute to the agency’s mission. As a result, agencies would be better positioned if they choose to reevaluate their decision on whether to use the majority-owned portfolio company funding option, which most agencies plan to do in the future. The effect of the NDAA provisions allowing SBIR participating agencies to permit majority-owned portfolio companies to participate in their SBIR programs has been limited, because the majority of participating agencies have opted not to open their SBIR programs to such companies. As the administrator of the SBIR program, SBA updated its SBIR Policy Directive to conform to the amendments made by NDAA but did not provide specific guidance on the evidence participating agencies may consider to comply with the written determination requirement. At the same time, NIH and DOE were able to complete their written determinations, which SBA reviewed. Although the other participating agencies have not asked SBA for additional guidance on the written determination requirement, SBA also has not discussed the issue with them, such as at their monthly meetings or as part of other outreach efforts. As a result, agencies may be uncertain about the evidence necessary to support the written determination and may view the determination as a potentially stringent requirement. SBA is not responsible for encouraging or discouraging agencies to use the new authority and expand eligibility to include majority-owned portfolio companies, but SBA, as the program administrator, could be missing an opportunity to help agencies better understand the evidence required for the written determination, which could inform agencies’ decisions about whether to expand their program. To help ensure that participating agencies understand the requirements of the NDAA provisions applicable to allowing majority-owned portfolio companies to apply for SBIR awards, we recommend that the Administrator of the Small Business Administration discuss the evidence required for the written determination with the participating agencies, such as at their monthly meeting or as part of another outreach effort, and, if needed, and in consultation with the participating agencies, amend its SBIR Policy Directive to provide additional guidance. We provided a draft of this report to the Secretaries of Health and Human Services, Agriculture, Commerce, Defense, Education, Energy, Homeland Security, and Transportation; the Administrators of the Small Business Administration, the Environmental Protection Agency, and the National Aeronautics and Space Administration; and the Director of the National Science Foundation for review and comment. SBA, the Departments of Health and Human Services, Homeland Security, and Transportation, and the National Science Foundation provided technical comments, which we incorporated, as appropriate. SBA SBIR officials provided comments on a draft of our report through an e-mail from their GAO liaison on October 29, 2014. In these comments, SBA stated that it intends to discuss the written determination with SBIR program managers at a future program managers meeting. However, SBA stated it is not required by statute to advise participating agencies on what evidence they should consider in their written determination. We clarified this in the final report. Additionally, SBA said the SBIR Policy Directive contains guidance on what the written determination must include, and participating agencies have not requested more detailed guidance on the written determination. We maintain that our findings and recommendation on providing guidance on the written determination are appropriate. As we noted above, SBA may not be required by law to advise agencies on the evidence they may use to support the written determination, but SBA could be missing an opportunity as program administrator to help agencies make a more informed decision about whether to expand their SBIR program. SBA notes that the SBIR Policy Directive contains guidance on the written determination and no agency has requested more detailed guidance. However, we found that participating agencies were viewing the evidence required for the written determination differently. Specifically, six of the nine agencies that have not opted to expand their program viewed the written determination as potentially stringent, possibly requiring independent analysis, while the two agencies that opted to expand their program viewed the written determination as a less stringent requirement. Our recommendation addresses this issue, and SBA’s plan to discuss the written determination with SBIR program managers at a future meeting is consistent with our recommendation. We are sending copies of this report to the Secretaries of Health and Human Services, Agriculture, Commerce, Defense, Education, Energy, Homeland Security, and Transportation; the Administrators of the Small Business Administration, the Environmental Protection Agency, and the National Aeronautics and Space Administration; the Director of the National Science Foundation; the appropriate congressional committees; and other interested parties. 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. GAO staff who made key contributions to this report are listed in appendix I. In addition to the contact named above, Richard Tsuhara (Assistant Director), Kathleen Boggs (Analyst-in-Charge), Hilary Benedict, William Chatlos, Alma Laris, Marc Molino, Patricia Moye, Christopher Murray, and Jennifer Schwartz made key contributions to this report.
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The SBIR program provides grants and contracts to small businesses to develop and commercialize innovative technologies. The 2011 SBIR reauthorization included a provision that gave agencies the option to allow majority-owned portfolio companies to participate in SBIR. SBA issued a rule to implement the statutory provision, which became effective in January 2013. The reauthorization act requires agencies to submit a written determination to SBA and Congress, explaining how such awards will, among other things, significantly contribute to the agency's mission, before making SBIR awards to majority-owned portfolio companies. The reauthorization mandated GAO to review the impact of this provision every 3 years. This is the first report under the mandate, and it examines (1) the impact of allowing majority-owned portfolio companies to participate in agency SBIR programs and (2) the extent to which agencies have elected to expand their SBIR programs to include majority-owned portfolio companies. GAO reviewed agency rules, policies, and other documents; analyzed SBIR data; and interviewed program officials from SBA and the 11 participating agencies, industry associations, and majority-owned portfolio companies. Two of the 11 agencies participating in the Small Business Administration's (SBA) Small Business Innovation Research (SBIR) program—the Department of Health and Human Services (HHS) and the Department of Energy (DOE)—opted to open part of their SBIR programs to small businesses that are majority-owned by multiple venture capital or similar firms (majority-owned portfolio companies), allowing such companies to apply for and receive SBIR awards. Specifically, HHS's National Institutes of Health (NIH) and the Department of Energy's Advanced Research Projects Agency-Energy (ARPA-E) opted to allow such companies to participate. For fiscal years 2013 and 2014, NIH and ARPA-E collectively received 20 applications from majority-owned portfolio companies and made 12 SBIR awards to them, totaling about $7.9 million. SBIR applications received and awards made to these companies comprise less than 1 percent of NIH and ARPA-E's SBIR applications and awards. NIH and ARPA-E officials said the change to allow majority-owned portfolio companies to apply for SBIR awards helps ensure that their SBIR programs receive the best research proposals. For various reasons, the remaining nine agencies participating in SBIR have not submitted a written determination to allow them to make SBIR awards to majority-owned portfolio companies. According to officials from these agencies, they did not conduct any formal analysis but considered various factors, such as whether the change would significantly increase the number of applications, what administrative resources would be required to implement the change, and whether they had the evidence needed to prepare a written determination. All but one of the agencies told GAO that they may reevaluate their decision in the future, but did not have any specific plans for doing so. Officials from several agencies said that they wanted to see how the change in eligibility affected NIH and ARPA-E before implementing the change at their agencies. GAO also found that some agencies viewed the written determination as a potentially stringent requirement. For their written determinations, NIH and ARPA-E did not conduct any independent research on majority-owned portfolio companies (nor were they specifically required to do so), but NIH cited related research. In contrast, six agencies viewed the written determination as potentially requiring independent analysis. Five agencies told GAO that they did not have the evidence or research needed to support a written determination, and another agency said it might consider opting in if it were easier to do so. According to SBA, the written determination is a notification letter that SBA reviews but does not approve or deny. SBA officials said they meet routinely with SBIR program managers, and this issue has not been raised. SBA updated its SBIR Policy Directive to include the written determination requirement but essentially used the same language as the reauthorization act without providing any specific guidance. In SBA's rule implementing the reauthorization act, SBA stated the rule's potential benefit is to provide more businesses with access to the SBIR program, which could increase competition and the quality of proposals and spur innovation. SBA is not responsible for encouraging or discouraging agencies to expand eligibility to include such companies, but SBA also has not discussed the issue with them. SBA could be missing an opportunity to help agencies better understand the evidence required for the written determination, which could inform the agencies' decisions whether to expand their program. GAO recommends that SBA discuss the written determination requirement with participating agencies and, if needed, provide additional guidance. SBA generally agrees with the recommendation and plans to discuss the written determination requirement at a future program managers meeting.
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The Federal Aviation Administration is responsible for managing the national airspace system and ensuring the safe and efficient movement of air traffic. In doing so, FAA controls the take-off and landing of nearly 200,000 planes per day, which carry over 700 million passengers per year. To accomplish this mission, FAA must have a sufficient number of adequately trained air traffic controllers working at its air traffic control facilities. In 1981 over 11,000 air traffic controllers went on strike and were subsequently fired by President Ronald Reagan. Between 1982 and 1990, FAA hired thousands of individuals to permanently replace the fired controllers. Most of this hiring took place between 1982 and 1986. Many of these controllers, as well as those controllers who did not participate in the strike, are now eligible or will soon be eligible to retire from FAA. Air traffic controllers play a critical role in the nation’s air transportation system by helping ensure the safe, orderly, and expeditious flow of air traffic in the air and on the ground. Controllers help ensure that aircraft maintain a safe distance between one another and that each aircraft is on proper course to its destination. Specific controller responsibilities for managing air traffic vary according to the type of air traffic control facility. For instance, controllers who work at airport 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 take-off and landing and coordinate the transfer of aircraft with adjacent control facilities as aircraft enter or leave an airport’s airspace. Controllers working at terminal radar approach control (TRACON) facilities use radar screens to track planes and manage the arrival and departure of aircraft within a 5- to 50–nautical mile radius of airports. At these TRACON facilities, a key function of an approach controller is to line up and sequence airplanes as they descend into an airport’s 5-mile radius. Controllers working at air route traffic control centers (commonly called en route centers) manage aircraft beyond a 50–nautical mile radius. These controllers assign aircraft to specific routes and altitudes while they fly along federal airways. These controllers also coordinate the transfer of aircraft control with adjacent en route or terminal facilities. The typical en route center is responsible for more than 100,000 square miles of airspace, which generally extends over several states. Figure 1 shows how controllers working at the different air traffic control facilities track aircraft during ground movements, take-off, in-flight, and landing operations. Currently, FAA operates 339 air traffic control facilities, consisting of 24 en route centers and 315 terminal facilities. In total, about 20,000 employees categorized as air traffic controllers directly control and manage the air traffic system, comprising several positions with differing responsibilities. (See table 1.) This total includes positions that actively control, or supervise the control of, traffic (air traffic control specialists, traffic management coordinators, and operational supervisors); and “off-line” positions that do not control traffic (former air traffic control specialists in management, training, or staff positions). As the table above indicates, the majority of air traffic controllers are classified as specialists. These controllers are represented by the National Air Traffic Controllers Association, which negotiated staffing levels with FAA in 1998. Under the terms of the agreement, nationwide staffing (in full- time equivalents) for these specialists was set at 15,000 for fiscal years 1999 through 2001. The agreement also called for 2 percent staff increases for fiscal years 2002 and 2003, arriving at a controller specialist staffing level of 15,606 by the end of fiscal year 2003. FAA has requested funding to meet the staffing levels called for in the agreement. Under the 1998 agreement, FAA headquarters officials and NATCA national representatives negotiate allocation of staffing levels for the air traffic control specialists among FAA’s nine regions. Figure 2 below shows the location of each FAA region and the number of controller specialists allocated to each region for fiscal year 2001. Once the regions receive their staff allocations, FAA regional managers and NATCA regional representatives negotiate staff allocations among the various field facilities in each region. The additional 606 controllers called for under the 1998 agreement are to be distributed to regions and field facilities in the same way, with FAA and NATCA officials negotiating allocations to each region and specific facility. In 1972, Congress passed Public Law 92-297, which authorized the secretary of transportation to set a maximum entry age for initial appointments to air traffic controller positions at the FAA. Pursuant to this authority, FAA requires that a potential controller candidate be hired before reaching his or her 31st birthday. This provision was established in recognition of the fact that younger trainees are more successful in completing the controller training programs, and that younger individuals may be better able to deal with the stress of controlling air traffic. One exception to this rule is the Employment of Retired Military Air Traffic Controllers Program, commonly known as the Phoenix Controller-20 program, under which FAA commits to hiring retired military controllers who are past the age of 30. This exception allows military controllers to stay with the military longer before moving to FAA to continue their controller activities. Controller retirement is also affected by special requirements. Controllers working at FAA’s air traffic control facilities and staff offices are eligible to retire under two sets of retirement provisions: the general retirement requirements for federal employees and special requirements for controllers. Depending on when a controller was hired, he or she is covered by either the Civil Service Retirement System or the Federal Employee Retirement System. As federal employees, controllers under these systems can retire if they meet certain age and years-of-service requirements. For example, under general CSRS, a controller who is 55 years old can retire after 30 years of federal service, or at 60 years old with 20 years of service, or at 62 with 5 years of service. Under the special controller retirement requirements, a controller may retire earlier than under the general CSRS and FERS requirements if he or she has enough service time as an active controller specialist, traffic management coordinator, or immediate supervisor. Time in these “covered” positions is generally known as “good time” because it counts toward the special retirement requirements. Controllers can retire at age 50 if they have spent at least 20 years in a covered position, or at any age if they have at least 25 years in a covered position. Under these provisions, controllers covered by CSRS are guaranteed a retirement annuity amounting to the greater of two figures: either 50 percent of their high average 3-year salary or the basic federal retirement annuity. Controllers covered by FERS receive an annuity amounting to 1.7 percent of their high average 3-year salary for the first 20 years of service plus 1 percent of their high average 3-year salary for each additional year of service. Table 2 summarizes the CSRS, FERS, and special retirement provisions. In addition to these basic retirement eligibility requirements, air traffic controllers covered by CSRS are also subject, pursuant to Public Law 92- 297, to a rule requiring mandatory separation at age 56. Controllers covered by FERS are subject to a similar rule, pursuant to Public Law 99- 335. Under this requirement, with some exceptions, controllers actively working in covered positions must separate by the last day of the month in which they turn 56. 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 air traffic control environment, (2) individuals with some controller training but generally no actual controller work experience, and (3) individuals with prior controller work experience. The first group includes individuals who respond to an Office of Personnel Management vacancy announcement. Referred to as off-the-street hires, these candidates must pass an OPM exam to qualify for employment with FAA and must pass a 15-week initial training program at FAA’s Academy in Oklahoma City, Oklahoma, before being assigned to a facility. There have been no OPM job announcements for entry-level air traffic control specialist positions since 1992, because FAA has chosen to rely on other sources for new candidates. FAA estimates that approximately 150 people who responded to the last announcement and passed the OPM exam are still eligible for employment as controllers. The second group includes graduates of FAA-accredited collegiate programs who receive initial air traffic control training prior to being hired by FAA. This type of training introduces students to the terminology, airspace configurations, and technical skills necessary to manage air traffic and operate equipment. Students can receive general air traffic control training at one of 13 schools under FAA’s collegiate training initiative program, or specialized en route training at the Minneapolis Community and Technical College, formerly known as the Mid-American Aviation Resource Consortium school (see app. II for more detailed information on the schools). Collegiate training initiative schools offer either two- or four- year aviation related degrees. Unlike these schools, the Minneapolis Community and Technical College program is not part of a broader academic program, and the federal government subsidizes the cost of training its students. Collegiate training initiative graduates must pass an initial 12-week controller training program at the FAA academy to begin work at their assigned facility, while Minneapolis Community and Technical College graduates can immediately begin working at their assigned facilities. During fiscal years 1997 through 2001, FAA has hired 465 from the collegiate training programs and 291 from the Minneapolis Community and Technical College. The third group of candidates consists of controllers with previous air traffic control experience, including both former Department of Defense (DOD) controllers and controllers fired in the 1981 strike. DOD employs both active-duty military controllers and civilian controllers. In general, military controllers can leave DOD for FAA at the end of their enlistments, as long as they do so before turning 31 years of age. To help DOD minimize military controller losses, FAA and DOD designed a program in 1999 called the Phoenix Controller-20 program to give controllers an incentive to stay in the military past age 30. Under this program, military controllers can join FAA after they retire from military service. FAA may also hire controllers who previously held air traffic controller positions with the agency; most of them are among those fired in the 1981 controller strike. President Reagan banned the federal government from hiring any of these controllers, but President Bill Clinton lifted this ban in 1993, at which time FAA issued a job announcement for fired controllers interested in returning to work. Candidates in this group are not required to attend initial controller training at the academy but may be required to take refresher training there. During fiscal years 1997 through 2001, FAA hired 793 former DOD controllers and rehired 562 controllers who had been fired in 1981. Once assigned to an air traffic control facility, candidates are classified as “developmental controllers” until they complete all requirements to be certified for all of the air traffic control positions within a defined area of a given facility. It generally takes new controllers who have had only initial controller training between 2 and 4 years—depending on the facility and the availability of facility staff or contractors to provide on-the-job training—to complete all the certification requirements to become certified professional controllers. It normally takes individuals who have prior controller experience less time to become fully certified. In October 2000, the chairman and ranking democratic member of the Subcommittee on Aviation, House Committee on Transportation and Infrastructure, asked us to examine FAA’s efforts to address existing and future controller staffing needs. We were asked to (1) identify likely future attrition scenarios for FAA’s controller workforce and (2) examine FAA’s strategy for responding to its short- and long-term staffing needs, including how it plans to address the challenges it may face. To identify future attrition scenarios for FAA’s controller workforce, we (1) obtained and analyzed FAA estimates of future retirement and attrition; (2) analyzed FAA’s employee database to determine when controllers would reach retirement eligibility; (3) developed a computer model to simulate future attrition based on historic FAA air traffic controller rates; and (4) developed and mailed a survey to a sample of current air traffic controllers to determine their retirement plans. FAA’s estimates: To obtain FAA’s estimates of future retirements and attrition, we interviewed officials in FAA’s Office of Air Traffic Resource Management who are responsible for managing the controller workforce. These officials provided information on the data used to support FAA’s estimates of future controller attrition. They provided estimates only for the 15,000 controller specialists; similar estimates were not available for other categories of air traffic controllers. Analysis of FAA’s workforce: We used personnel data supplied by FAA to calculate the age and service characteristics of 20,021 air traffic controllers who were employed as of June 30, 2001, the most recent data available at that time. These included 15,120 controller specialists, 670 traffic management coordinators, 1,862 operational supervisors, and 2,369 managers and staff specialists. We used this information to determine the number of controllers reaching retirement eligibility over the next decade. Additional information on how we made these projections is contained in appendix III. Simulation model of attrition: We developed a computer simulation that projected the level of potential controller attrition through 2011. This model used age and years of service information for the controller workforce, in addition to past attrition rates and some assumptions about future attrition rates, to estimate the number of future losses FAA will face in its controller workforce. Additional information on the methodology of the computer simulation, including the assumptions we used, is given in appendix IV. Survey of controllers: We mailed a survey to controllers to obtain independent estimates of future controller attrition. After developing and pre-testing the survey, we sent it to a statistically representative sample of 2,100 current controllers. The survey asked the controllers about when they planned to retire or leave the agency and about factors that could affect their decision. We received responses from over 75 percent of our sample. Additional information on the survey methodology can be found in appendix V. To address the second objective of examining FAA’s strategy for responding to its short- and long-term staffing needs, including how it plans to address the challenges it may face, we obtained information on the availability of potential controller candidates, FAA’s process for hiring new controller candidates, and FAA’s training activities associated with new candidates. To obtain information on the availability of candidates, we interviewed officials at FAA headquarters, the 9 FAA regional offices, the 14 college or university air traffic control programs, and the Department of Defense to determine the number of controllers who are potentially available to FAA. We visited schools in California, Minnesota, New Hampshire, and Florida to better understand their activities. We did not verify the information provided by these sources. To understand FAA’s process for hiring new controller candidates, we interviewed officials at FAA’s headquarters and regional offices. At FAA’s headquarters we focused on the activities of the Air Traffic Resource Management office, which is responsible for monitoring air traffic controller hiring levels. In addition, we met with officials at FAA’s Civil Aeronautical Medical Institute to discuss their activities to develop a new screening test for potential controller candidates—referred to as Air Traffic Selection and Training exam (AT-SAT). In addition, we obtained information on how FAA uses staffing standards to determine staffing levels at its various facilities and interviewed officials with the National Academy of Sciences about their review of FAA’s staffing standards. To obtain information on FAA’s training activities, we visited FAA’s training academy in Oklahoma City, Oklahoma, and discussed on-the-job training with each of FAA’s nine regional offices. We also interviewed officials with the Air Transport Association, NATCA, and representatives of all nine FAA regional offices to ensure that we obtained a nationwide perspective on controller staffing issues. Finally, we obtained and reviewed information from the Office of Personnel Management and our previous reports on good human capital practices in government agencies to evaluate FAA’s workforce plan regarding air traffic controller staffing. We conducted our review from January 2001 through April 2002, in accordance with generally accepted government auditing standards. We obtained oral comments on a draft of this report from senior FAA officials, which are discussed at the end of chapter 3. Although the exact number and timing of the controllers’ departure is impossible to determine, attrition scenarios developed by both FAA and GAO indicate that the total attrition will grow substantially in the short and long terms. As a result, FAA will likely need to hire thousands of air traffic controllers in the next decade to meet increasing traffic demands and to address the anticipated attrition of experienced controllers, predominately created by retirements. Depending on the scenario, total attrition could range from 7,200 to nearly 11,000 controllers over the next decade. GAO also found that the potential for retirement among frontline supervisors and controllers at some of FAA’s busiest facilities may be high. To identify likely future attrition scenarios, we (1) reviewed FAA’s 10-year hiring plan and associated attrition forecasts for approximately 15,000 controller specialists who actively control and separate traffic in the air and on the ground; (2) analyzed FAA’s workforce database to determine when the current controllers (those at FAA as of June 30, 2001) would become eligible to retire; (3) developed a computer model to predict future attrition based on historic levels; and (4) developed and administered a survey to a statistically representative sample of controllers so as to obtain information on when they might leave FAA. GAO’s analysis covers more than 20,000 controllers—the 15,000 controller specialists whom FAA analyzed and about 5,000 controllers who supervise and manage the air traffic control system. GAO included the additional personnel because attrition from these positions is generally filled from the controller specialist ranks and, thus, omitting them would understate potential attrition among all controllers. In May 2001 FAA prepared a 10-year estimate of its hiring needs that included a projection of the number of controller specialists who may be needed in the future and estimates of expected controller losses. The estimate shows that the number of controller specialists needed to help manage the air traffic system could grow from about 15,000 in fiscal year 2001 to over 17,000 by the end of fiscal year 2010, and that losses of controllers could increase from 428 in fiscal year 2001 to over 1,000 in 2010. FAA estimates that future air traffic increases will require it to hire more than 2,000 additional air traffic controllers over the next decade. FAA bases its future projections on a mathematical model, referred to as the staffing standard, which factors expected traffic levels and the amount of tasks a typical controller can perform in a given time frame in order to estimate the future number of controllers that FAA will need. As shown in table 3, FAA anticipates a growing requirement for controller specialists. FAA’s controller staffing levels in fiscal years 2002 and 2003 were established under the terms of FAA’s 1998 contract with NATCA, which represents the controller specialists. To estimate staffing needs for fiscal year 2004 and beyond, FAA used its air traffic control staffing standards. The standards estimate that FAA will need, on average, about 245 additional controllers each year from the end of fiscal year 2003 though fiscal year 2010, mainly because of increases in air traffic. The standards further estimate that FAA will need 17,309 controllers by fiscal year 2010— over 2,000 more controllers than are currently employed. The National Academy of Sciences examined FAA’s staffing standards in 1997. It found that the standards did a reasonable job of estimating future needs on a national or regional level, but that the standards were not as useful in determining facility level needs. It recommended that FAA modify its staffing process to produce more reliable facility staffing estimates. To date, however, FAA has not fully implemented this recommendation because of funding limitations, according to the branch manager, Resource Management. FAA’s projections show growing losses of controller specialists. FAA included estimates of three types of losses: retirements, nonretirements (for example, resignations, firings, and deaths), and non-attrition (controllers who leave to take other positions within FAA, such as supervisory and staff positions). According to the branch manager, Resource Management, the forecast is based on historic attrition levels. Table 4 displays FAA’s 10-year projections. As the table shows, FAA is estimating sizable increases in controller specialist retirements over the next decade, with retirements increasing each year and exceeding 700 by the end of fiscal year 2010. The average annual retirement level over the length of the forecast period is 423, which is three times higher than the average annual retirement level of 141 that FAA experienced over the 5-year period of 1996 through 2000. Combined with other losses, this estimate anticipates a nearly 50-percent turnover in the next decade from its current controller specialist contingent of approximately 15,000. The scenarios shown by our analysis of retirement eligibility trends, the results of our simulation model, and estimates from our controller survey all indicate that FAA may face a sizable increase in future attrition, primarily because of retirements. In addition, we examined attrition patterns for supervisors and for controllers at the busiest facilities because of their importance to the national air traffic control operations, and we found that attrition levels for these groups could be sizable over the next decade. Because many controllers were hired in the early 1980s, FAA is facing an aging controller workforce. As of June 30, 2001, the average age of an FAA controller was 43, and approximately 7,400 controllers were 45 or older. In addition, because of the special controller retirement provisions, many controllers may soon accrue enough years of service to meet the retirement eligibility requirements. Because FAA’s employee database does not identify the amount of time controllers have worked controlling traffic (good time), we examined the eligibility of FAA’s entire controller workforce (about 20,000 employees), using both the special controller retirement provisions and the CSRS/FERS retirement provisions. Although most of the employees would be expected to first reach eligibility under the special provisions (20 years of good time and age 50, or 25 years of experience at any age), some of those employees who were older when hired or were working at positions other than actually controlling traffic (like training) might first become eligible under CSRS or FERS provisions (age 55 with 30 years federal employment, age 60 with 20 years federal experience, or age 62 with 5 years experience). Our review of the eligibility data shows that about 2,500, or 12 percent of the current controller workforce, was eligible to retire at the end of fiscal year 2001. As figure 3 shows, an increasing percentage of current controllers will become eligible to retire between fiscal year 2002 and 2011, with nearly 11,200 of the current controllers becoming eligible for retirement over the next 10 years. In addition, those already eligible, coupled with the nearly 11,200 additional controllers becoming eligible over the next 10 years, will increase the number of current controllers eligible to retire to more than 13,600, or 68 percent of FAA’s total current controller workforce, by the end of fiscal year 2011. Our controller attrition simulation model projects that high numbers of controllers will leave the workforce between fiscal years 2002 and 2011. Probabilities for separation were based on controller attrition patterns between 1997 and 2000 and were applied to the 20,021 controllers at FAA as of June 30, 2001. Projections are therefore based on the June 2001 population, and there is no adjustment for new appointments. As shown in figure 4, the simulation model predicts that about 600 to 800 controllers will leave each year between fiscal years 2002 and 2011, which is one and one-half to two times higher than average attrition was over the past 5 years. It also indicates that nearly 7,500 controllers (about 37 percent of the current controller workforce) are projected to leave FAA by the end of fiscal year 2011. Based on the results of our survey of air traffic controllers, we estimate that many controllers plan to leave FAA soon. Of the 20,021 controllers working at FAA as of June 30, 2001, we estimate that approximately 5,000 controllers plan to leave (predominately because of retirement) between fiscal years 2002 and 2006, and about 10,900 by the end of fiscal year 2011. As shown in figure 5, we estimate that between fiscal years 2002 and 2011, approximately 1,100 controllers on average plan to leave each year, and about 1,300 controllers plan to leave in fiscal year 2007 alone—also the peak year for controllers reaching retirement eligibility. These estimates are more than double the recent attrition levels that FAA has experienced—on average, about 436 controllers separated each year for the past 5 years. We also estimate, based on the survey responses, that there are two time frames for when controllers said they might leave or retire. An estimated 40 percent of the controllers said they planned to leave or retire at age 50 or earlier, and another 26 percent said they planned to leave or retire around the maximum 56-separation age. In addition, we also found that approximately 51 percent of controllers said they planned to retire when they first become eligible. Because supervisors are important to air traffic control operations and because they tend to be older than others controlling traffic, we examined retirement eligibility and survey results of supervisors at FAA as of June 2001. We found that supervisors will become eligible and said they planned to leave FAA in very high numbers over the next decade. We found that 1,205, or 65 percent, of current supervisors will become eligible to retire between 2002 and 2011. (See fig. 6.) Given that 28 percent of current supervisors are already eligible to retire and that by 2011 another 65 percent will have reached eligibility, about 93 percent of current supervisors will be eligible to retire by the end of fiscal year 2011. As a result, FAA may face substantial turnover in its supervisory ranks over the next decade. In addition, estimates from our survey show sizable attrition through fiscal year 2011. As shown in figure 7, we estimate that 770 supervisors (about 39 percent of current supervisors) said they plan to leave between fiscal years 2002 and 2006, and 1,503 supervisors (about 76 percent of current supervisors) plan to leave FAA, primarily through retirement, through fiscal year 2011, an average of about 150 per year. The peak year in planned attrition is fiscal 2007, when we estimate that 221 supervisors plan to leave. This level of potential attrition for supervisors is higher than in the past 5 years, during which an average of 71 supervisors left each year. High levels of supervisor attrition could also affect the controller specialist workforce. To the extent that FAA replaces supervisors who leave, increases in supervisory retirements could further reduce the number of experienced controller specialists available to control traffic and increase controller specialist hiring needs in order to replace the controllers moving to supervisory positions. The overall impact of supervisor attrition is unclear at this time. Until recently, FAA was in the process of reducing the controller-to-supervisor ratio from 7-to-1 to 10-to-1, through attrition, as agreed to in the 1998 NATCA collective bargaining agreement. This strategy would help mitigate the flow of NATCA bargaining unit controllers into the supervisory ranks. The outcome of this strategy is uncertain because the Conference Report for the fiscal year 2002 Department of Transportation Appropriations (H. Rpt. 107-308) stated that the conferees were concerned about the impact of the reduction and directed FAA not to reduce supervisory staffing further. FAA intends to abide by this language for this fiscal year, and its future decisions on supervisory reductions are subject to congressional direction. Because of the crucial role played by en route centers and the busiest terminal facilities in the national air space system, we analyzed the impact of retirement eligibility on the 21 major en route centers, the 10 busiest airport towers, and the 10 busiest TRACON facilities. Based on our analysis of FAA’s employee database, we found that the en route centers and the busiest terminal facilities will experience a sizable increase in the number of controllers reaching retirement eligibility. As figure 8 shows, retirement eligibility in these facilities grows over the next decade. In analyzing retirement eligibility data for the en route centers, we found that 903, or about 11 percent, of the controllers currently at FAA’s 24 en route centers are already eligible to retire. Additionally, the cumulative percentage of current controllers becoming eligible to retire increases to about 28 percent by the end of fiscal year 2006 and reaches about 65 percent by the end of fiscal year 2011. In terms of the 21 major en route centers, the Jacksonville center had the highest proportion of retirement- eligible controllers at the end of fiscal year 2001, with 79 of its 376 controllers being eligible for retirement (21 percent). By the end of fiscal year 2006, at least 29 percent of current controllers will be eligible for retirement at 10 centers—Albuquerque, Atlanta, Boston, Fort Worth, Houston, Jacksonville, Los Angeles, Memphis, Seattle, and Washington, D.C. At the 10 busiest airport towers, 76, or about 10 percent, of current controllers are eligible to retire. The cumulative percentage rises to about 34 percent by the end of fiscal year 2006 and reaches 74 percent by the end of fiscal year 2011. Based on our analysis for these towers, we found that the Denver tower had the highest proportion of retirement-eligible controllers as of September 30, 2001, with 14 of its 51 (27 percent) controllers being eligible to retire. By the end of fiscal year 2006, 45 percent of Denver’s current controllers will be eligible to retire, and by the end of fiscal year 2011 it reaches 90 percent, as 46 of its 51 current controllers will reach retirement eligibility. At the 10 busiest TRACON facilities, about 199, or about 12 percent, of current controllers are eligible to retire. The cumulative percentage increases to about 36 percent by the end of fiscal year 2006 and reaches about 73 percent by the end of fiscal year 2011. Based on our analysis for these facilities, the Dallas/Fort Worth TRACON had the highest level of current controllers eligible to retire at the end of fiscal year 2001, with 36 of its 147 (24 percent) controllers being eligible. By the end of fiscal year 2006, the cumulative percentage grows to 46 percent, and by the end of fiscal year 2011 it reaches 87 percent, as 128 of the 147 controllers currently at the facility will have reached retirement eligibility. Attrition of air traffic controllers will increase substantially over the next decade, primarily because many controllers will retire. This condition is widespread across the various air traffic control facilities at the FAA, and the potential for massive turnover exists even at FAA’s most complex and busiest facilities. To effectively deal with expected attrition, government agencies must identify human capital needs, assess how current staff and expected future staff will meet those needs, and create strategies to address any shortfalls or imbalances. As we have reported, a high- performing organization typically addresses its current and future workforce needs by estimating the following: the number of employees it will need; the knowledge, skills, and abilities those employees will have in order for the organization to accomplish its goals; and the areas where employees should be deployed across the organization. We have developed a model that identifies strategic workforce planning as a critical success factor in effectively managing a human capital program, because such planning can help agencies ensure that they have adequate staff to accomplish their missions. Although FAA will be faced with unprecedented numbers of retirements of its air traffic controllers, it has not yet developed a comprehensive workforce plan to address this issue and therefore risks having a shortage of qualified controllers. Good workforce planning includes developing strategies for integrating hiring, recruiting, training, and other human capital activities in a manner that meets the agency’s long-term objectives. FAA generally hires new controllers only when current, experienced controllers leave, and it does not adequately take into account the time necessary to fully train these replacements. Furthermore, although FAA intends to increasingly hire individuals with no prior controller experience, its new aptitude test for potential candidates may not be as effective in screening them as initially planned. In addition, FAA has not provided its training academy with the resources necessary to handle the expected large increase in controller candidates. Finally, exemptions to the mandatory age 56-separation provision raise equity and safety issues. FAA therefore might face a shortage of experienced controllers, leading to an increase in overtime logged by its remaining controllers. Increased flight delays might also result from this situation, as fewer controllers might not be able to safely guide the same number of flights that would be possible with a fully staffed controller workforce. A key component of workforce planning is ensuring that appropriately skilled employees are available when and where they are needed to meet an agency’s mission. This means, in part, that an agency continually needs trained employees becoming available to fill newly opened positions. FAA’s current hiring process does not adequately ensure that qualified replacements are available to expeditiously assume the responsibilities of those who retire. The main objective of FAA’s branch manager for resource management is to ensure that controller-staffing levels meet the levels called for in FAA’s contract with the controller’s union (NATCA). To do this, he estimates how many controller specialists will leave during the year and allocates this number among regions as a target-hiring figure. On at least a quarterly basis, he informs the officials in the regions how many controller candidates they are allowed to hire for that period. If attrition is lower than expected during that period, he may tell them to delay hiring until a later quarter. For example, in fiscal year 2001, the plan called for hiring 425 controller candidates but, because of lower-than-expected attrition levels, FAA hired only 358 new controllers. According to this official, FAA does not have budgetary resources to maintain and develop an employee pipeline to ensure that fully certified replacements are available, so it has no plans to change these hiring practices. FAA’s approach of hiring new employees only when current employees leave does not adequately account for the time needed to train controllers to fully perform their functions, or for the increased retirements that are projected in the short and long terms. The amount of time it takes new controllers to gain certification depends on the facilities at which they will work, but it generally takes from 2 to 4 years and can take up to 5 years at some of the busiest and most complex facilities. The branch manager’s May 2001 hiring plan identifies a “hiring lead time adjustment” starting in fiscal year 2004 that provides for additional hiring in recognition of the time necessary to train employees. The numbers included, however, do not appear adequate to account for the large potential increases in controller attrition. For example, in fiscal year 2004, the adjustment is for hiring 70 extra candidates, which would respond to a potential attrition of about 700 to 1,100 controllers in 2006, when these new hires might be ready for certification at some facilities. In addition, the branch manager told us that budget constraints play a key role in determining the timing of hiring new candidates. For example, he said that budget requests are tied to the NATCA contract amounts and that FAA had no plans to request the additional funding necessary to go above those levels. FAA officials also stressed that staffing management is now a partnership between FAA and NATCA, and that this also creates constraints on FAA’s ability to hire and place new controllers at specific facilities. FAA regional officials, who are responsible for ensuring that FAA’s air traffic facilities are adequately staffed, are particularly concerned about FAA’s replacement-hiring policy. Eight of nine regional officials with whom we spoke stated that they would like for FAA to allow them to hire new controller staff above their authorized levels so that experienced, fully qualified controllers will be ready when current controllers retire. The officials were particularly concerned that significant increases in retirement rates among veteran controllers would leave the facilities short of qualified controllers while new trainees are hired and trained. Several regions stated that they had made formal and informal requests to FAA headquarters to obtain additional controllers who could be hired and trained in advance of future retirements. In May 2001, for example, officials from FAA’s Southwest Region formally requested 48 additional staff members to mitigate the impact of future retirements. The region asked for new hires at one of its en route centers to “ensure that quality customer service is maintained, budgetary concerns are addressed, and controller attrition is dealt with.” In April 2002, FAA headquarters informed the region that their request was denied because of operational constraints imposed by the 1998 agreement with the controllers’ union and because of the current fiscal year’s budgetary constraints. Furthermore, numerous FAA regional officials told us that they were frustrated by their agency’s insistence on staffing as close to the numbers called for in the NATCA contract as possible. A lack of experienced controllers could have many adverse consequences, according to several FAA regional officials. Several regional officials stated that if a facility becomes seriously short of experienced controllers, the remaining controllers might have to slow down the flow of air traffic through their airspace. If the situation became dire, FAA could require airlines to reduce their schedules, but this would be an unlikely, worst-case scenario, according to some FAA regional officials. Also, because there would be fewer experienced controllers available to work, some FAA facility officials stated that those controllers could see increased workloads and additional, potentially mandatory, overtime. Some facility managers told us that they expected this increased burden to result in additional work-related stress for the remaining controllers, which would increase sick leave usage. It could also cause experienced controllers to retire sooner than they otherwise might. For example, based on our survey results, we estimate that 33 percent of controllers would accelerate their decision to retire if forced to work additional mandatory overtime. Identifying sources of future potential employees with the requisite skills and aptitude is another key piece of a comprehensive workforce plan. As discussed in chapter 1, FAA historically has hired its new controllers from a variety of sources, including graduates of institutions in FAA’s collegiate training initiative program, the Minneapolis Community and Technical College, candidates already on a list maintained by OPM, controllers formerly employed by FAA who were fired by President Reagan in 1981, and former DOD controllers. Table 5 shows the sources and number of new controllers that FAA hired between fiscal years 1997 and 2001. DOD officials were concerned that increasing retirements of FAA’s controllers over the next 5 years will cause greater operational problems, and possibly affect defense readiness, if potentially thousands of DOD controllers were to fill openings at FAA. DOD has lost many controllers to FAA—about 35 percent of FAA’s hires in the past 5 years. FAA’s regional officials told us that they like to hire former military controllers because of their experience, maturity, and work ethic. DOD officials with whom we spoke explained that these losses had resulted in cutbacks for fighter training missions by at least one of the armed services and in the implementation of significant retention bonuses to military controllers. Although DOD employs both civilian and uniformed military controllers, there remains a pay disparity between DOD and FAA. These officials believe that the higher pay offered by FAA explains why DOD military and civilian controllers apply for FAA controller jobs. For example, in fiscal year 2001, the maximum base salary levels for DOD controllers were $48,730 for a DOD military controller and $74,553 for a DOD civilian controller, while FAA controllers could earn up to $128,386. DOD officials stated that both agencies (FAA and DOD) must meet their recruiting and retention goals to support national security and defense requirements. To that end, DOD officials said that the focus needs to be on the requirement for air traffic controllers as a whole and not on two competing systems. Along these lines, FAA headquarters officials said that because FAA hopes to achieve a more diverse workforce, it expects to concentrate increasingly on hiring off-the-street candidates. The success of the off-the-street hiring depends in large part on identifying potential candidates who have an appropriate aptitude for controllers’ work. Traditionally, FAA used the academy’s initial entry-training program to screen out candidates who could not become successful controllers. According to FAA officials, as many as 50 percent of off-the-street applicants have dropped out before finishing the required training program. These officials estimated that about $10 million per year was spent on training candidates who later failed the program. FAA therefore developed a new screening exam, known as AT-SAT, to better ensure that the new hires have the skills and abilities to succeed on the job. FAA plans to require that candidates without prior experience pass the 8-hour AT-SAT exam before they begin training at its academy. According to academy officials, the academy is planning to rely on AT-SAT as a way to screen out candidates unlikely to pass the academy’s training, and it has therefore revised its training program to emphasize teaching skill-sets rather than serving as a screening program. Uncertainty exists regarding the exam’s ability to screen out unsuccessful candidates and help ensure that new candidates have the aptitude to become successful controllers. For example, FAA has recently changed the exam to allow more candidates to pass, which creates some uncertainty about its ability to identify successful candidates. During initial validation of AT-SAT, FAA found that the test should predict, with a high level of validity, that those who passed it would become successful controllers. However, FAA found that only about 28 percent of non-FAA test subjects and about 62 percent of active controllers could pass the test. In addition, they found that passing rates for some applicant groups, including particularly African-Americans and females, might be significantly lower than the overall passing rates. Therefore, FAA concluded that the passing score on the test was set higher than the typical controller’s job expectations. As a result, the developers of the exam changed the weight given to different portions of the exam and adjusted the passing score to tie the test more accurately to the actual job performance of controllers. According to FAA, this will result in more applicants passing the exam (68 percent are now expected to pass). FAA plans to begin using the test in June 2002. Although FAA has not revalidated the effectiveness of the revised exam, FAA officials stated that they have long planned to perform an operational evaluation of the exam to assess how well the exam works in practice, and that they are currently considering two options for performing this evaluation. First, FAA could correlate candidates’ scores on the exam with how well they perform on a computer simulation of actual air traffic. In order to implement this option, FAA would have to develop a new computer-based performance measure for the terminal environment. Officials indicated that this would cost several hundred thousand dollars. The second option would be to validate the exam against initial training at the academy, field training, and job performance. This would require FAA to develop criteria for measuring success in each of these three areas. In any case, to evaluate the exam, the officials need to decide on an option, develop a detailed implementation plan, and identify funding for this purpose. Officials could not provide an estimate as to when they will decide on a specific option. Until the results are evaluated, the operational effectiveness of the exam will be unknown. Workforce planning should consider the approach and resources necessary for providing new employees with the means to acquire the knowledge, skills, and abilities to accomplish the agency’s mission. However, FAA has not adequately addressed the challenges associated with providing the training resources—specifically training staff, equipment, and opportunities for on-the-job training—needed for large increases in new hires. Most controller candidates undergo both 15 weeks of classroom exercises at FAA’s academy in Oklahoma City and on-the-job training at the facility where employees are assigned. As of March 2002, the academy was staffed with 91 FAA employees and 60 contractors. This number of employees and contractors has been used to train, on average, about 200 new hires for each of the past 5 years. The academy’s training plan anticipates that between 547 and 980 controller candidates might need training each year through fiscal year 2005. To meet the projected levels, these officials believe they will need up to 50 additional staff to provide training. The training academy may have difficulty recruiting current controllers to conduct portions of their training program. Academy officials told us that their recent attempts to persuade experienced controllers to volunteer to train new recruits have not been very successful. Academy officials explained that the 1998 pay raise, which in some cases increased salaries for controllers by more than 30 percent but applied only to periods when the controllers were actually guiding air traffic, has affected the controllers’ willingness to participate. Whereas a controller was once paid the same amount for providing training as for controlling traffic, under the new system a controller would lose pay by becoming a trainer at the academy. Academy officials said they recently put an announcement out asking for volunteers to conduct training and received 31 applications. They noted that before the pay raise they were receiving hundreds of applications for these positions, which provided them a greater opportunity to select from a broader pool. Equipment deficiencies also hamper the academy. For example, the academy is training en-route controllers on equipment that is not used at actual en-route centers, so controllers must retrain on different equipment once they reach their facilities. To efficiently train en-route and terminal controllers, academy officials told us that they need a specialized en-route simulator lab known as a Display System Replacement lab, which costs between $7 million to $45 million, depending on the sophistication of the model purchased. Academy officials have been trying to obtain this equipment for several years, and the academy has recently made another proposal regarding this equipment. FAA headquarters is expected to decide whether to purchase this lab in the near future. In addition, the academy uses tower simulators to give trainees experience with controlling traffic in a computer-simulated environment. However, academy officials said their current simulators are often broken, outdated, and lacking in the necessary capacity to train large numbers of new hires. The cost of the new equipment is estimated at $2 million. If FAA does not make these investments, academy officials said, controller candidates will need more training time when they reach their facilities. New controllers might also have difficulty obtaining on-the-job training, FAA regional officials stated. New controllers are to receive their facility training from fully certified controllers already working in that facility. Under FAA’s current hiring system and estimated attrition rates, however, there will be fewer experienced controllers to provide training and more new hires in need of training. More time will thus likely be needed to train new controllers. This situation could be particularly acute at FAA’s en-route centers and busy terminal facilities, because it takes longer to train replacement controllers at these facilities. Retirements at these facilities are expected to increase the burden on the remaining experienced controller staff. Ensuring that a workforce retains employees with the requisite skills and abilities is another important piece of workforce planning. As described in chapter 1, legislation passed in 1972 stipulates that air traffic controllers must separate at age 56. Some controllers are exempt from the retirement rule, however, and continue to work beyond age 56. This practice raises two concerns: (1) whether the skills and abilities of the older controllers have diminished, thus potentially compromising safety; and (2) whether the exemptions result in unequal treatment for some controllers. In 1972, Congress directed that “an air traffic controller shall be separated from the service on the last day of the month in which he becomes 56 years of age.” The House Report associated with this law justifies the provision by stating that “air traffic control is a young man’s business…and that because of the natural forces of aging, magnified by the stresses of control functions, the productive and proficient life of the controller is substantially less than that which prevails in most other occupations.” In addition, the report states, “the controllers themselves are convinced that the demands of their job are so great that only young, healthy adults can consistently do a safe, competent job of controlling the steadily growing volume of air traffic.” The House Report further states that “as the controller approaches age 50 his mental faculties of alertness, rapid decision making, and instantaneous reaction…begin a definite decline.” In addition, the associated Senate Report states, “like skilled athletes, most controllers lose proficiency to some degree after age 40, and in the interest of the public’s safety, should not be retained as controllers in busy facilities beyond the time they can perform satisfactorily.” The law’s provision requires mandatory separation at age 56 for controllers who separate and control air traffic; provide preflight, in-flight, or airport advisory service to aircraft operators; or serve as the immediate supervisors of any employee who performs these duties. These positions include controller specialists and their first-line supervisors as well as traffic management coordinators and their first-line supervisors. Some controllers who separate and control traffic are exempted from this provision, however, including controllers appointed by the Department of Transportation (DOT) before May 16, 1972, and controllers appointed by DOD before September 12, 1980. In addition, those controllers covered by the FERS retirement system can continue working past age 56 until they have reached 20 years of service in a covered position (so called good time under the special air traffic controller retirement provisions). Similarly, on November 12, 2001, the president signed a law allowing controllers covered by the CSRS retirement system to work in covered positions past age 56 until they first become eligible for retirement annuities under any retirement scenario. Our analyses of FAA’s employee database shows that approximately 700 of those controllers currently engaged in separation and control of traffic are exempt from the requirement and have already turned age 56, and another 1,200 will reach 56 by December 31, 2006, if they do not leave FAA before then. According to FAA, 287 controllers were appointed by DOT before May 16, 1972, and are exempt from the requirement. Most of the remaining exempted controllers were either appointed by DOD before September 12, 1980, or are covered by FERS provisions. FAA also has the statutory authority to waive the age provision on a case- by-case basis. The applicable law states that “the Secretary of Transportation, under such regulations as he may prescribe, may exempt a controller having exceptional skill and experience as a controller from the automatic separation provisions of this subsection until that controller becomes 61 years of age.” However, according to an FAA Headquarters official, FAA has never granted an age waiver to the mandatory separation provision. Further, since 1995, it has been FAA’s policy not to grant any age waivers. This official also stated that most controllers are aware of the difficulty in obtaining an age waiver and do not even apply for one—only seven controllers have applied for a waiver since 1995. Despite this view, many controllers said they would like the opportunity to work past the age of 56. Our survey indicates that many controllers would continue to work if they were permitted to do so; approximately 31 percent of respondents cited the opportunity to work past age 56 as a factor that could lead them to delay their retirement plans. In addition, regional FAA officials said they would like to have the flexibility to retain some of these experienced controllers. As mentioned above, safety concerns formed the basis of the age-56 separation provision. Only limited actions have been taken, however, to assess whether those controllers who are exempted from the provision have adequately retained the skills and abilities necessary to perform their duties. FAA requires all controllers to pass annual physical examinations that test sight, hearing, and overall health conditions. No additional tests— such as for mental acuity or changes in reaction time—are given to controllers who surpass age 56. The equity issues associated with the exemptions to the age-56 separation rule could become more prominent in the future if FAA continues to rehire controllers fired during the 1981 strike. In 1993 President Clinton, through presidential directive, lifted the ban on hiring former striking employees. In the past 5 years, FAA has rehired about 850 controllers who were fired in 1981. The average age of the 733 still working as of June 30, 2001, was 54, and about 35 percent were aged 56 or older. The oldest was 69 as of June 30, 2001. In addition, FAA officials said that most of the rehires are exempt from the mandatory separation provisions because they were originally hired before May 16, 1972. Further, recently a group of controllers fired during the 1981 strike filed a class action lawsuit alleging that FAA discriminates against such controllers because of their age. Depending on the outcome of this lawsuit, about 2,000 former controllers—many aged 50 and above—could be given hiring priority. Although the attrition scenarios projected by FAA and us reflect estimates of the future, and any particular estimate in any given year is subject to varying degrees of uncertainty, the overall results suggest that FAA will face significant personnel challenges. If controllers leave at a quicker pace than estimated, the situation may become even more difficult for FAA, as it would have to swiftly replace its seasoned controllers with new controllers possessing lesser experience. To the extent that controllers leave at a slower pace than estimated, FAA will have a larger window of opportunity to replenish its workforce. Ultimately, FAA’s ability to successfully plan for and manage this situation will dictate its overall impact on the nation’s air traffic control system and the safety and efficiency of air travel in the United States. The employees whom FAA will need to replace possess unique skills and are critical to the safety and efficiency of the nation’s air transportation system. FAA, as the agency responsible for managing this workforce, does not have a comprehensive workforce plan to help manage the expected turnover. An effective human capital process anticipates expected attrition and includes the development of a comprehensive workforce plan that (1) establishes an effective approach for hiring individuals with the requisite skills and abilities in time to accomplish agency missions, (2) provides new employees with the best training opportunities possible to maximize their potential, and (3) uses opportunities to retain qualified staff. FAA’s approach to workforce planning does not adequately address these strategies, raising the risk that the safety and efficiency of the nation’s air transportation system will be adversely affected. In addition, if FAA does not take steps to develop and implement a more comprehensive workforce strategy, increased traffic delays and overtime costs could result. FAA’s practice of hiring replacements for controllers only after a position is vacated leaves the agency vulnerable to skills imbalances, with inexperienced and uncertified controllers replacing seasoned veterans. This situation may be exacerbated at individual air traffic control facilities because the age and experience of controllers varies across the system, which could cause some locations to experience additional staffing challenges. Also of concern are the effects of the recent scoring changes that were made to the test used to screen potential candidates. Until the screening test results are examined, the ability of the exam to identify candidates who will make successful controllers will not be known. Further, the quality of the training that controllers receive could be compromised because FAA has not addressed the human resources and equipment needs of its training academy, despite the growing projected student population. Finally, safety and equity issues associated with the age-56 separation exemptions could affect the morale of the controller workforce and the safety of air traffic. To help meet the challenges presented by hiring thousands of new controller candidates, we recommend that the secretary of transportation direct the administrator of the Federal Aviation Administration to develop a comprehensive workforce plan that includes strategies for: Identifying the number and timing of hiring necessary to ensure that facilities have an adequate number of certified controllers available to perform needed duties. As part of this effort, FAA should determine and plan for the expected attrition levels and timing at each facility; Evaluating the newly developed screening test to determine whether it is identifying the most successful candidates; Addressing the resource and equipment needs at the training academy to help ensure that FAA is in a position to successfully train a growing number of controller candidates; and Assessing the safety and equity issues associated with exempting potentially large numbers of controllers from the mandatory age-56 separation requirement. In commenting on a draft of this report, senior FAA officials found that the report was generally accurate and indicated that they would consider our recommendations in FAA’s workforce planning. Overall, FAA stressed that it has a working human capital workforce strategy model that has enabled the agency to meet its staffing goals over the past few years. FAA officials agreed that the potential for sizable future attrition, in the range of 600–800 controllers per year, is likely over the next decade. The officials said, however, that although they have plans that extend to 2010, the uncertainty surrounding the future, along with labor contracts and budget constraints, limit their specific workforce planning for air traffic controllers to fiscal years 2002 through 2004. With general agreement between FAA and GAO that attrition will grow substantially over the next decade, we believe that the workforce challenges FAA faces extend well beyond fiscal year 2004. As such, we believe that sound workforce planning demands that FAA develop a strategic vision that includes a workable, long-term plan to meet staffing needs. Regarding our concern about FAA’s preparedness for the future, the FAA officials remarked that FAA’s ability to meet its past goals is an indication of its ability to meet future needs, and that there is nothing to indicate that its successful performance will not continue in the future. We recognize that FAA has been able to meet its recent staffing goals. However, the recent workforce climate for FAA could be significantly different from that which it will face over the next decade. Chapter two of the report highlights the workforce challenges, particularly the sizable anticipated increases in controller attrition, that are likely over the next decade, and this chapter identifies challenges in FAA’s planning that will make it difficult for FAA to maintain its past performance. In particular, the report points out the potential skills gap that FAA could face in the future because its current hiring process does not ensure that fully qualified controllers are available to replace experienced controllers when they leave. The officials also commented that FAA has long planned for an operational evaluation of the new screening exam, and that research associated with this evaluation has been underway for some time. The officials indicated that they are considering two options for evaluating the effectiveness of the exam. The officials commented, however, that limited work has been done on the evaluation process since 1998, and that they must determine which option to pursue, develop a detailed implementation plan, and identify funding for the evaluation. The officials further noted that continued funding for the ongoing research could not be assured. In response to this comment, we revised the text of the report to recognize FAA’s efforts and plans regarding evaluation of the new screening exam. As such, we are encouraged that FAA plans to conduct an operational evaluation of the exam, once it has been implemented. However, we remain concerned that FAA has not decided how it will conduct the evaluation or how it will fund it and has already highlighted potential funding issues that could serve as a constraint to performing the planned evaluation. Further, we believe that an evaluation of the revised exam is an integral part of a comprehensive workforce plan and have modified the recommendation to emphasize this belief. Finally, the FAA officials provided technical comments that we incorporated, as appropriate. For example, we added information in this chapter to highlight the constraints that FAA’s labor contract and budget impose on the timing of hiring controllers.
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Thousands of the Federal Aviation Administration (FAA) controllers will soon be eligible to retire because of extensive hiring in the 1980's to replace striking air traffic controllers. Although the exact number and timing of the controllers' departures has not been determined, attrition scenarios developed by both FAA and GAO indicate that the total attrition will grow substantially in both the short and long term. As a result, FAA will likely need to hire thousands of air traffic controllers in the next decade to met increasing traffic demands and to address the anticipated attrition of experienced controllers, predominately because of retirement. FAA has yet to developed a comprehensive human capital workforce strategy to address its impending controller needs. Rather, FAA's strategy for replacing controllers is generally to hire new controllers only when current, experienced controllers leave. This does not take into account the potential increases in future hiring and the time necessary to train replacements. In addition, there is uncertainty about the ability of FAA's new aptitude test to identify the best controller candidates. Further, FAA has not addressed the resources that may be needed at its training academy. Finally, exemptions to the age-56 separation rules raise safety and equity issues.
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DOE’s Hanford site in southeastern Washington State was established in 1943 to produce nuclear materials for the nation’s defense. Although DOE stopped producing nuclear material at Hanford in 1989, millions of gallons of high-level radioactive waste from production still remain in aging, underground waste tanks, most of which are beyond their design life and many of which have reportedly leaked waste into the soil. Since production ended, DOE has attempted and abandoned several different approaches to treat and dispose of Hanford’s tank wastes. DOE’s current approach, the WTP project, is intended to separate the waste into high- level and low-activity fractions, and immobilize all of the high-level fraction and about half of the low-activity fraction of Hanford’s approximately 56 million gallons of radioactive waste for permanent disposal. To achieve this goal, DOE contracted with Bechtel in 2000 to construct a complex of 3 waste processing facilities, an analytical laboratory, and over 20 smaller, supporting facilities to treat and package the waste. The original contract was for $4.3 billion, with a completion date of 2011. However, since then numerous problems with the design and construction of the facilities have resulted in several cost and schedule overruns. DOE currently estimates that the WTP project will cost $12.2 billion, with a completion date of late 2019. (See fig. 1 for an aerial view of WTP as of March 2007.) DOE relies almost entirely on contractors to carry out its production, research, and cleanup missions. DOE’s history of inadequate management and oversight of contractors and of failure to hold its contractors accountable led us in 1990 to designate DOE’s contract management, including both contract administration and project management, as a high- risk area vulnerable to fraud, waste, abuse, and mismanagement. Similarly, both DOE and DOE’s Office of Inspector General have reported contract and project management as significant DOE management challenges since the 1990s. Over the years, we have also reported on project management weaknesses at WTP. Because of both contractor and DOE management problems with the project, DOE directed Bechtel to slow down or stop construction activities on two of the major facilities—the pretreatment facility and the high-level waste facility. The construction slowdown caused Bechtel to lay off several hundred construction workers in 2005, and caused Bechtel’s total annual WTP expenditures to drop from $751 million in fiscal year 2005 to $498 million in fiscal year 2006. However, Bechtel is preparing to restart construction on the two facilities and hire several hundred more workers in 2007 and 2008. While the majority of Bechtel’s WTP employees are located at or near the WTP construction site in Richland, Washington, some are also located off-site, primarily at Bechtel corporate offices in California and Maryland. DOE officials stated that because of the difficulty of hiring engineers willing to relocate to Richland, Bechtel plans to hire many more off-site employees in the future and is in the process of establishing a satellite office in Oakland, California, and expanding a satellite office in Frederick, Maryland, exclusively for the WTP project. While our previous reports on WTP primarily discussed DOE’s project management practices, this report addresses aspects of its contract administration practices. Contract administration involves those activities performed by government officials, such as the program office staff, contracting officer and representatives, property administrator, and financial staff, after a contract has been awarded to help ensure that the contractor complies with the terms of the contract and that the government gets what it paid for at an appropriate cost. DOE and the contractor must also comply with applicable provisions of the FAR, which is the primary regulation that federal agencies must follow when acquiring supplies and services with appropriated funds. The Department of Energy Acquisition Regulation establishes uniform acquisition policies that implement and supplement the FAR and is applicable to DOE acquisitions. The contract also specifies the DOE orders and directives that are applicable to the project. These orders and directives may impose requirements on DOE, the contractor, or both. Under the WTP contract, Bechtel must submit an invoice to DOE twice a month for reimbursement of all allowable costs incurred to complete the contract. Excluding incentive fees, each semimonthly invoice averaged more than $30 million in costs during fiscal year 2005, and more than $20 million during fiscal year 2006. DOE’s WTP contracting officer was responsible for approving each invoice within a few days so that DOE could pay the contractor within 7 days of receiving the invoice as required under the contract. However, if DOE discovers an overpayment or underpayment after approval, it can make a subsequent adjustment at any time prior to contract closeout. Under the terms of the contract, the FAR, and the cost accounting standards, reimbursable costs include supplies and services purchased directly for the contract, payments to subcontractors, direct labor, direct travel, other direct costs, and properly allocable and allowable indirect costs. The FAR and the cost accounting standards provide the cost principles and procedures for determining the allowability, allocability, and reasonableness of such costs. Bechtel calculates the indirect costs in each invoice based on the various indirect cost billing rates that Bechtel and the government’s corporate administrative contracting officer negotiate and agree to each year. Once agreed upon, the same set of rates applies to all of Bechtel’s government contracts. The corporate administrative contracting officer assigned to oversee Bechtel is an official of DCMA, a component of the Department of Defense. DCAA and, to a lesser extent, DCMA, perform various reviews and audits of Bechtel’s corporate-wide billing, purchasing, and accounting systems as well as various reviews of direct and indirect costs. The WTP contract provides that title to property purchased by the contractor for which the contractor is reimbursed by the government passes to the government, and that the contractor is responsible and accountable for all such property. It further requires the contractor to establish and maintain a program for the use, maintenance, repair, protection, and preservation of government property in accordance with sound business practice and with FAR 45.5. The FAR provides additional requirements for the contractor’s property control program, such as requirements for the contractor to investigate and report to the DOE property administrator all cases of loss, damage, or destruction of government property and to require and ensure that subcontractors provided government property under the prime contract comply with the FAR requirements. The FAR requires DOE to review and approve the contractor’s property control system and to perform reviews to ensure compliance with the government property clauses of the contract. In addition, DOE Order 580.1, Department of Energy Personal Property Management Program, sets forth the standards, practices, and performance expectations for the management of personal property owned by DOE, including requirements for DOE property administrators to develop and apply an oversight program, resolve property administration issues, and make recommendations concerning the acceptability of contractor personal property management systems. Internal control is the first line of defense in safeguarding assets and preventing and detecting fraud and errors. Internal control is not one event or activity but a series of actions and activities that occur throughout an entity’s operations on an ongoing basis. It comprises the plans, methods, and procedures used to effectively and efficiently meet missions, goals, and objectives. As required by 31 U.S.C. § 3512(c),(d), commonly referred to as the Federal Managers’ Financial Integrity Act of 1982, GAO issues standards for internal control in the federal government. These standards provide the overall framework for establishing and maintaining internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. The accompanying internal control standards tool provides additional guidance to assist agencies in maintaining or implementing effective internal control and in determining what, where, and how improvements can be implemented. The standards include establishment of a positive control environment that provides discipline and structure as well as a climate that influences the quality of internal control. As we reported in our Executive Guide, Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations (improper payments guide), a lack of or breakdown in internal control may result in improper payments. Improper payments are a widespread and significant problem in government and include inadvertent errors, such as duplicate payments and miscalculations; payments for unsupported or inadequately supported claims or invoices; payments for services not rendered; and payments resulting from outright fraud and abuse. DOE’s controls over payments to contractors were not effectively designed to adequately reduce the risk of improper payments, particularly given the inherent financial risks of the WTP project. Specifically, several factors combine to pose a significant inherent risk of improper payments to the government on this project, including the size and complexity of the project, escalating cost and schedule estimates, and the significant volume of transactions Bechtel bills to DOE each invoice. However, despite these risks, DOE performed little or no review of the contractor’s invoices in fiscal years 2005 and 2006 or of supporting documents for the almost $1.25 billion Bechtel billed to DOE on these invoices. Instead, DOE relied primarily on DCAA’s review and approval of Bechtel’s financial systems and on Bechtel’s review and approval of subcontractor charges. DOE’s heavy reliance on others, with little oversight of its own, exposed the hundreds of millions of dollars it spent annually on the project to an unnecessarily high risk of improper payments. The WTP is a long-term project that DOE currently estimates will cost over $12 billion and take almost 20 years to complete. The size and complexity of the project and the escalating cost and schedule estimates pose a significant inherent risk to the government of improper payments that warrants a commensurate level of internal controls and oversight to help mitigate such risk. Table 1 illustrates the major categories of expenditures billed by Bechtel and reimbursed by DOE for the project in fiscal years 2005 and 2006. As discussed in GAO’s improper payments guide, the risk of improper payments increases in programs with a significant volume of transactions or emphasis on expediting payments. Bechtel bills DOE for thousands of transactions totaling tens of millions of dollars on every semimonthly invoice. In addition, the WTP contract specifies that DOE pay the contractor within 7 days of receipt of a proper invoice rather than the 30 days normally allowed under the Prompt Payment Act before it becomes liable for a late payment interest penalty. This large volume of transactions combined with the expedited payment terms increases the risk of improper payments. In addition, as a cost-plus-incentive-fee contract, the WTP contract type has its own inherent risks. Specifically, cost-reimbursement contracts (1) place maximum risk with the government and minimum risk with the contractor and (2) provide the contractor with little financial incentive to control costs. In some cases, the government may incorporate incentives within the fee structure to encourage the contractor to control costs, which DOE did in Bechtel’s contract by providing the potential for Bechtel to earn incentive fees based on the relationship of total allowable costs to certain cost targets. In this case, however, the current contract incentives are no longer meaningful because the current cost and schedule goals are no longer achievable due to the cost overruns and schedule delays that have already occurred. The FAR specifies that a cost-reimbursement contract may be used only when appropriate government surveillance during contract performance will provide reasonable assurance that efficient methods and effective cost controls are used. Further, GAO’s Standards for Internal Control in the Federal Government states that internal control should provide for an assessment of the risks the agency faces from both external and internal sources. It also states that once risks have been identified, they should be analyzed for their possible effect, including estimating the risk’s significance, assessing the likelihood of its occurrence, and deciding how to manage the risk and what actions should be taken. Despite these requirements, DOE did not perform or document any type of formal risk assessment as a basis for determining the level of surveillance and internal controls it would use to manage the substantial risks associated with this project. Consequently, the low level of contractor oversight carried out by DOE was not commensurate with the high level of risk, thereby increasing the vulnerability of the contract payments to waste, fraud, and abuse. Despite the project’s risks, in fiscal years 2005 and 2006 DOE performed little review of contractor invoices or supporting documents for the millions of dollars in charges that Bechtel billed to DOE twice a month. GAO’s Standards for Internal Control in the Federal Government states that internal control activities—such as approvals, authorizations, verifications, reconciliations, and reviews—should help ensure that actions are taken to address risks. It further states that control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. In fiscal years 2005 and 2006, Bechtel invoiced DOE twice a month for WTP expenses, averaging $20 million to $30 million and thousands of transactions per invoice. According to DOE officials, because of the size and volume of transactions in each invoice, the contractor did not provide supporting documents for the individual charges with each invoice but instead agreed to make them available to DOE upon request. DOE officials stated that prior to fiscal year 2005, a DOE accountant would judgmentally select from each invoice a few of the individual charges listed and request the contractor to provide the supporting documents for them. However, after a reorganization in fiscal year 2005 placed the contracting officer and the accounting staff that performed the invoice reviews in separate branches, DOE discontinued the reviews and instead conducted only an annual review of a few dozen transactions selected from two or three invoices. The contracting officer who was responsible for approving the invoices for payment said that DOE reduced the frequency of its invoice reviews in fiscal years 2005 and 2006 based on the results of the prior reviews. Consequently, he stated that his review of the invoice was limited primarily to ensuring that the contractor used the correct overhead and indirect cost billing rates; did not make any large, obvious mistakes; and properly treated any specific, unusual transactions he was expecting based on the project’s progress. However, we found the lack of detail on the invoices for direct costs other than labor hindered DOE’s ability to identify potentially improper charges, obvious mistakes, or unusual transactions based on the invoice alone. For example, a standard invoice review procedure would include looking for items with descriptions of potentially unallowable charges. However, this type of review was impossible to perform on WTP billings because neither the contractor’s invoices nor the billing system that generated them provided adequate descriptions of the charges. The FAR and the WTP contract require a proper contractor’s invoice to include the description, quantity, unit price, and extended price of supplies delivered or services performed. However, the contractor’s invoice does not provide, and DOE has not required, purchase descriptions. Instead, Bechtel’s invoices list most transactions under broad cost categories such as “construction material & supplies” or “subcontracts, consultants, & outside services” with vendor or subcontractor names, dates, and amounts. Thus, the lack of transaction descriptions would make it difficult for the contracting officer to identify obvious mistakes or unusual transactions, as well as potentially improper charges. Fig. 2 illustrates the level of detail provided, taken from an actual page of an invoice billed to DOE. DOE’s WTP project directors, who were responsible for overseeing the design and construction of designated WTP facilities and thus had more knowledge of daily work activities, received an abbreviated version of the invoice twice a month for review. However, we found that the abbreviated invoice provided only summary totals for labor, other direct costs, and indirect costs and did not provide even the limited transaction detail that was included in the full invoice. Thus, the project directors’ reviews were limited primarily to assessing whether the total costs billed for their respective projects appeared reasonable given their projects’ annual budgets and progress. Although these project directors had project knowledge, the lack of invoice detail prevented them from performing any meaningful review of specific costs. For example, one report the project directors received for project management purposes was a biweekly report showing the construction materials Bechtel used during that period. However, the abbreviated invoice did not show the type and amount of materials purchased or used, or even a summary total of construction materials billed. Thus, the information on the two documents could not be compared and neither could be meaningfully used to confirm or question individual costs being billed to DOE. According to DOE officials, there was no requirement specifying how frequently invoices should be reviewed or how such reviews should be performed. DOE had previously issued a local directive, dated September 23, 2002, specific to the WTP project that provided DOE staff with instructions for reviewing Bechtel’s semimonthly invoices. However, DOE officials stated the directive is inactive because it supplemented the WTP contract management plan that was undergoing revision, even though the plan had not been updated since July 11, 2002. According to DOE’s acquisition guide, voucher (invoice) processing and review is an important aspect of contract management, and thus the guide recommends that the contract management plan discuss the process for reviewing and approving invoices and discuss the roles and responsibilities of individuals who are directly involved in the process. The lack of a current contract management plan and corresponding requirements for invoice review—specifying an appropriate level, extent, and responsibilities—further impedes the effective administration of the WTP contract. The manager of the DOE staff that previously performed the invoice reviews stated that he did not believe that the FAR required DOE to review the invoiced charges because DCAA had already audited and considered Bechtel’s accounting system to be adequate. Specifically, he stated that FAR 32.503-4 allowed DOE to rely on the internal controls of Bechtel’s accounting system because DCAA had certified Bechtel’s system; thus the invoice reviews DOE performed in the past were beyond what the FAR required. However, FAR 32.500 explicitly states that that section of the FAR does not apply to payments under cost-reimbursement contracts and, therefore, FAR 32.503-4 does not apply to the WTP contract. Instead, the FAR recognizes that cost-reimbursement contracts carry a greater degree of risk to the government, and specifies that cost-reimbursement contracts should have appropriate government surveillance during performance to provide reasonable assurance that efficient methods and effective cost controls are used. GAO’s Standards for Internal Control in the Federal Government states that internal control should be designed to ensure that ongoing monitoring occurs in the course of normal operations, is performed continually, and is ingrained in the agency’s operations. While the standards acknowledge that separate evaluations can also be useful by focusing directly on the controls’ effectiveness at a specific time, both ongoing monitoring activities and separate evaluations of the internal control system should be considered in assessing the continued effectiveness of internal control. Consequently, while external reviews such as DCAA’s can supplement an overall system of internal control, they are not a substitute for them. Although DCAA conducts several types of audits of Bechtel, it generally conducts its reviews at the corporate-wide level and not at the level specific to a particular contract. Bechtel maintains one overall accounting system that includes various feeder and subsystems—such as the timekeeping and billing systems—for the entire corporation. DCAA audits these systems on a cyclical basis, such that each system is reviewed only once every 3 to 4 years, and these systems audits are not intended to determine the allowability of specific costs. Although DCAA performs annual incurred cost audits that do examine the allowability of the contractor’s direct and indirect costs, there is a significant time lag between when a calendar year closes and when the audit takes place. For example, as of the end of fiscal year 2006 the most recent audit DCAA completed of Bechtel’s incurred costs covered calendar year 2003. This delay was caused in part by the typical 8 months that it may take for the contractor to submit its final indirect cost rate proposal for the year reviewed and in part by a backlog of incurred cost audits at DCAA. In addition, DCAA’s incurred cost audits of Bechtel express an opinion on the allowability of both direct and indirect costs for all of Bechtel’s government contracts and subcontracts. Although the WTP project accounts for a substantial portion of Bechtel’s total federal contract dollars, the 2003 incurred cost audit report listed over 50 applicable Bechtel contracts. Consequently, WTP was just one of many contracts included in the audit’s scope of review. In addition, DOE relied primarily on Bechtel to review and validate subcontractor charges without having an adequate process in place to assess whether Bechtel was properly carrying out this responsibility. While we recognize that under the FAR the government does not have privity of contract, that is, a direct contracting relationship, with the prime contractor’s subcontractors, the government should have a process in place to ensure that the prime contractor is providing adequate oversight and effective cost control of its subcontractors’ expenditures. This need is even more pronounced when both the prime contract and the subcontract are cost-reimbursable contracts. In fiscal years 2005 and 2006, Bechtel had over 150 subcontracts open, of which 7 were cost-reimbursable subcontracts with a total contract value of $495 million. DOE’s internal controls for ensuring the propriety of subcontractor costs were limited primarily to including selected subcontractor purchases during its periodic reviews of Bechtel’s invoices. However, as noted previously, during the period of our review DOE performed little review of the contractor’s invoices. DOE officials stated they also rely on DCMA’s contractor purchasing system review of Bechtel, which includes reviewing the contractor’s controls for subcontracting. However, similar to the DCAA system reviews described above, DCMA’s contractor purchasing system review of Bechtel is a corporate-wide review performed only about once every 3 years, and the review is not intended to determine the allowability of specific costs. Because a substantial portion of Bechtel’s WTP expenditures goes to subcontractors, for which DOE ultimately pays, DOE should have a process in place to provide reasonable assurance that it can rely upon Bechtel’s controls to ensure subcontractors’ expenditures are allowable and necessary. The use of cost-reimbursement contracts places special responsibilities on the contracting agency to monitor and control costs by using good contract management and administration practices, including proper internal controls. By not adequately monitoring charges, DOE may not be identifying errors or the weaknesses that allowed them to occur and thus is providing no deterrent to future errors or improprieties. Although DOE officials stated that they were comfortable with the current level of review because they had not found a significant number of errors in the past, as noted in the Strategies to Manage Improper Payments guide, most improper payments associated with federal programs go unidentified typically because of factors such as insufficient oversight or monitoring. DOE recently took some steps to begin strengthening its oversight of contractor payments. Based on weaknesses identified in its limited fiscal year 2006 annual review of transactions selected from two invoices, DOE began performing monthly invoice reviews in fiscal year 2007. While this is a step in the right direction, it is no substitute for a comprehensive approach that includes an appropriate assessment of risk that could then be used as a basis to design a system of internal control that would be effective in reducing the risk of improper payments. In addition, without sufficient detail in the invoices from which the transactions are selected, such reviews are minimally effective in identifying potential improper payments. DOE did not perform adequate oversight to reasonably ensure that Bechtel had established proper accountability for assets purchased with WTP project funds. The FAR and the contract require the contractor to establish a property management program to safeguard and account for such assets. The FAR also requires DOE to review the contractor’s property program to ensure compliance with the property clauses of the contract. However, we found that DOE relied primarily on the contractor to manage WTP property without adequate oversight to help ensure that the contractor complied with these requirements. As a result, until recently DOE management was largely unaware of numerous internal control weaknesses in the contractor’s property management system, which exposed WTP assets to loss or misuse. While new property managers for DOE and Bechtel have begun addressing the internal control weaknesses we identified, both DOE and the contractor will need continued vigilance in their oversight and management of WTP property to help ensure that it is adequately safeguarded and tracked. DOE reimbursed Bechtel more than $100 million and $200 million in fiscal years 2006 and 2005, respectively, for property purchased for the direct construction of the WTP facilities or to support the construction activities. Such property varies by type and value and includes (1) construction materials, which may be consumed during construction and incorporated into an end product (e.g., cement and pipes); (2) plant equipment, which is personal property of a capital nature and used for administrative or general plant purposes (e.g., cranes and vehicles); (3) sensitive items, which are personal property susceptible to theft and misappropriation (e.g., computers and audiovisual equipment); and (4) tools, which include both inexpensive handheld tools as well as power tools costing thousands of dollars. Despite the hundreds of millions of dollars in WTP funds expended to acquire property over the years, DOE performed little oversight of Bechtel’s property management program, relying primarily on the contractor to meet property requirements and self-report its compliance. Although the contractor was responsible for the day-to-day management of the property, the FAR required DOE to (1) review and approve the contractor’s property management system and (2) ensure compliance with the government property clauses of the contract. In addition, DOE’s own policies required DOE to maintain records of approvals and reviews of contractors’ property management systems. Nonetheless, besides issuing a letter dated November 21, 2002, approving Bechtel’s property control system, DOE did not document its review of the system and could not provide any supporting documentation demonstrating what it reviewed as the basis for approving the system. The DOE official responsible for the approval told us that he reviewed the contractor’s policies and procedures and spot-checked implementation of procedures on site but did not formally document his assessment or corrective actions he required of the contractor. Consequently, there was no documentary evidence available from which we or DOE could evaluate the adequacy of the original assessment and any corrective actions. Moreover, DOE did not perform sufficient reviews after its 2002 approval of Bechtel’s property management system to help ensure that Bechtel followed property procedures and complied with FAR and contract requirements. GAO’s Standards for Internal Control in the Federal Government states that internal control should be designed to provide reasonable assurance regarding prevention of or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets. However, the DOE official responsible for the oversight of WTP assets from May 2005 to May 2006 stated that he never went out to the WTP site to review procedures, observe property management operations, or conduct spot checks of property because he did not have the time to perform such reviews. While DOE received some reports from the contractor related to property—such as periodic reports of lost, damaged, or destroyed government property and Bechtel’s annual performance measures report that included limited summary-level data, such as percentage of items located during physical inventories—it accepted these reports without performing on-site observations or reviewing any supporting documentation to validate the information. In addition, DOE relied solely on Bechtel to ensure that subcontractors maintained adequate accountability for government property they possessed without having a process in place to assess whether Bechtel was properly carrying out this responsibility. DOE officials acknowledged that DOE oversight of WTP property management has been inadequate and attributed this control weakness to a staffing shortage. According to DOE’s personal property director at DOE headquarters and the WTP contracting officer, a dedicated DOE property administrator should have been assigned to the WTP project, but DOE had difficulty filling the position. As a result, DOE did not assign a property administrator dedicated to the WTP project until June 2006, over 5 years after it awarded the contract. In the meantime, DOE assigned to the DOE Richland Office’s property management officer the oversight responsibility for all government property at Hanford—including WTP property—held by DOE and several contractors. Although DOE’s written responsibilities for such property officers identify them as the leader of an appraisal team responsible for ensuring that DOE contractors established and maintained effective property management programs, a former property officer stated that he was never assigned staff to assist him with his oversight responsibilities. The lack of dedicated DOE staff to oversee management of WTP property was further exacerbated by the high turnover rate of property officers assigned to Hanford. DOE officials stated that there have been four property officers at Hanford within the past 5-½ years, and that they were assigned other collateral duties in addition to their property oversight responsibilities. Ongoing monitoring of the contractor’s program to safeguard and account for WTP assets located both on- and off-site is critical for preventing and detecting the loss and misuse of such assets. Had DOE implemented effective oversight controls, it may have identified the numerous weaknesses in the contractor’s property management program described below and could have directed the contractor to take corrective actions sooner. We identified several weaknesses with Bechtel’s property management program that increased the risk of theft, loss, or misuse of government assets. The WTP contract provides that title to property purchased by the contractor for which the contractor is reimbursed by the government passes to the government, and that the contractor is responsible and accountable for all such property in accordance with sound business practice and with applicable provisions of FAR 45.5. As part of these responsibilities, the FAR requires the contractor to establish and maintain a program to control, protect, preserve, and maintain all government property. As of September 30, 2006, Bechtel reported that it had about $65 million in its inventory of capital equipment and sensitive property and $16 million in its tools inventory related to the WTP project. Bechtel had about $100 million in its construction materials inventory as of May 2007. (See fig. 3 for a sample of equipment and tools used at WTP.) Our review of Bechtel’s property management program disclosed numerous internal control weaknesses that exposed government assets to an increased risk of theft, loss, or misuse and decreased the likelihood of detecting such incidents in a timely manner: Inadequate segregation of duties. GAO’s Standards for Internal Control in the Federal Government state that key duties and responsibilities should be divided among different people to reduce the risk of error or fraud. The FAR and Bechtel’s own policies require that personnel who perform the physical inventory not be the same individuals who maintain the property records. However, during our review, one Bechtel employee was primarily responsible for reviewing the procurement system to identify accountable property purchased, bar coding property when received, entering new property items into Bechtel’s government property system, performing annual physical inventories, and updating the government property system for the results of the inventory. In addition, no one reviewed the data she entered into the property system. Bechtel management attributed this control weakness to reduced staffing caused by the construction slowdown. Inaccurate property system data. Bechtel used its government property system to track its inventory of capital equipment and sensitive items. Thus, Bechtel’s property procedures required it to maintain the government property system in a manner sufficient to keep database records current and accurate. For example, the procedures state that property management staff are responsible for updating the property records with current locations and custodians. However, during our physical observations of selected property items, we identified items recorded in Bechtel’s government property system with the wrong custodian or location and items recorded in the system that were actually missing. We also identified property that Bechtel had purchased and received but not recorded in the government property system, such as personal digital assistants, copiers, and computer equipment. Bechtel’s property management staff explained that the failure to record the items was caused in part by property staff errors in determining whether to record certain items and to receiving staff’s failure to promptly notify property staff of newly acquired property. Bechtel property staff recorded the assets in their property system after we brought them to their attention. Inadequate inventory procedures. The FAR requires the contractor to conduct periodic physical inventories of all government property in its possession or control. It also requires the contractor, with the approval of the government property administrator, to establish the type, frequency, and procedures for such inventories. However, we found that Bechtel’s procedures did not specify the frequency or type of inventory required for construction materials, and DOE approved Bechtel’s inventory procedures for materials without an established time frame. Consequently, Bechtel’s property manager stated that while it had performed some spot inventories of selected materials at various times, Bechtel had not performed a complete inventory of materials in fiscal years 2005 or 2006 because of staffing shortages. Bechtel property management staff also stated that they inventory all assets recorded in Bechtel’s government property system annually, yet we identified about 900 items recorded as of September 30, 2006, that the system showed had not been inventoried within the prior year. Bechtel staff claimed that the information in the property system was wrong and that the items had been inventoried, but could not provide adequate documentation to support their claim. We selected 32 of these items for observation and could not locate 4 of them. Records in the government property system as of September 30, 2006, for these 4 missing items—3 computers and 1 projector that are considered sensitive assets—showed that they had not been inventoried in over 2 years. Inadequate policies and procedures for the accountability of tools. Bechtel acquires a large number of tools at substantial cost for the WTP construction project, billing the government $2.3 million for tools in fiscal year 2005 alone. Tools are easily pilferable, and while many tools may be considered nominal in cost, some cost thousands of dollars and thus warrant commensurate controls to safeguard them effectively. However, we identified several weaknesses with Bechtel’s management of tools. For example, because Bechtel lacked adequate inventory procedures for tools, workers could check out tools from the main tool crib indefinitely without the tools ever being inventoried to ensure that they still existed and were being utilized. Additionally, employee exit procedures were not consistently followed to ensure that terminated employees returned their tools before leaving. We selected for observation five tools that property records showed were assigned to former employees, and found that all five were missing. Furthermore, our review of the tools database and human resource records showed that some workers checked out tools the day before or the day of their termination dates. Bechtel also lacked adequate guidelines for the disposal of tools damaged through normal wear and tear. Specifically, until recently there was no requirement to obtain Bechtel or DOE property management approval to dispose of worn tools. As a result, warehouse staff independently designated over $90,000 of tools as “worn” and disposed of them without any management concurrence required. Lack of compliance with property checkout procedures. Bechtel’s property procedures required employees to obtain a property pass for items removed from project-controlled areas, and to renew the pass annually if the asset was still needed off-site by presenting the item to the property staff for inspection. We reviewed Bechtel’s government property system and found that about 100 of the 300 items checked out—primarily computers—had expired property passes, some of which had expired as far back as March 2005. We selected 10 assets with expired property passes to observe, and could only locate 9 of them. The missing item, whose property pass had expired in March 2006, was also one of the computers discussed previously that had not been recently inventoried. Bechtel property staff stated they query the government property system monthly to identify and alert custodians of property passes that are about to expire, but could not explain how they missed the expired passes we identified. Lost, damaged, or destroyed property items not promptly reported. Although the FAR requires the contractor to investigate and report to DOE all cases of loss, damage, or destruction of government property, Bechtel did not always submit such reports to DOE timely. For example, Bechtel did not report to DOE the loss of 3 laptop computers and 2 projectors until 2 years after it first identified them as missing. In April 2007, Bechtel reported to DOE another 15 computers, a printer, and a projector as missing. Bechtel’s government property system indicated and Bechtel’s property staff confirmed that Bechtel first identified at least 2 of these items as missing as far back as 2002. Part of the cause for these delays was that until August 2006 neither Bechtel nor DOE had policies requiring specific time frames for investigating and reporting such incidents. Bechtel officials acknowledged that they should have reported these missing assets more promptly but stated that the delays were caused by Bechtel staff not always promptly reporting lost or damaged government property to Bechtel property staff, and by property staff delaying submitting the reports in hopes that the missing assets would eventually be found. These delays in reporting missing assets, particularly computers that may contain sensitive or proprietary information, decreased the opportunity for DOE to require a timely and thorough investigation into the losses and to require Bechtel to promptly implement controls to help avert future losses of a similar nature. Inadequate oversight of subcontractors with WTP assets. Bechtel works with numerous subcontractors that supply materials and services to help construct WTP facilities, some of which possess WTP property. The FAR requires the prime contractor to ensure that its subcontractors adequately care for and maintain government property and ensure that it is used only for authorized purposes. This is particularly important since the subcontractors generally maintain the property records for government property they purchase and use, rather than Bechtel. Consequently, Bechtel’s property procedures require its property manager to review and approve its subcontractors’ government property programs. However, Bechtel did not adequately perform such reviews or follow up on subcontractors’ property management issues. For example: Although Bechtel policy required it to audit its subcontractors’ government property programs, one subcontractor refused to be audited by Bechtel because the subcontractor claimed that it already had a property program approved and audited by the government. Even though that program had no relevance to the WTP contract, Bechtel never audited the subcontractor. In addition, this subcontractor refused to provide Bechtel a copy of its property policies and procedures, citing proprietary concerns. Thus, Bechtel had no basis for and never assessed the adequacy of this subcontractor’s property management program. The subcontractors’ property management policies were not always complete or consistent with Bechtel’s property policies. For example, one subcontractor’s policy lacked formal procedures for reporting lost, damaged, or destroyed government property and thus did not have any requirements for reporting such items promptly. Another subcontractor’s policy for tracking sensitive items was inconsistent with Bechtel’s own policy. Specifically, the subcontractor’s dollar threshold for tracking sensitive items, such as cameras and video equipment, was higher than Bechtel’s threshold. As a result, WTP assets susceptible to theft and misuse were not being consistently tracked in the property systems for inventory control purposes. Bechtel did not timely follow up on subcontractor property management issues it identified through its audit and oversight to ensure that the subcontractors properly implemented corrective actions. For example, during an April 2005 subcontractor audit, Bechtel identified several government assets that were not marked with indication of government ownership as required by the FAR. In its audit report, Bechtel indicated that it would perform a follow- up review within 30 days to ensure that corrective actions were implemented; however, it could not provide us any documentation that such follow-up was performed. During our visit to that subcontractor in February 2007, we saw several government assets that were not marked as government property. During the same April 2005 audit, Bechtel discovered a missing computer and instructed the subcontractor to submit a lost property report, which the subcontractor submitted in June 2005. Bechtel rejected the report and requested a revision, but did not follow up with the subcontractor to ensure that a revised report was submitted. Consequently, Bechtel did not receive a revised report until February 2007, which it subsequently submitted to DOE. DOE has recently taken steps to increase its oversight of Bechtel’s WTP property management program. At the time we began our audit, DOE hired a property administrator responsible solely for overseeing the WTP property management program. This property administrator has taken on a more active oversight role through his procedural and compliance reviews. For example, since his arrival in mid-2006 he has issued specific requirements to the contractor for reporting lost, damaged, or destroyed property more timely; directed the contractor to perform a materials inventory at least annually; issued guidelines for performing inventories of tools checked out to workers; and performed several on-site inspections identifying instances of noncompliance and corrective actions for Bechtel to address. In addition, he has directed the contractor to prepare and submit for his approval a detailed inventory plan for construction materials specifying the inventory type, frequency, and detailed procedures. For its part, Bechtel has also initiated a number of corrective actions to improve its management of government property. Bechtel also hired a new property manager in mid-2006 who in turn hired several additional property staff to better address the segregation-of-duties issue and to help implement requirements. The new property manager has developed and issued new policies, such as a policy requiring Bechtel and DOE property management concurrence prior to disposing of worn tools. In addition, he implemented a new property database system and tasked his staff with correcting errors in the property system. He stated he also plans to review Bechtel’s receiving process and tools accountability. Because the policy and procedural changes primarily occurred after our review period, we have not assessed the effectiveness of the changes. If implemented properly, these should help improve the contractor’s management of government property and DOE’s oversight of the contractor’s program. However, additional issues remain which, if not addressed, will continue to expose government property to an increased risk of theft, loss, or misuse. DOE’s oversight of contractor billings and property management on the WTP project did not have the level of internal controls that would be expected of a project of this magnitude and complexity. DOE’s lack of appropriate oversight controls for contractor invoices significantly increased its vulnerability to improper payments. Further, DOE did not establish basic oversight controls to reasonably ensure that Bechtel and its subcontractors appropriately tracked and safeguarded the millions of dollars in property and equipment purchased for the project. Given that DOE has estimated that it will likely spend at least another $9 billion on the WTP project over the next decade or more, it is critically important that it establish appropriate oversight and controls commensurate with the risks involved in this costly, complex project. This is particularly important in the near term as the project ramps back up and the contractor begins to hire hundreds of additional workers in Hanford and at off-site locations. The recent corrective actions taken to date, if effectively implemented, are positive first steps to improving DOE’s oversight of contractor payments and property management. DOE management’s commitment and continued attention to these areas will be essential to establishing a lasting and more effective administration of the WTP contract. To improve DOE’s oversight of and accountability for WTP expenditures, we recommend the following 11 actions. To improve DOE’s review and approval process for contractor billings, we recommend that the Secretary of Energy direct the Assistant Secretary for Environmental Management or designee to: Perform an assessment of the risks associated with WTP contract payments, including subcontractor payments, which should include comprehensively identifying the risks, performing a risk analysis of their possible effects, and identifying the actions—both preventive and detective—to be taken to mitigate those risks. Based on the results of the risk assessment, establish appropriate policies and procedures for effective review and approval of the prime contractor’s invoices. Such policies and procedures should specify the steps to be performed for review and approval, the individuals responsible for carrying out these steps, the level of invoice detail needed to perform an appropriate review, and the appropriate documentation to be maintained of that review process. Establish a policy and procedures to periodically assess the prime contractor’s oversight of subcontractor payments to determine if there are any deficiencies and corrective actions needed and assess whether the controls can be sufficiently relied on to ensure that subcontractor payments are allowable, reasonable, and in compliance with all FAR and contract requirements. To strengthen DOE’s accountability for contractor-acquired government property, we recommend that the Secretary of Energy direct the Assistant Secretary for Environmental Management or designee to: Follow DOE’s existing requirements to periodically document and assess the contractor’s property management program for compliance with the FAR and DOE policy. Follow DOE’s existing requirements to document the adequacy of corrective actions planned and implemented by the contractor to address weaknesses identified in DOE’s assessments of the contractor’s property management program. Direct the contractor to implement control procedures to help ensure the timeliness and accuracy of information entered into the property systems. Review the adequacy of Bechtel’s proposed inventory plan for construction materials once submitted, and ensure that the approved plan is properly implemented. Direct the contractor to establish appropriate controls to ensure that employee exit procedures requiring terminated employees to return tools before they leave are followed. Direct the contractor to establish a formal policy and procedures for property staff to (1) periodically monitor the government property system for assets with property passes that are due to expire soon, (2) notify property custodians with such assets to renew their property passes or return the items if no longer needed, and (3) ensure that such assets are verified as required. Direct the contractor to establish control procedures to help ensure that Bechtel staff and subcontractors report lost or damaged government assets to property management in a timely manner so that they can be forwarded to DOE within recently established time frames. Establish procedures to periodically assess the prime contractor’s oversight of its subcontractors in possession of government property to ensure that the prime contractor (1) audits applicable subcontractors’ property management programs as required, (2) reviews applicable subcontractors’ property management policies and procedures for completeness and consistency, and (3) follows up on and documents resolution of corrective actions in a timely manner. We provided a draft of this report to DOE for its review and comment. In its written comments, DOE stated it had assessed the risk of improper payments at contract inception, but agreed with the recommendation to perform an updated risk assessment to ensure adequate oversight and accountability for WTP expenditures. It did not specifically comment on the remaining recommendations. DOE stated in the letter that it would engage with DCAA to update the assessment of the risks, revise the current policies and procedures related to contractor billings as necessary, and assess the adequacy of property management staff levels and capabilities to ensure that adequate coverage is provided for oversight of the WTP. However, while not disputing the specific facts contained in the report, the letter states that DOE believes (1) the controls in place during the period of review, fiscal years 2005 and 2006, met the requirements and intent of the applicable federal acquisition regulation, DOE orders, and contract terms; (2) the combination of the contractor’s billing systems, DCAA’s ongoing audits, and the recurring DOE review of selected invoices adequately prevent unallowable or improper costs, and (3) the property management weaknesses and corrective actions reflected in our reported findings and recommendations were self-identified by DOE and the contractor. DOE also provided technical comments that we subsequently discussed with DOE officials and incorporated as appropriate. We disagree with DOE’s contention that the controls in place during the period of review met the requirements and intent of the applicable FAR requirements, DOE orders, and WTP contract terms. For example, as noted in our report, the FAR and the WTP contract require that a proper contractor’s invoice include the description, quantity, and unit price of supplies delivered or services performed, but Bechtel’s invoice did not include such detail and DOE did not enforce the requirement. DOE’s policies required it to maintain records of its reviews of contractors’ property management systems, but DOE could not produce any documentation demonstrating what it reviewed as the basis for approving Bechtel’s property management system. The FAR requires that personnel who perform the physical inventory not be the same individuals who maintain the property records, but at the time of our review one property staff member was performing both of these duties. These and other examples in our report illustrate that DOE’s and the contractor’s controls did not always meet FAR, DOE, or WTP contract requirements. Further, as reflected in both the report title and objectives, the focus of our report was not limited to DOE’s compliance with regulations, but more broadly on the adequacy of its internal controls over contractor payments and project assets. The Standards for Internal Control in the Federal Government, with which DOE as a federal agency must comply, state that internal control is an integral part of managing an organization, and involves providing reasonable assurance that the agency not only complies with applicable laws and regulations, but also operates efficiently and effectively, including the use of the entity’s resources. Internal control is to serve as the first line of defense in safeguarding assets and preventing and detecting errors and fraud. Internal control helps organizations achieve desired results through effective stewardship of public resources. Our report discusses several areas in which DOE had not developed the policies needed to effect adequate internal control. For example, there was no requirement specifying how frequently contractor invoices should be reviewed or how such reviews should be performed. Similarly, until August 2006 neither Bechtel nor DOE had policies requiring specific time frames for reporting lost, damaged, or destroyed property items. Thus, while taking 2 years to report such property to DOE may not have violated any specific FAR, DOE, or contract requirements up to that point, such practices did not constitute acceptable internal control. Regarding the contractor billing process, DOE stated that it assessed the risk of improper payments at contract inception and believes the combination of the contractor’s billing systems (based upon DCAA’s assurances), DCAA’s ongoing audits, and the recurring DOE review of selected invoices adequately prevent unallowable or improper costs. We disagree. The WTP project has changed significantly since contract inception. Numerous DOE and contractor problems and project management weaknesses over the years have contributed to an almost threefold increase in the project’s estimated cost and an almost twofold increase in the completion schedule since the contract began in December 2000. Thus, a risk assessment performed at contract inception does not reflect current conditions and risks and thus does not provide a proper foundation for designing an adequate system of internal control. Further, while we agree that a DCAA audit of contract costs can provide a detective control to help determine whether contractor costs were proper, reliance on an after-the-fact audit is not an acceptable replacement for the type of real-time monitoring and oversight of contractor costs—preventive controls—that we found to be deficient. Also, as noted in our report, while the FAR allows contracting agencies to rely on DCAA’s certification of the contractor’s accounting system for certain types of payments, the FAR explicitly excludes payments under cost-reimbursement contracts from this provision, recognizing that cost-reimbursement contracts carry a greater degree of risk to the government and therefore must have appropriate surveillance during performance to provide reasonable assurance that efficient methods and effective cost controls are used. It is important that DOE establish a control environment that includes specific control activities to prevent questionable or improper payments to begin with or that detects them soon after they occur so that they can be resolved in a timely manner. Primary reliance on an audit of contractor costs by DCAA 3 years after DOE reimbursed the contractor for such costs is not adequate given the magnitude of the contract. With regard to DOE’s invoice reviews, we noted in our report that DOE began performing monthly invoice reviews in fiscal year 2007, which we believe is a step in the right direction. However, we continue to maintain that the effectiveness of such reviews is hindered by the lack of detail in the invoices from which the transactions are judgmentally selected. Given the many challenges and events that have occurred on this project since the contract began, a proper and current assessment of the risks that is then used as the foundation for designing an overall system of internal control is needed to effectively reduce the risk of improper payments. DOE has committed to updating its assessment of the risks and revising its policies and procedures as necessary, and we will continue to monitor its progress in addressing our recommendations in this area. With regard to the property management issues identified, we commend DOE and the contractor for taking a more aggressive approach in the last year toward improving the WTP property management program, which we recognized in our report. Throughout our fieldwork, we raised issues and concerns regarding property management weaknesses we observed, some of which we recognize were also being identified by DOE and the contractor concurrent with our review. For example, during our initial site visit in June 2006 we obtained some of the contractor’s reports of lost, damaged, and destroyed property and noted significant delays in Bechtel’s reporting of these assets. During the same week, DOE issued a memo to the contractor questioning these delays, and subsequently issued a new policy in August 2006 to improve the timeliness of such reporting. However, we disagree with DOE’s contention that all of the weaknesses and corrective actions reflected in our findings and recommendations were self-identified by DOE and the contractor. Our audit work identified many internal control weaknesses that were not identified before we raised them or did not result in corrective action until after we brought them to DOE’s or the contractor’s attention during the course of our audit. For example, it was our data mining queries of the property databases that identified the assets checked out to employees with expired property passes, property items purchased and received that had not been recorded in the government property system, and tools that were still assigned in the property records to former employees. Our physical observations of selected property items identified items recorded in Bechtel’s government property system with the wrong custodian or location and items recorded in the tools database that were missing. Our inquiries and walk-throughs of operations identified still other weaknesses. For example, after Bechtel told us on May 14, 2007, that a complete materials inventory had not been done for 2005 or 2006, DOE issued a memo to the contractor on May 17, 2007, expressing disappointment in Bechtel’s inability to provide us with materials inventory results, and directed the contractor to begin conducting annual materials inventories starting in 2007. We were encouraged by the fact that as we asked questions and raised concerns with both DOE and contractor staff throughout our audit, they typically took prompt action to address these issues. Continued focus on this area with prompt, corrective actions consistent with our recommendations will go a long way toward reducing the risk of theft, loss, or misuse of WTP assets. We are sending copies of this report to other interested congressional committees and to the Secretary of Energy. 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 on this report, please contact me at (206) 287-4809 or by email at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. For this review, we considered internal controls in place during fiscal years 2005 and 2006 at the Department of Energy (DOE) and at Bechtel National, Inc. (Bechtel) related to the Hanford Waste Treatment and Immobilization Plant (WTP) project. To perform our work, we reviewed the WTP contract; the Federal Acquisition Regulation (FAR); DOE’s Acquisition Regulation (DEAR) and other DOE directives, policies, procedures; and GAO’s Standards for Internal Control in the Federal Government to gain an understanding of the applicable requirements. We made site visits to Richland, Washington, to perform work at DOE’s Office of River Protection, Bechtel’s WTP project office, and the WTP work site. We also met with Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA) auditors and with the DCMA corporate administrative contracting officer and reviewed copies of relevant reports they had prepared based on their reviews of Bechtel to obtain an understanding of DCAA’s and DCMA’s reviews and oversight of Bechtel. We also coordinated with DOE Inspector General staff to determine whether they had performed audit work that may be relevant to our review, and met with Bechtel internal audit staff and obtained copies of their reports. Our work was not designed to determine or estimate the allowability of all contractor costs or the accountability of all property items. To assess the reliability of data we used for this report, we performed the following steps: Because Bechtel maintains the billing system that generates the hard copy invoices it provides to DOE, we requested data extracts from its billing system representing charges that Bechtel billed to DOE in fiscal years 2005 through 2006. These extracts contained the amounts billed to DOE for labor and other direct costs. To assess the reliability of the billing data extracts for purposes of our review, we (1) compared total WTP disbursements to Bechtel per DOE’s accounting records to the total amount of invoices Bechtel billed to DOE for the period, (2) compared the invoiced total to Bechtel’s schedule of amounts billed to DOE, (3) compared the amounts shown for labor and other direct costs on Bechtel’s schedule to the billing data extracts we received for the period of review, and (4) reviewed other documents to verify the amount of adjustments and other items billed. We also performed electronic testing of selected data elements, reviewed existing information about the data and the system that produced them, and interviewed Bechtel officials knowledgeable about the system. We determined that the billing data extracts were sufficiently reliable for the purposes of this report. Because the billing system did not contain detailed information—such as purchase descriptions—for other direct costs that would enable us to sufficiently perform data mining, we worked with Bechtel staff to identify an alternative system. Bechtel’s procurement system was the primary system that contained detailed purchase descriptions; however, it did not directly feed or otherwise interface with the billing system. In addition, Bechtel officials stated that the procurement system was not designed with commensurate controls to be a source system. We worked with Bechtel staff to attempt to identify a potential work-around to link the billing system charges to the corresponding purchases in the procurement system using data from the accounts payable system; however, results of our electronic testing showed that the linkages between the data were not sufficiently reliable to perform data mining. The billing data extracts contained detailed information on nonmanual labor costs, such as the amount of straight time and overtime paid per employee per pay period. However, because Bechtel pays its manual, or craft, labor costs directly to the unions in aggregate weekly totals, the billing data only reflect these aggregate payments. Thus, we requested a data extract of the craft labor payroll system. We assessed the reliability of the payroll data by comparing the payroll system totals to the related billing system totals for manual labor, reviewed existing information about the data and the system that produced them, and interviewed Bechtel officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. We assessed the reliability of extracts from Bechtel’s human resource system for nonmanual labor by performing electronic testing of required data elements, reviewing existing information about the data and the systems that produced them, and interviewing Bechtel officials knowledgeable about the systems. We determined that the data were sufficiently reliable for the purposes of this report. Based on our property walk-throughs, we determined that controls over property were weak and that the two property databases used to track these items were incomplete and thus unreliable. Therefore, we used the property system data to perform selected internal control tests to illustrate the effects of their weak property controls, as discussed further below. To determine whether DOE’s internal controls were adequately designed to prevent and detect improper payments, we used GAO’s Standards for Internal Control in the Federal Government as a basis to assess the internal control structure—control environment, risk assessment procedures, control activities, information and communications, and monitoring efforts of DOE over contractor payments. Further, we reviewed the contract requirements, the FAR, the DEAR, and other relevant DOE policies, procedures, and guidance. We interviewed program oversight and financial management personnel regarding policies and procedures that were in place over contractor payments, performed walk- throughs of key processes, and reviewed supporting documentation to gain an understanding of DOE’s controls over contractor payments. We interviewed Bechtel staff to gain an understanding of their billing process and controls. We performed data mining on billing system nonmanual labor data, manual labor payroll data extracts, and human resource data extracts to query for records with certain characteristics, such as payments made to employees after termination dates and employees with high numbers of hours paid during a pay period; followed up on query results with Bechtel staff; and obtained and reviewed supporting data to corroborate explanations. To determine whether DOE’s oversight controls reasonably ensured proper accountability over WTP property, we used our Standards for Internal Control in the Federal Government as a basis to assess the internal control structure—control environment, risk assessment procedures, control activities, information and communications, and monitoring efforts of DOE over contractor payments. Further, we reviewed the contract requirements, the FAR, the DEAR, and other relevant DOE policies, procedures, and guidance. We also reviewed contractor and selected subcontractor property management policies and procedures. We interviewed the DOE headquarters personal property management division director as well as former and current DOE officials responsible for the oversight of Bechtel’s management of WTP property to understand the level and extent of DOE oversight controls over the contractor’s property management system. Additionally, we interviewed Bechtel property management staff, requested and reviewed relevant documentation, and performed walk-throughs to gain an understanding of Bechtel’s internal controls and procedures over property management. We also performed the following tests. Data queries. We performed data mining queries on data extracts from Bechtel’s government property system and its Toolhound system to identify records with certain characteristics, such as property not recently inventoried or items with expired property passes. We followed up on selected results with Bechtel property staff and reviewed related documentation. We also selected a nongeneralizable sample of items from our query results with different attributes to physically observe as described further below. Physical observations. We selected assets using three different methods to perform physical observations. First, based on our query results, we selected a limited number of assets from Bechtel’s government property system and Toolhound database to observe at the WTP project site, selected WTP subcontractors in Richland, and Bechtel offices in San Francisco in order to test for existence of the assets and accuracy of recording. Second, to test for completeness of Bechtel’s and the subcontractors’ government property systems, we selected a limited number of assets we observed at WTP and subcontractor sites and determined whether they had been properly tagged as government property and recorded in the respective property systems. Third, we selected a limited number of transactions from Bechtel’s procurement, accounts payable, and purchase card databases that appeared to be potential property purchases; reviewed the supporting documents to determine whether they were in fact property purchases; traced the items to the government property system where possible to determine if they had been recorded; and physically observed some of the items. For all items observed, we reviewed supporting documentation, such as invoices, packing slips, and material receiving reports; verified the assets’ serial numbers, custodians, locations, and other key identifying information; and compared this information to the applicable property systems. Because we only selected a limited number of transactions from each method in order to test for different attributes, the results of our review cannot be used to make inferences about the population. Contractor compliance with reporting requirements. We reviewed reports on lost, damaged, and destroyed property that Bechtel provided to DOE to assess the timeliness of the reports. We also queried the property databases and reviewed subcontractor inventory records for items indicated as lost or missing, and compared them against copies of the lost property reports to determine whether Bechtel had reported them to DOE. We requested and reviewed copies of the contractor’s audits and reviews of applicable subcontractors’ property management programs. We provided DOE with a draft of this report for review and comment. DOE’s Assistant Secretary for Environmental Management provided written comments, which are reprinted in appendix II. We also had subsequent oral discussions with DOE officials to clarify the written comments. We also provided key DCAA and DCMA officials with draft excerpts of the report relating to their respective agencies, and incorporated as appropriate oral and written comments we received from them. Our work was performed from June 2006 through May 2007 in accordance with generally accepted government auditing standards. In addition to the individual named above, Doreen Eng, Assistant Director; Jessica Gray; R. Ryan Guthrie; Mary Ann Hardy; Delores Lee; Jenny Li; and Ting-Ting Wu made significant contributions to this report. Others who made important contributions included Richard Cambosos; Tim DiNapoli; and Wil Holloway.
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In December 2000, the Department of Energy (DOE) awarded Bechtel National, Inc. (Bechtel) a contract to design and construct the Waste Treatment Plant (WTP), one of the largest nuclear waste cleanup projects in the nation. Originally expected to cost $4.3 billion and be completed in 2011, DOE now estimates that WTP will cost over $12.2 billion and be completed in late 2019. Weaknesses in DOE's management and oversight of contractors led GAO to designate DOE contract management as a high-risk area since 1990. GAO was asked to determine whether (1) DOE's internal controls are designed to provide reasonable assurance against improper WTP payments and (2) DOE's controls reasonably ensure proper accountability for WTP assets. GAO reviewed fiscal year 2005 and 2006 internal controls by analyzing data and documents, interviewing DOE and contractor staff, and physically observing property items. DOE's internal controls over payments to contractors on its WTP project did not provide reasonable assurance against the risk of improper contractor payments, particularly given the project's substantial inherent risks. Several factors combined to pose a risk of improper payments on this project, including the size and complexity of this one-of-a-kind nuclear construction project, escalating cost and schedule estimates, and the thousands of charges Bechtel billed to DOE on each invoice. Despite the risks, in fiscal years 2005 and 2006 DOE performed little or no review of contractor invoices or supporting documents for the $40 million to $60 million in charges that Bechtel billed to DOE each month to help ensure the validity of these charges. Instead, DOE officials relied primarily on the Defense Contract Audit Agency's reviews of Bechtel's corporate-wide financial systems and on Bechtel's reviews of subcontractor charges for assurance that the charges were proper. DOE's heavy reliance on others, with little oversight of its own, exposed the hundreds of millions of dollars it spent annually on the project to an unnecessarily high risk of improper payments. DOE also did not adequately oversee the contractor to ensure accountability for assets purchased with WTP contract funds, relying primarily on the contractor to manage such government property without ensuring the adequacy of the contractor's controls. We found numerous internal control weaknesses with Bechtel's property management program, including poor segregation of duties, property system errors, and inadequate property procedures. For example, Bechtel did not timely prepare and submit required reports of lost or damaged property, taking up to 2 years in some instances to report missing assets, such as computers, to DOE. Bechtel also did not always review subcontractors' property management policies and procedures as required or follow up on subcontractor weaknesses it identified to help ensure that its subcontractors adequately managed and safeguarded WTP property in their possession. These property control weaknesses coupled with the lack of DOE oversight created an environment in which property could be lost or stolen without detection.
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The United States Citizenship and Immigration Services, within the Department of Homeland Security, delivers services to aliens and adjudicates their eligibility for various immigration benefits, including naturalization, adjustment of status to lawful permanent resident, employment authorization, and asylum. USCIS carries out its service function through a network of field offices consisting of a National Benefits Center, which serves as a central processing hub for certain benefit applications and utilizes secured depositories in Chicago, Illinois, and Los Angeles, California, to collect fees; 4 service centers, which generally adjudicate applications that do not require interviews with the applicants; 78 district and local offices; 31 international offices and 8 asylum offices, which generally adjudicate applications that require interviews; and 129 application support centers, which collect and process biometric information. Appendix II contains a detailed discussion of USCIS’s organizational structure. USCIS’s application-processing procedures vary by application type and by office. Figures 1 and 2 depict the agency’s process for adjudicating naturalization and adjustment of status applications—its two most common and complex application types. In general, the following tasks are involved in application processing: (1) collect and deposit application fees and issue receipts to applicants; (2) create or request existing alien files; (3) enter applicant data into an automated system; (4) take applicants’ fingerprints and send them to the Federal Bureau of Investigation (FBI) for a criminal history check, including a criminal history check based on the applicant’s name (if required by the type of application); (5) review application, and other supporting documents, such as FBI fingerprint check results, marriage certificates, or court dispositions of an arrest; (6) interview applicants (if required by the type of application); (7) administer naturalization tests (for those applying for naturalization); (8) approve or deny cases; (9) notify applicants of USCIS’s decisions; or (10) issue a Notice to Appear placing applicant in removal proceedings; and (11) update USCIS’s automated systems. Although USCIS processes about 50 types of immigration benefit applications, its backlog elimination efforts have focused on the 15 application types that make up about 94 percent of its workload. Table 1 lists these 15 application types and their purposes. In October 2000, the Immigration Services and Infrastructure Improvements Act mandated INS, the agency previously responsible for USCIS’s functions, to develop a plan to eliminate its backlog of benefit applications. The act defines backlog as the period of time in excess of 180 days (6 months) that an immigration benefit application has been pending before the agency. Moreover, in February 2001, in the President’s fiscal year 2002 budget, the Administration proposed a universal 6-month standard for completing adjudication of immigration applications and supported a 5-year, $500 million initiative to meet this standard. The President reiterated this goal during a naturalization ceremony on July 10, 2001, saying, “Today, here’s the goal for the INS: a six-month standard from start to finish for processing applications for immigration. It won’t be achievable in every case, but it’s the standard of this administration and I expect the INS to meet it.” In May 2001, we reported on the difficulties INS had in managing its workload, resulting in ever-growing backlogs of applications, despite growth in staff and budget. For example, although the agency’s efforts to meet production goals for processing naturalization and adjustment of status applications did help reduce backlogs in those areas, backlogs for other application types increased. Under a 5-year plan starting in March 2002, INS intended not only to eliminate the immigration benefit application backlog, but also to achieve a 6-month processing standard for all applications in every office. The original plan was to eliminate the backlog in 2 years, with the remaining years used to invest in information technology in order to prevent future backlogs. However, in part because of events following the September 11, 2001, terrorist attacks, including attention to national security priorities and agency reorganization, INS’s resources were diverted from backlog elimination efforts. For example, adjudicators assumed responsibility for registering and fingerprinting nationals already living in the United States from countries identified as potential threats and for overseeing the student immigration tracking system—functions that have since been transferred to the Immigration and Customs Enforcement (ICE) bureau within DHS. In June 2004, the newly formed USCIS issued a revised backlog elimination plan that proposed to eliminate the backlog of benefit applications by September 30, 2006, and to reduce application completion times to no more than 6 months. As of June 30, 2005, USCIS estimated it had about 1.2 million cases remaining in its backlog, down from 3.7 million at the end of fiscal year 2003. However, USCIS’s operational definition of backlog is different than the definition contained in the Immigration Services and Infrastructure Improvements Act of 2000, and its count is not a precise reflection of the number of cases that have been pending for more than 6 months. USCIS defines its backlog generally in terms of its pending workload—that is, the number of applications it has on hand minus the number of applications it has received during a specified period of time, which is 6 months or less, depending on the type of application. It has established targets for each fiscal year for reducing its pending workload, by application type, based upon its estimate of how much time is required to complete each type. Table 2 shows these workload targets by application type and fiscal year. According to USCIS, the data management systems it currently uses to manage its backlog elimination efforts cannot comprehensively produce data to measure and track the time that all applications have been pending, and therefore the agency cannot readily retrieve information on the number of applications that have been pending for more than 180 days, as specified in the definition of backlog in the Immigration Services and Infrastructure Improvements Act of 2000. Instead, USCIS estimates its backlog based on the number of pending applications in excess of the applications it received during the past 6 months. For example, if the agency had received 100,000 applications for benefits in the most recent 6 months and currently had 120,000 cases awaiting adjudication, it would report a backlog of 20,000 cases. The agency’s rationale for using this proxy is that by consistently completing more applications than are filed each month, the agency should gradually reduce its pending workload of applications to a level at which it can complete all incoming applications within the workload targets established for each application type. Eventually, according to the agency’s backlog elimination plan, as long as USCIS is processing all applications received within the past 6 months (or less, depending on the application type’s workload target) there should be no backlog because those applications awaiting adjudication should be completed before they become part of the backlog count of applications pending longer than 6 months. However, USCIS’s definition of backlog does not guarantee that every applicant requesting a benefit will receive a decision within 6 months of filing. In our previous work on the benefit applications backlog, we noted that the agency’s automated systems were not complete and reliable enough to determine how long it actually takes to process specific benefit applications or to determine the exact size of its backlog. Therefore, we recommended that the former Immigration and Naturalization Service develop the capability and begin to calculate and report actual processing times for applications as soon as reliable automated data are available. USCIS has agreed that ideally it would prefer to base its backlog calculations on the actual age of each pending application. However, the data management system USCIS is currently using to manage its backlog elimination efforts does not have this capability for most application types. Since our recommendation, USCIS has identified requirements for transforming its information technology systems to address deficiencies in its capabilities. Starting in fiscal year 2002, INS and subsequently USCIS invested about 2 percent ($10.5 million) of its funds allocated for backlog elimination in planning for technology improvements. Table 3 shows USCIS’s annual expenditures from its backlog elimination funds. Included in USCIS’s technology transformation effort is the design and implementation of a new, integrated case management system that should provide the agency with the capability to produce management reports on the age of all pending benefit applications. USCIS considers this new case management system to be one of the most critical components of its technology transformation and plans to begin implementation in fiscal year 2006. However, this information technology transformation effort is still in the early stages of planning, and USCIS does not expect these systems, including the new case management system, to be fully deployed before fiscal year 2010. Until USCIS develops the ability to track the actual age of individual applications, it will not be able to provide accurate information about the actual number of applications that have been pending in excess of 180 days or the actual amount of time they have been pending. USCIS has taken several actions to eliminate its benefit application backlog and to reduce the time it takes to process benefit applications. The most immediate short-term action was to hire temporary adjudicators—whose terms expire within 4 years—to address the backlog. In addition, USCIS began to implement longer-term strategies to eliminate the backlog, such as reallocating staff and reprioritizing the order in which the agency adjudicates petitions for alien relatives. The agency also has revised its guidance to increase the efficiency of application processing and has proposed related changes to its regulations. Finally, it has experimented with different processes to expedite application adjudication and is considering adopting best practices identified from those pilot programs. In addition to its efforts to reduce the backlog by September 30, 2006, the agency has developed a staffing allocation model and is planning a major transformation of its information technology systems to prevent future backlogs. According to the model, USCIS must fill positions that are currently vacant and better balance the number of adjudicator staff among the field office locations. USCIS’s proposed information technology transformation is intended to support the prevention of future backlogs by upgrading its information technology infrastructure, providing better data management support, and developing new business processes. However, it is still in the early stages of planning. Beginning in fiscal year 2002, USCIS has added about 1,100 temporary adjudicators to address the backlog. As figure 3 shows, from fiscal year 2002 through fiscal year 2005, the agency allocated about 70 percent of its backlog elimination funds for these temporary adjudicators and to overtime pay. USCIS allocated the remaining 30 percent to information technology planning, mail and data entry, and records management. USCIS has applied several approaches to balancing its workload and improving the processing time for benefit applications. For example, between September 2003 and September 2004, USCIS transferred hundreds of applications for Adjustment of Status to Lawful Permanent Resident from the Chicago district office to the San Antonio district office for adjudication, because the Chicago office’s workload exceeded its adjudicator capacity. Another approach has been to temporarily detail adjudicators from overstaffed offices to understaffed offices. For example, as of September 2005, USCIS officials said that about 50 adjudicators from central and western region district offices had been detailed to the New York district office and the Garden City, New Jersey suboffice. In addition, another 40 adjudicators were detailed to the Atlanta and Miami district offices. USCIS has also reprioritized the order in which it adjudicates petitions for alien relatives. Because these relatives are subject to annual limits on the number of available immigration visas, even if USCIS were to find an alien relative eligible to immigrate, that alien could not immigrate if a visa were not available. Therefore, in July 2004, USCIS decided to focus its efforts on adjudicating only those petitions for alien relatives where a visa was immediately available. According to USCIS, by setting aside those petitions for which a visa was not immediately available, the agency has been able to concentrate its efforts on those petitions for alien relatives who can immigrate immediately. Therefore, USCIS officials say, this approach has enabled the agency to increase its meaningful completions of petitions for alien relatives. Because of this policy change, USCIS has also removed those cases for which a visa is not available from its count of backlogged cases, eliminating approximately 1.15 million cases from its backlog count of about 3.7 million. USCIS has proposed or undertaken changes in regulations and processes to boost efficiency in processing benefit applications. While the results of these efforts should help eliminate the backlog and reduce time for completing applications, we did not evaluate the effects of these changes on backlog reduction and adjudication quality. As one of these streamlining efforts, the director of domestic operations for USCIS issued a memo in January 2005 revising its interview waiver requirements for adjustment of status applications. According to USCIS, the intent of the revised guidance is to more clearly define the circumstances in which service centers should transfer adjustment applications to district offices for interviews, which increases the time needed to adjudicate the case. In the summer of 2005, USCIS reviewed an informal sample of pending applications filed at the National Benefits Center to determine the percentage of adjustment applications that met the criteria for an interview waiver and found that about 20 percent met the criteria. In July 2005, USCIS began directing adjustment of status application packages that met the interview waiver criteria to the California service center for adjudication. According to USCIS, this process will alleviate some of the burden on offices that are struggling to meet backlog elimination targets and provide relief to offices that are currently sending staff to provide assistance. USCIS has issued clarifying guidance and is seeking to amend regulations that address when Requests for Evidence (RFE) and Notices of Intent to Deny (NOID) are required. Currently, federal regulations require USCIS to issue an RFE when initial evidence or eligibility information is missing from an application or petition, and in each case, USCIS is required to provide applicants with 12 weeks to respond. USCIS also has the discretion to issue an RFE for additional evidence and must give applicants 12 weeks to respond. Additionally, in some cases, federal regulations require USCIS to issue a NOID before denying benefits. These regulations normally require that applicants be given 30 days to respond to a NOID. In November 2004, a proposed rule was published in the Federal Register that would generally give USCIS discretion to issue an RFE or NOID and would allow USCIS to determine whether additional information is required to decide cases. Additionally, the rule proposes to replace the current 12-week response period with a more flexible approach that would allow USCIS to set deadlines based on factors such as type of benefit requested or type of application or petition filed. USCIS officials expect that reducing the number of RFEs and NOIDs required to be issued will reduce the average case-processing time by reducing the time a case is held awaiting decision and decreasing administrative burden. However, in commenting on the proposed rule, the American Immigration Lawyers Association expressed concern that USCIS is placing a higher priority on streamlining processes than on maintaining due process protections for applicants. In its comments, the association said that the proposed rule has no safeguards for ensuring that cases will be fairly adjudicated and that denying applications instead of giving applicants an opportunity to submit additional evidence results in a significant growth of arbitrary and capricious decisions. The final rule is still under review at USCIS. USCIS also issued guidance in February 2005 designed to increase the efficiency of application processing in cases involving RFEs and NOIDs under current regulations. Among issues covered in this guidance are appropriate circumstances to approve and deny benefits without issuing an RFE or NOID and how to choose between RFEs and NOIDs. Further, the guidance included instructions to limit RFEs and NOIDs to specific items of missing evidence. USCIS included these instructions because it found that adjudicators were, in some instances, issuing unnecessarily broad requests, which wasted adjudicator resources on review of unnecessary, duplicative, or irrelevant documents. In July 2004, USCIS published an interim rule in the Federal Register that allows it more flexibility in establishing the length of validity for Employment Authorization Documents (EAD). Previously, federal regulations required USCIS to limit the time EADs were valid to 1 year for specific types of applicants who applied for employment authorization. The interim rule removes regulatory language limiting EAD validity periods to 1 year. Under the interim rule, USCIS can determine the appropriate length of time, up to 5 years, for EADs to remain valid by using certain criteria such as an applicant’s immigration status, processing time of the underlying application or petition, and background checks. USCIS officials said they expect that the ability to set longer validity periods for some types of applicants covered by the current regulation could reduce the adjudicative resources dedicated to processing renewals, thus allowing them to use this time to process new pending Applications for Employment Authorization. Although the flexibility to set the length of EAD validity is available, USCIS is currently restricting its EAD validity periods to 1 year. According to USCIS officials, fraudulent applications have slowed the adjudication process. Because USCIS has not systematically tracked the occurrences of fraud, the agency has not been able to determine with any precision the extent to which fraud slows the adjudication process. In 2003, USCIS created the Office of Fraud Detection and National Security (FDNS) and revised its standard operating procedures to, among other things, help adjudicators identify fraudulent benefit applications and remove them from the processing stream. FDNS is currently developing a data system to track occurrences of fraud. In addition, to ensure that all fraud leads are collected and entered into this data system, adjudicators are now required by FDNS’s fraud referral process to send all cases meeting the minimum criteria for suspected fraud to FDNS immigration officers, even if the adjudicator has sufficient evidence to deny the application or petition. According to USCIS officials, FDNS’s fraud referral process—used in the district offices, service centers, and asylum offices—begins with an adjudicator’s review of applications, petitions, supporting documentation, interviews, and other records. If the adjudicator discovers conflicting or otherwise unfavorable information that would lead a reasonable person to question the credibility of the applicant or petitioner, the adjudicator is to submit the application or petition to FDNS along with a list of general fraud indicators and a brief narrative explaining the nature of the suspected fraud that could render an applicant ineligible for the benefit sought. An FDNS immigration officer is to then conduct a variety of systems checks and additional research in an effort to verify the suspected fraud. If fraud is verified, the case is to be forwarded to the FDNS Fraud Detection Unit at the appropriate service center for review and possible referral to the Benefit Fraud Unit within ICE. According to USCIS, ICE has agreed to notify USCIS within 60 days whether it will accept or reject a request for investigation by the FDNS Fraud Detection Unit. If ICE declines the request for investigation, USCIS is to continue to pursue the information necessary to render a proper adjudication. If ICE investigates and verifies the suspected fraud, the FDNS immigration officer is to provide a written report to the adjudicator for preparation of the appropriate notice or decision. We did not evaluate the effectiveness of USCIS’s fraud referral process as part of this review, but we plan to issue a separate report later this year on the nature and extent of immigration benefit fraud and the control mechanisms USCIS has in place to detect and deter fraud. The Homeland Security Act of 2002 created the Office of the Citizenship and Immigration Services (CIS) Ombudsman within the Department of Homeland Security, but independent of USCIS. The Ombudsman’s role is to enhance the administration and delivery of citizenship and immigration services by identifying problems and proposing recommendations to eliminate major systemic obstacles to efficiency. Further, the Ombudsman is to work closely with DHS leadership in providing policy, planning, and program advice on immigration matters. In response to recommendations made in the CIS Ombudsman’s 2004 annual report, USCIS conducted a number of pilot projects designed to reduce benefit application-processing times and is considering adopting several practices it determined to be successful. The agency studied the processing of two types of applications during the pilots—applications to replace permanent resident cards (form I-90) and applications to register permanent residence or adjust status (form I-485). The applications to adjust status pilots involved both petitions for alien relatives (form I-130) and petitions for immigrant workers (form I-140). During the period March 2004 through November 2004, USCIS conducted a pilot program designed to reduce processing time for applications for permanent resident cards. The pilot, conducted in the Los Angeles area, allowed for electronically filed permanent resident cards to be processed at application support centers, where applicants have their initial contact with the agency and have their photographs and fingerprints taken. Data showed that over 10,000 permanent resident cards were processed at Los Angeles application support centers and 88 percent were approved during the initial contact. During the pilot, average processing times were reduced from over 8 months to about 2 weeks. USCIS’s Performance Management Division has recommended that USCIS implement the pilot nationwide. Beginning in March 2004 and May 2004 respectively, USCIS conducted pilot programs in the New York and Dallas district offices that focused on testing new processes for adjudicating family-based applications for adjustments of status within 90 days. Each sought to streamline and accelerate application processing by shifting aspects of processing responsibility from the National Benefits Center to the district offices. Besides reducing the backlog, one of the advantages of the ability to process adjustments of status within 90 days is reducing issuance of interim documents such as travel documents and employment authorizations. USCIS is generally required by regulation to grant interim employment authorization documents to applicants whose adjustment of status applications have not been adjudicated within 90 days. In such cases, the adjudication process, including background checks, may not have been completed prior to the issuance of these documents. Therefore, in some instances benefits may be issued to applicants whose eligibility and potential risk to national security have not been fully determined. The New York pilot employed a process similar to the standard process of sending applications to a centralized location for receiving fees, conducting the initial processing, and initiating checks of records. Applicants were to be scheduled for an interview as soon as records checks were complete—with emphasis on completing these within 90 days. The New York pilot also placed particular emphasis on fraud deterrence. USCIS ultimately determined that the New York pilot was unsuccessful and terminated it, because, among other things, it failed to facilitate the adjudication of the majority of applications within 90 days and presented a fairness issue for earlier-filed cases. The Dallas pilot employed an up-front processing model that allowed applicants to be interviewed on the same day the application was filed. Data from Dallas showed that adjustment of status applications were completed, on average, within 90 days in 58 percent of cases where applications were processed using this up-front processing model. Moreover, according to the June 2005 CIS Ombudsman report, during the last weeks reported, the Dallas office was processing 71 percent of applications within 90 days, using the up-front processing model. Further, the Ombudsman’s report indicated that USCIS issued fewer interim benefits using the up-front processing model—approximately 20 percent of cases compared with approximately 85 percent nationally. Although the Dallas pilot showed improvements in adjustments of status within 90 days using the up-front model, USCIS raised several concerns during its evaluation, including concerns that (1) some inefficiencies resulted from the fact that information required to process applications was sometimes incomplete, as was the case when criminal history checks were not complete; (2) the pilot could not meet the Department of the Treasury’s regulations requiring fees to be deposited within 24 hours; and (3) there were equity concerns because the pilot involved processing recently received applications before those filed earlier. Despite concerns USCIS raised in evaluating the Dallas pilot project, beginning in April 2005, USCIS began a phased implementation of up-front processing through its National Benefits Center central processing hub. Using elements of processes tested in the Dallas and New York pilot projects, USCIS has implemented up-front processing at three district offices—San Diego, San Antonio, and Buffalo—that did not have a backlog of adjustment of status applications when implemented. USCIS anticipates expanding the number of offices on a quarterly basis as they become current in their processing so that applicants with pending applications are not disadvantaged. The pilot in Dallas will also continue as long as USCIS determines that additional information may be gleaned and until the district office becomes current in processing applications. In March 2004, a third adjustment of status pilot for employment-based applications was implemented at the California service center. The focus was to adjudicate within 75 days petitions for immigrant workers with advanced degrees concurrently with the associated applications for adjustment of status. Included among the pilot’s objectives were to (1) reduce the issuance of interim benefits to ineligible applicants, (2) identify frivolous and fraudulent filings designed to obtain interim benefits, and (3) reduce the number of additional background checks required for adjudication. This pilot identified eligible applications and initiated security checks as applications were filed. According to the pilot’s subsequent evaluation report, when security checks were complete and no adverse information was detected, USCIS ordered permanent resident cards for these applicants. During this pilot, USCIS processed about 30 percent of immigration petitions and 25 percent of adjustment of status applications within the target time frame. As with the other pilots, processing newly filed petitions and applications before those filed earlier was a concern. Additionally, USCIS expressed concern about the amount of time and resources required to manage the pilot, as well as the length of time it took the FBI to conduct background checks for aliens in certain high-tech occupations. Ultimately, USCIS deemed the pilot inefficient and adverse to the service center backlog elimination goals because resources were diverted from addressing backlogged cases. Among the recommendations proposed in its 2005 annual report to Congress, the CIS Ombudsman advocated that USCIS adopt the up-front processing model piloted in Dallas for all adjustment of status applications. The Ombudsman report states that overall the pilots show that up-front processing does work and is preferable to USCIS’s current business processes because it can reduce workload, improve completion rates, enhance customer satisfaction and reduce issuance of interim benefits. However, according to USCIS officials, the report did not address the inefficiencies resulting from the delay of required information, the inability to meet the Department of the Treasury’s deposit regulations, and the inequity of processing newer applications before those filed earlier that USCIS identified during the pilot. Moreover, USCIS officials said the agency does not plan to implement the up-front processing model at district offices with a backlog of adjustment of status applications, because of these concerns. The 2005 Ombudsman report also noted the indirect effect that reducing the backlog could have on the fee revenue on which USCIS services are based. For example, USCIS is required to provide an interim work permit to applicants whose applications for adjustment of status have not been adjudicated within 90 days. These interim work permits are valid for 240 days. At their expiration, the applicant must apply, and pay a fee, for a renewal permit. This process could be repeated if the underlying application for adjustment of status continues unadjudicated. To the extent, however, that USCIS efforts are successful in reducing the time for adjudicating adjustment of status applications, the need for interim work permits will be correspondingly reduced, as will the fee revenue resulting from them. The Ombudsman’s report does not estimate the extent of this lost revenue, but it does estimate that in fiscal year 2004, fee revenue from all work permit applications (not just interim permit applications) filed in connection with applications for adjustment of status totaled $135 million, approximately 10 percent of total USCIS revenue in that year. USCIS acknowledges that some revenue loss will result from its backlog elimination efforts. On the other hand, it expects that elimination of the backlog will reduce the need for staff assigned to this effort and consequently result in savings. As applications for interim benefits decline, savings in processing costs will be realized, although it is unknown whether they would be commensurate with the loss in revenue. According to USCIS, revenue loss estimates are under review. In May 2005, USCIS finalized a staffing allocation model that addresses how many and where staff are needed to better match projected workloads. On the basis of this model, USCIS determined it must (1) retain the temporary adjudicators currently on hand (about 1,100) through the end of fiscal year 2006 and (2) fill vacancies to increase its level of permanent adjudicator staff by 27 percent (about 460) to maintain productivity and prevent future backlogs through fiscal year 2007. According to USCIS, it is reasonable to assume that vacant permanent positions will be filled in large part from within the existing cadre of temporary adjudicators. The staffing allocation model also projects the alignment of personnel at each USCIS office through fiscal year 2007—one of the essential elements of USCIS’s strategy to prevent future backlogs, according to the Associate Director for Operations. As previously discussed, USCIS’s distribution of adjudicators across field offices does not match the distribution of the workload across field offices. To rectify this staffing imbalance, USCIS finalized a staffing allocation model in May 2005 that addresses how many and where staff are needed to better match projected workloads. For example, because district offices in the eastern region have the smallest proportion of staff to workload, the staffing allocation model calls for about 37 percent of the total needed permanent positions (about 170) to be filled there. Figure 4 shows the distribution of adjudicator staff in the regions and the service centers as of January 2005 compared with the proposed distribution that USCIS believes is required through fiscal year 2007 to maintain productivity and prevent future backlogs. This kind of planning is consistent with the principle of integration and alignment that we have advocated as one of the critical success factors in human capital planning. As we have previously reported, workforce planning that is linked to strategic goals and objectives can help agencies be aware of their current and future needs such as the size of the workforce and its deployment across the organization. In addition, we have said that the appropriate geographic and organizational deployment of employees can further support organizational goals and strategies. USCIS has used a significant portion of its funds for backlog elimination efforts to hire and pay temporary adjudicators. According to USCIS’s budget director, the agency’s projected fee revenues and spending authority in fiscal year 2006 are sufficient to absorb the cost of additional permanent adjudicators called for in the staffing allocation model. Finally, USCIS officials said that the need for future staffing adjustments could be offset by future efficiencies gained during its transition to more robust information technology capabilities. We have previously reported that leading organizations consider how new initiatives, such as new technologies, affect human capital in their strategic workforce documents. However, USCIS’s current allocation staffing model does not consider these expected productivity gains. Reflection of these expected gains in its staffing allocation model should improve USCIS’s ability to make strategic staffing decisions. In a February 2004 hearing before the House Subcommittee on Immigration, Border Security, and Claims, USCIS Director Aguirre testified that “technology is, without a question, the only way we are going to get out of this horrible backlog that we have.” Accordingly, USCIS has identified requirements for transforming its information technology by upgrading the agency’s information technology capabilities to support the prevention of future backlogs and for other purposes. In March 2005, the Director of USCIS approved the agency’s mission needs statement (MNS), and in April 2005, the DHS Joint Requirements Council approved the MNS, which outlines the purpose of technology transformation and the requirements to address deficiencies in its current information technology capabilities. The MNS focuses on three modernization efforts: (1) upgrading information technology infrastructure—including improved desktops, servers and network computers; (2) creating an integrated foundation to support data management and business processes among multiple systems; and (3) developing new business processes—for example, the ability to adjudicate cases electronically. We have long been proponents of federal agencies having a strong Chief Information Officer (CIO) to address information and technology management challenges, and the Clinger-Cohen Act of 1996 requires agency heads to designate CIOs to lead technology reforms. In April 2004, USCIS established an Office of the Chief Information Officer and in June 2005 began the process of aligning information technology under the CIO’s authority. According to the MNS, the plan to transform USCIS’s information technology will address several deficiencies in the agency’s current information technology environment, including (1) inadequate ability to meet changing business requirements, (2) need for improved efficiency to maintain processing time goals and prevent the occurrence of backlogs, (3) inadequate information technology oversight and governance, (4) inconsistent access and data integrity controls, and (5) paper records systems that are not cost-effective and do not comply with the paperwork reduction act. Moreover, the MNS outlines several ways in which information technology transformation is intended to support the DHS strategic goals of prevention, service, and organizational excellence. For example, according to the MNS, by upgrading the technical infrastructure, USCIS can leverage the improved security features available in newer operating systems, thereby supporting the objective of the DHS prevention goal, which aims to ensure the security and integrity of the immigration system. According to the MNS, implementation of the information technology infrastructure is scheduled to be complete by fiscal year 2011. Prior to the proposed information technology program, USCIS had begun developing several information systems to enhance its information technology capabilities, which are reflected in the MNS. Among the systems are the Background Check Service, the Biometric Storage System, and an integrated case management system. These systems are designed to manage and automate security check information, to store and retrieve biometric data, and to manage case data in a paperless environment. The MNS does not include consideration of whether and to what extent the proposed technology transformation would be expected to have an effect on staffing levels and use. We have reported in our work on demonstrating results of information technology investments that leading organizations evaluate both the overall performance of the information technology function and the outcomes for individual technology investments. In addition, we have reported that high-performing, client- focused organizations must take into account relationships among people, processes, and technology. Further, significance in resource administration is one of the early-stage approval criteria listed in DHS’s management directive on technology investments. Consideration of the expected productivity gains could help both the agency and Congress make informed decisions about the appropriate level and timing of investment in technology upgrades and staffing resource allocation. Although USCIS has made progress in reducing its backlog of benefit applications as it defines backlog, it seems unlikely that USCIS will meet its September 30, 2006, goal of reducing the number of pending applications to a level no greater than the previous 6 months’ receipts for every form type at every office. It will be particularly difficult for USCIS to meet the progressively more ambitious targets it has set for completing some of the more complex benefit applications—specifically for applications for adjustment of status and applications for naturalization—by September 30, 2006. Furthermore, although USCIS officials have stated that the agency has sufficient staff resources to process its overall projected workload by the end of fiscal year 2006, in certain offices, where the volume of applications exceeds adjudicator staff capacity, the backlog may remain. Additionally, external factors beyond USCIS’s immediate control may limit the feasibility of achieving its goal, such as the need for extended background checks, availability of entry visas, and possible legislative changes. USCIS met all of its 2004 targets for processing its workload of pending applications and as of June 30, 2005, was showing progress toward meeting its workload targets for fiscal year 2005 for most application types. However, performance so far indicates it may have difficulty achieving the much more ambitious targets it set for fiscal year 2006 for at least two of the more complex application types. To ensure progress toward meeting its goal of achieving a pending workload of applications no greater than the number of applications it received during the previous 6 months, USCIS established progressively more stringent targets. For the application types included in the backlog elimination plan, table 4 shows the size of USCIS’s workload—that is, the months of receipts pending adjudication—as of June 2005, the latest available data, and the workload targets established for fiscal years 2004 through 2006. As of June 2005, USCIS had met or exceeded its fiscal year 2005 workload processing time targets for 10 of 15 application types (see solid circles in table 4). In fact, for 8 of these application types, USCIS met or exceeded its fiscal year 2006 targets (see solid circles in table 4). In addition, as figure 5 shows, USCIS has made progress in reducing its backlog—from a peak of about 3.8 million applications in January 2004 down to about 1.2 million in June 2005. Since October 2003, completions have generally outpaced receipts, contributing to backlog reduction. However, the sharp drop in the backlog is due to USCIS’s decision in July 2004 to remove from its backlog count those 1.15 million cases for which an immigration visa is not immediately available and a benefit cannot be provided. Nevertheless, August 2004 was USCIS’s most productive month, with completions exceeding receipts by 138 percent. USCIS’s productivity notwithstanding, workload processing targets for two of the more complex application types appear to be rather ambitious in light of the agency’s performance through June 2005. For example, figures 6 and 7 show a substantial drop in targets for reducing pending adjustments of status to lawful permanent resident and reflect the challenge USCIS faces to meet fiscal year 2005 targets for applications for naturalization. According to USCIS, these two application types require the most effort and, as of June 2005, constituted more than three-quarters of the remaining backlog of 1.2 million applications. As figure 6 shows, USCIS has made progress toward reducing its pending applications to adjust status to lawful permanent resident to 15 months for fiscal year 2005. However, the workload target for fiscal year 2006 drops dramatically to 6 months. Further, USCIS estimates it has a backlog of about 600,000 of this application type as of June 2005, which represents the largest number of applications in the backlog. As shown in figure 7, although the difference between 2005 and 2006 workload targets for applications for naturalization is not as pronounced, it is still ambitious, particularly since USCIS appears to be struggling to reduce its pending workload to 10 months by the end of fiscal year 2005. Moreover, USCIS estimates it has a backlog of about 290,000 of this application type as of June 2005, which represents the second largest number of applications in the backlog. If meeting its targeted workload is a reliable indicator of USCIS’s ability to meet its September 30, 2006, goal, then its progress through June 2005 and the more ambitious targets that must be achieved for these two application types raises doubts about USCIS’s ability to meet the ultimate goal of reducing its pending number of these application types to a level that can be adjudicated within 6 months by September 30, 2006. Further, our analyses indicate that to eliminate the backlog for these two application types, USCIS would need to complete significantly more applications than it has in the past. Specifically, during the most recent 15 months for which data were available (April 1, 2004, to June 30, 2005), USCIS completed about 800,000 applications for adjustment of status. According to USCIS’s projections, it must complete another 1.3 million (about 69 percent more) in the 15 months between July 1, 2005, and September 20, 2006, to eliminate the backlog of this application type by the deadline. Similarly, USCIS completed about 800,000 applications for naturalization during the most recent 15 month period and must more than double that level and complete another 1.8 million naturalization applications (an increase of about 124 percent) during the following 15 months to eliminate the backlog of this application type. USCIS’s calculation of its backlog provides an estimate of the number of applications on an agencywide basis that exceed the number of applications received over the last 6 months, rather than in each location. When USCIS’s agencywide data reflect that it has eliminated the agencywide backlog for a certain application type, it may not be an indication that this backlog has been eliminated at every location. USCIS officials told us that even if they report that they have eliminated the agencywide backlog by the end of fiscal year 2006, it is possible that backlogs (i.e., pending applications representing more than 6 months’ worth of receipts) of certain application types could remain at certain field locations. For example, as of June 2005, USCIS data indicated that, on an agencywide basis, a backlog no longer existed for seven types of benefit applications: applications for (1) renewing or replacing a lawful permanent resident card, (2) travel documents, (3) extending or changing status, (4) employment authorization, (5) temporary protected status, and petitions for (6) nonimmigrant workers and (7) immigrant workers. However, upon closer examination of the data, backlogs remained for five of these application types at specific locations. Specifically, as of June 2005, a backlog of applications to renew a lawful permanent resident card and applications for temporary protected status (about a dozen each) remained at the Vermont and Nebraska service centers, respectively. Moreover, a backlog of nearly 3,000 applications for travel documents remained across a dozen district offices combined and nearly 2,500 remained at the Nebraska service center alone. Similarly, nearly 2,000 applications for employment authorization remained across nine district offices combined and nearly 70,000 remained at the California service center alone. Finally, a backlog of about 3,000 petitions for immigrant workers remained at the California and Nebraska service centers combined. According to USCIS, it has the staffing capacity agencywide to address the backlog, but some benefit applications in offices where volume exceeds adjudicator capacity may require more than 6 months to process, causing backlogs to remain beyond September 30, 2006. USCIS estimates that it will have to complete about 10 million benefit applications between July 1, 2005, and September 30, 2006, to retire the backlog and reduce its pending applications, on average, to a level that can be processed within 6 months or less. According to the Deputy Associate Director for Operations, the agency’s staffing level as of June 2005—about 3,100 permanent and temporary adjudicators and information officers—should be adequate to retire the backlog. However, the distribution of adjudicators across field offices does not match the current distribution of the workload across field offices. A reason for this staffing imbalance, according to USCIS officials, is that the agency hired temporary adjudicators for all district offices to concentrate on adjudicating forms in the backlog while permanent adjudicators could focus attention on adjudicating new petitions for alien relatives and prospective spouses and related applications for adjustment of status to lawful permanent resident under the Legal Immigration Family Equity (LIFE) Act. However, USCIS officials said that the anticipated volume of LIFE Act applications and petitions never materialized in district offices in the central and western regions. Unless the agency is successful in redistributing its adjudicator staff, it appears that backlogs are likely to remain at understaffed field offices in the eastern region in fiscal year 2007. According to the Deputy Associate Director for Operations, USCIS has too few adjudicators at district offices in the eastern region to address the workload, while district offices in the central and western regions have excess adjudicator staff. Figure 8 shows the distribution of workload to adjudicators across regions. Factors beyond the agency’s control could prevent some applications from being adjudicated within 6 months. For example, some applications may require longer to adjudicate because of factors such as (1) the need for more extensive background checks for certain applicants, (2) annual limitations on certain visas, and (3) legislative changes. USCIS performs a background check on all benefit applicants via its Interagency Border Inspection System (IBIS). Adjudicators said they can normally perform these checks on their desktop computers in a matter of minutes, a process we observed at the Houston district office. For selected immigration benefit applications, USCIS requires additional background information from fingerprint checks and name checks performed by the FBI. Officials from the FBI said they can normally check fingerprint records in about 24 hours or less and return the results to USCIS in batch format about two times a week. The FBI results either indicate no record of a criminal history or provide the applicant’s criminal history record. However, FBI name checks can be far more involved and take more than 6 months to complete. For example, when an applicant’s name matches the name or alias of someone with a criminal history, the FBI is to perform a secondary check of multiple databases, which can take up to a month to complete. A small percentage of cases have to be subjected to a more intensive file review, which can take more than 6 months. For example, USCIS found an example where it took the FBI nearly 2 years to complete a name check for a naturalization applicant. Table 5 summarizes the types of background checks required for those forms included in USCIS’s backlog elimination plan. According to our analysis of about 670,000 naturalization applications filed between February 2004 and February 2005, the FBI returned about 59 percent of the names within 10 days, and 72 percent were returned within 30 days. About 11 percent of the applications (more than 74,000) took more than 90 days to complete. Further, about 7 percent of these naturalization applicants (more than 44,000) had not received a final response as of February 28, 2005. Until these name checks are completed, applications cannot be finally adjudicated. In addition, USCIS officials said that it often takes a long time (as much as 4 to 6 months) to clear the names of immigrant workers with high-tech backgrounds who are applying to change their status to lawful permanent resident, because, since September 11, the FBI has become especially interested in carefully vetting aliens with such backgrounds. The availability of visas issued by the Department of State will not affect the backlog as defined by USCIS because USCIS excludes from its count of backlog those cases for which a visa is not available. However, it may result in some applicants having to wait much longer than 6 months before their benefit is adjudicated. In order to initiate a visa request to have an alien relative or prospective employee immigrate to the United States, a qualifying relative or employer must file a petition with USCIS on behalf of the immigrant. Section 201 of the Immigration and Nationality Act sets effective annual limits of 226,000 visas for family-sponsored immigrants and approximately 148,000 visas for employment-based immigrants. In addition, the act sets preference levels for both family-based and employment-based immigrants, which further determine which applicants receive priority for a visa. Further, section 203(e) of the act states that family-sponsored and employment-based preference visas should be issued to eligible immigrants in the order in which a petition on behalf of each was filed with USCIS. There are also annual numerical limitations on the number of visas that can be allocated per country under each of the preference categories. Thus, even if the annual limit for a preference category has not been exceeded, visas may not be available to immigrants from countries with high rates of immigration to the United States, such as China and India, because of the per country limits. Table 6 lists the types and allocation limits of visas for family- and employer-sponsored immigrants. Until an alien obtains an immigrant visa and enters the United States, or an alien already in the United States is able to adjust his or her status, the immigrant will not be able to become a lawful permanent resident. The actual petitions for alien relatives (I-131) or immigrant workers (I-140) can be filed with and adjudicated by USCIS at any time, regardless of the availability of visa numbers. However, USCIS may not adjudicate any pending applications for adjustment of status to lawful permanent resident (I-485) when visa numbers have been exhausted for the particular preference category or country. Since visas must be issued on a first-come, first-served basis within each priority category, applicants may be inclined to file an application to adjust status knowing they may remain ineligible for a benefit for many years. For example, in September 2005, the Department of State was issuing, under the general family-based preference limits, visas for unmarried sons and daughters of citizens whose petitions were filed with USCIS on or before April 15, 2001, and for brothers and sisters of adult citizens whose petitions were filed with USCIS on or before December 15, 1993. In these situations, USCIS may not adjudicate any pending adjustment applications until visa numbers become available for those applicants and may have to hold such applications for several years. These kinds of delays in adjudication of pending adjustment of status applications for family-sponsored immigrants may continue to grow because of a demand that may continue to exceed the number of available visas each year. In fiscal year 2004, USCIS received nearly 700,000 petitions for alien relatives—more than three times the amount of available annual visas. Additionally, as of June 2005, USCIS had received another 484,000 petitions for alien relatives that add to the 152,000 pending petitions. According to USCIS officials, 2005 is the first year in which the agency has adjudicated a number of employment-based petitions and ensuing applications for adjustment of status up to the annual visa cap. As a result, USCIS will start the next fiscal year with a queue of pending petitions that has the potential of resulting in an adjudications backlog of employment-based immigration adjustment of status applications. USCIS officials noted that its current backlog elimination plan is based on the assumption that the agency will continue to operate under current laws. These officials noted, however, that if any new legislation is enacted between now and the end of fiscal year 2006 without provisions for resources to carry out new responsibilities, the agency’s ability to eliminate the backlog could be compromised. For example, USCIS officials told us that the REAL ID Act of 2005 has recently added to USCIS’s workload by, among other things, increasing the number of persons eligible to apply for and receive nonimmigrant worker status for temporary nonagricultural workers and foreign investors, as well as adding an expanded and more complex ground of inadmissibility relating to terrorism that must be addressed as part of the adjudication of many immigration benefit applications. In addition, the act does not provide additional resources to carry out these activities. USCIS operates two distinct postadjudication quality assurance programs, but neither provides a comprehensive review of the agency’s efforts to ensure that immigration benefits are granted only to persons eligible to receive them. Both of USCIS’s major quality assurance programs are limited to a small number of application types they review and, taken together, the programs do not review all 15 of the major application types included in the backlog elimination plan. One program measures quality by assessing adjudicator compliance with standard operating procedures used in adjudicating two application types, but it does not determine the reasonableness of the final adjudicative decision. The other program measures both compliance with standard operating procedures and the reasonableness of adjudicator decisions for selected application types. Although supervisory reviews of cases are conducted at the local office level, the reviews lack a standardized approach across all offices. USCIS is currently reviewing its quality assurance procedures and plans to improve the metrics used to measure quality agencywide. USCIS’s Performance Management Division administers an agencywide quality assurance program, which reviews adjudicator compliance with selected processes for adjudicating 2 of the 15 major application types: applications for naturalization and for adjustment of status to lawful permanent resident. The review is restricted to compliance with standard operating procedures and does not evaluate the reasonableness of the final adjudicative decisions. The program began in 1997 in response to media criticism about the integrity of its naturalization application processing and was developed to improve the quality and consistency of naturalization application processing by ensuring that immigration laws, regulations, policies, and operating guidance are adhered to during the adjudication process. In February 2005, USCIS expanded its quality assurance review to include adjustments of status. To conduct its reviews, the performance management staff selects a sample of applications completed during a given month and available at the selected district office or service center. (Completed applications are not stored in district offices and service centers.) In general the number of cases sampled depends upon the number of applications processed in a given month, and a sample of cases is chosen from the applications that are available. USCIS’s Performance Management Division staff uses a standardized series of questions to determine the extent to which adjudicators have followed the required processes. The staff records the results and sends them to the adjudicative staff for correction. The quality assurance review of naturalization applications covers critical processes and non-critical processes. Critical processes are generally those that relate to security procedures, for example documenting fingerprints, IBIS checks, and name checks. Non-security-related processes such as marking approved applications with an approval stamp are generally considered noncritical processes. Figure 9 shows that for the sample of naturalization applications that were reviewed during fiscal year 2004 and the first and second quarters of fiscal year 2005, USCIS exceeded the critical and noncritical processing accuracy goals of 99 percent and 96 percent respectively. The review of adjustment of status applications, like the review of naturalization applications, includes security system checks and checks on adjudication processes, but only reports an overall processing accuracy rate, not the processing accuracy rates for critical processes. USCIS’s quality assurance reviews reported an overall agencywide processing accuracy rate of 98.5 percent for the sample of cases examined for the period January 2005 through March 2005. A study conducted by an independent management consultant, using sampling methods similar to those USCIS uses to assess adjudicator compliance with standard processes, produced similar results as USCIS for naturalization and lower results for adjustment of status applications. For example, the consultant found that the overall processing accuracy rate for naturalization applications was over 98 percent for the cases reviewed at selected district offices. Since April 2002, USCIS’s Service Center Operations Division has performed quality assurance reviews designed to evaluate the quality and correctness of adjudicative decisions for selected benefit applications filed exclusively at service centers. This quality assurance review uses the same guidance as the agencywide program to select cases to review. In general the number of cases sampled depends upon the number of applications processed in a given month, and a sample of cases is chosen from the applications that are available. Two application types were selected for the initial review—first, applications for adjustment of status and, 6 months later, applications to extend or change nonimmigrant status. Subsequently, the service center added other application types to its review including petitions for alien relatives and petitions for nonimmigrant workers. For this review, a sample of case files is selected and independently reviewed by the quality assurance unit. The review selects cases based on three types of adjudicative decisions: (1) approvals, (2) denials, and (3) requests for evidence. Each case file is evaluated for compliance with processes and procedures and completeness of the administrative actions. In addition, the reviewer evaluates the reasonableness of the decision outcome—that is, whether he or she would have made the same decision given the evidence provided. The Service Center Operations Division has developed a series of standardized checklists that is used for reporting purposes. When errors are detected in the review, such as when an IBIS check is marked as valid on the checklist when in fact the IBIS check had expired, service center guidance indicates that corrective actions should be taken. For example, if an erroneous decision was identified during the review of an approved case, the corrective action could result in the cases being reopened and the benefit being rescinded. The guidance further indicates that after the initial quality assurance reviews, a small sample of previously reviewed cases should be checked a second time by a separate reviewer to validate the initial results. The Service Center Operations Division develops a quality level indicator by calculating the number of correct decisions identified among the total number of cases reviewed. According to USCIS, the emphasis of the program is on using trend analyses to identify and address weaknesses in administrative decision making rather than meeting a specific performance target. In fiscal year 2004, the Service Center Operations Division reviewed three forms—employment-based applications for adjustment of status, applications to extend or change nonimmigrant status, and petitions for alien relatives. The rates of correct decisions for the forms reviewed were 94.3 percent, 95.7 percent, and 93.5 percent respectively. In the first two quarters of the fiscal year 2005, in addition to continuing the reviews of adjustments of status and petitions for alien relatives, USCIS added petitions for nonimmigrant workers. The rate of correct decisions for reviewed applications of this type was 98 percent for the period January 2005 through April 2005. Aside from these two quality assurance programs, USCIS also checks quality through supervisory reviews of case files at the local office level. However, these reviews are not consistently performed across all local offices. For example, some local offices, such as the San Antonio district office, perform supervisory reviews of all cases awaiting adjudication, as well as a group of adjudicated cases, while others, such as the Texas service center, may perform supervisory reviews of all cases adjudicated by new staff. The independent review of USCIS’s quality assurance program, discussed previously, made a number of recommendations to improve the agency’s programs; among them, that the Performance Management Division’s quality assurance program include application types not currently part of the program to determine their level of compliance with adjudicative procedures. In addition it recommended that that USCIS focus fewer resources on naturalization applications in offices that consistently meet the quality goal and spend resources on the new adjustment of status application review because the review shows compliance was lower for this application. According to USCIS guidance, the agency planned to progressively include other application types and operations in its quality assurance approach, but the agency has not established specific strategies and timelines for doing so. According to agency officials, USCIS is in the process of collecting and validating data on the current inventory of quality assurance measurements in use throughout USCIS. After the validation process, they plan to analyze this information to identify gaps and areas of improvement. USCIS plans to design, develop, and test a draft set of proposed quality metrics. USCIS plans to have a final set of quality metrics available by December 2005, which the agency says will reflect several dimensions of quality including accuracy, consistency, timelines, efficiency, customer service and production. USCIS intends to address deficiencies in its current information technology systems through technology transformation, including the development of a new, integrated case management system capable of providing managers reports on the actual age of pending immigration benefit applications. Under USCIS’s current method for calculating backlog, it is possible for individual applicants to wait longer than 6 months for a benefit decision, even if the backlog for that benefit type has technically been eliminated. USCIS’s proposed technology transformation should have the capability to provide information about the actual number of applications that have been pending for more than 6 months so that the agency is able to define its backlog consistently with the statutory definition of any application pending adjudication for more than 180 days. USCIS has made substantial progress toward its goal of reducing its backlog of benefit applications and may eliminate much of the backlog by September 30, 2006. In addition to efforts to eliminate the current backlog, it is important for the agency to take steps to prevent future backlogs. The agency’s ambitious technology transformation plan promises to meet this need by moving the agency from a manual, paper-driven process to an automated, paperless adjudication environment. As USCIS strives to become a high-performing, client-focused organization, it must take into account relationships among people, processes, and technology. For example, one of the assumptions underlying technology transformation is that it will facilitate more efficient, streamlined processes, which in turn could yield productivity gains, thus allowing more work to be accomplished without added staff resources. The agency has not identified these potential effects in its staffing and technology plans. Considering these relationships and including them in operational and strategic plans would give USCIS a sound basis for making strategic decisions regarding resource allocation. Without such information, Congress cannot be assured that the agency’s investments in information technology will contribute to maximizing productivity and preventing future backlogs. At present, USCIS’s quality assurance efforts do not comprehensively assess the adjudicative process and its outcomes, nor do they address all benefit application types. While USCIS has taken steps and has other steps planned to identify and address shortcomings in its quality assurance program, it has not yet developed the specific performance measures and goals needed to ensure consistent quality of adjudication across all components of the adjudication process. As a result, the agency cannot be assured that all benefit applications are adjudicated in compliance with agency guidance and that reasonable decisions are rendered on a consistent basis. To help determine the size of its backlog in a manner consistent with the definition in the Immigration Services and Infrastructure Improvements Act of 2000, we recommend that the Secretary of Homeland Security direct the Director of USCIS to develop and implement the capability to produce management reports on the actual age of individual benefit applications as soon as practicable in its long-term technology transformation process. To help ensure that USCIS has the information necessary to make sound strategic decisions regarding resource allocation—including staffing allocation and investment in technology transformation—and to inform Congress about expected gains from investments in technology, we recommend that the Secretary of Homeland Security direct the Director of USCIS to take the following two actions: identify potential productivity gains and their effects on preventing future backlogs and identify the potential effects of technology improvements on its staffing allocation plans. To improve its quality assurance efforts and to help ensure that benefits are provided only to eligible individuals, we recommend that the Secretary of Homeland Security direct the Director of USCIS to modify its quality assurance programs to address both adjudication process compliance and reasonableness of adjudicator decisions and expand coverage to all types of benefit applications. We provided a draft of this report to the Department of Homeland Security for review. On November 8, 2005, we received written comments on the draft report, which are reproduced in full in appendix VII. The department concurred with the findings and recommendations in the report, and agreed that efforts to implement our recommendations are useful for ensuring that USCIS provides decision makers with full and adequate information. Specifically, the department said that USCIS’s proposed case management system will provide the capability to produce management reports on the actual age of individual benefit applications. In addition, the department said USCIS is currently piloting several initiatives to increase productivity and efficiency and will continue to seek opportunities and methods to streamline processes and increase productivity while maintaining integrity and security of the adjudicative process. The department also said that USCIS is committed to analyzing staffing allocation levels twice yearly to ensure that resources are properly aligned with its workload. Moreover, as process and technology improvements are realized, resource allocations will be changed to fit the conditions. Finally, the department said that USCIS has begun to develop a comprehensive quality management program intended to develop a set of quality performance measures to assess servicewide performance for all benefit application types. These measures will address both process compliance and the quality of adjudicators’ decisions. The department also provided technical comments on our draft report, which we incorporated where 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 the date of this report. At that time, we will send copies of this report to the Secretary of the Department of Homeland Security and the Director of United States Citizenship and Immigration Services. 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 at [email protected]. Key contributors to this report are listed in appendix VII. During our review, we interviewed United States Citizenship and Immigration Services (USCIS) officials in headquarters from a number of divisions, including the offices of Budget, Field Operations, Service Center Operations, Records Services, Modernization Services, Asylum Division, Performance Management, and Administrative Appeals. We also spoke with the USCIS Chief Information Officer and officials in the Office of the Citizenship and Immigration Services Ombudsman. In addition, we spoke with officials from Immigration and Customs Enforcement, as well as a stakeholder group that frequently interacts with USCIS, the American Immigration Lawyers Association. We visited and interviewed officials in 10 USCIS field offices—the California service center, in Laguna Niguel; the Texas service center, in Dallas; the National Benefits Center, near Kansas City; district offices in Dallas, Houston, Los Angeles, San Antonio, San Diego, and Washington, D.C.; and the Los Angeles asylum office. We selected these offices because they constituted a cross section of field offices that (1) were handling large, medium, and small volumes of applications and petitions; (2) were overstaffed and understaffed; (3) had backlogs of applications or petitions or no backlogs; and (4) had conducted or were conducting some of the pilot projects. Because we selected a nonprobability sample of field offices to visit, the results from our interviews with USCIS officials in these offices cannot be generalized to USCIS offices nationwide. To determine the status of USCIS’s backlog of pending benefit applications, we interviewed agency officials and reviewed USCIS’s backlog elimination plans and updates along with the agency’s supporting analyses and compared them with the statutory definition of backlog in the Immigration Services and Infrastructure Improvements Act of 2000. To determine the actions USCIS has taken to eliminate the backlog of applications and prevent future backlogs, we reviewed USCIS’s planning documents on the agency’s staffing, budget, and information technology modernization. We also reviewed evaluation reports on process streamlining initiatives and pilot projects, as well as interviewing appropriate USCIS officials. Where possible, we corroborated their responses with agency data that we assessed for reliability and determined were sufficiently reliable for our purposes. To estimate the likelihood that USCIS would eliminate the backlog by September 30, 2006, we tracked and compared the agency’s progress in reducing its workload with the targets USCIS established. We also analyzed workload and staffing data from the agency’s Performance Analysis System, the official system of record used to manage the agency’s backlog elimination efforts. We reviewed existing information about the data and the system that produced them, including procedures for ensuring accuracy. We also interviewed USCIS staff in the Performance Management Division regarding the collection and analysis of the workload data and determined that the data were sufficiently reliable for the purposes of this report. In addition, we reviewed USCIS’s backlog elimination progress reports and staffing analysis model that were derived from the Performance Analysis System. We also collected and analyzed information on factors that could affect USCIS’s ability to eliminate the backlog, including the duration of Federal Bureau of Investigation (FBI) name checks for naturalization applications, visa allocation limits, and new legislation. We analyzed data on FBI name checks obtained from USCIS’s Computer Linked Application Information Management System (CLAIMS 4). We assessed the reliability of CLAIMS 4 data by (1) performing electronic testing of the required data elements for obvious errors in accuracy and completeness, (2) reviewing related documentation, and (3) interviewing USCIS staff knowledgeable about the CLAIMS 4 system and obtaining answers to written questions about the system, and we determined that these data were sufficiently reliable for our purposes. We also reviewed information on visa allocation limits from the Department of State and spoke with USCIS officials in the Office of Operations and the Office of Fraud Detection and National Security. Finally, we discussed with USCIS officials the effects the REAL ID Act of 2005 had on the adjudications workload as an example of how new legislation without the provision of additional resources could take adjudicator staff resources away from backlog elimination efforts. To determine how USCIS ensures the quality and consistency of adjudicator decisions, we interviewed USCIS officials in the Performance Management Division. We reviewed USCIS reports and data on accuracy rates related to its two quality assurance programs. We also reviewed the findings and recommendations of an independent study on USCIS’s quality assurance programs. Finally, we discussed 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 conducted our work from September 2004 through October 2005 in accordance with generally accepted government auditing standards. USCIS carries out its service function through a network of field offices consisting of a National Benefits Center, 4 service centers, 78 district and local offices, 31 international offices, 8 asylum offices, and 129 application support centers. USCIS’s National Benefits Center, located in Missouri, was created in April 2003 to serve as a central processing hub for benefit applications generally requiring an interview, such as petitions for admission of spouses and other family members. These “preprocessing” activities include conducting background security checks, performing initial evidence reviews, adjudicating any associated employment authorization and travel applications, denying adjustment of status cases for applicants who are statutorily ineligible, and forwarding scheduled cases to the cognizant district so that the applicant can be interviewed and the case decided. Eventually, the National Benefits Center will also preprocess all applications for naturalization. USCIS’s 4 service centers are located in California, Nebraska, Texas, and Vermont. They were created in 1990 to help reduce application backlogs in the district offices. Service centers process 35 types of applications, including petitions for permanent and temporary workers and applications for employment-based adjustment of status to permanent resident. Since February 1996, the service centers have shared responsibility with the districts for processing naturalization applications. Naturalization applications are received by the service centers and processed up to the point of interview, at which time responsibility for processing the case is shifted to the appropriate district so that the applicant can be interviewed and the case decided. USCIS’s 78 district and local offices and 31 international offices are located throughout the nation and around the world. These offices generally process applications that require interviews with the applicant or verification of an applicant’s identity. In addition to processing naturalization applications, districts process petitions for alien relatives and family-based adjustment of status applications, among others. USCIS’s 8 asylum offices are located in Newark, New Jersey; New York, New York; Arlington, Virginia; Miami, Florida; Chicago, Illinois; Houston, Texas; Los Angeles, California; and San Francisco, California. Asylum offices adjudicate asylum applications and applications for suspension of deportation and special rule cancellation of removal under Section 203 of the Nicaraguan and Central American Relief Act (NACARA 203); conduct “credible fear” and “reasonable fear” screening interviews of certain removable persons who have expressed a fear of return to the country of removal to determine if they qualify for an opportunity to seek relief from removal before an Immigration Judge, and provide staffing support to the Refugee Branch to assist in USCIS’s overseas refugee processing efforts. USCIS’s 129 application support centers are under the jurisdiction of districts and are located throughout the nation. They were established in fiscal year 1998 to serve as INS’s designated fingerprint locations. In June 2000, INS shifted responsibility for processing applications for renewal of permanent resident cards (i.e., green cards) from the districts to the support centers. Several information technology systems critical to USCIS’s information technology transformation plan are in development. One objective of this plan is to develop a new integrated customer-focused case-processing system that will deliver comprehensive information from immigration applications. Other systems under development are USCIS’s Background Check Service system, which is designed to manage security check information and the Biometric Storage System, which will store biometric data. The integrated case management system is a tool that will be used by USCIS staff in processing benefits and adjudicating cases. USCIS’s information technology transformation mission needs statement estimates that the case management system development will begin in fiscal year 2006. USCIS is currently assembling the system requirements and conducting surveys of industry best practices. In addition, USCIS is reviewing a cost-benefit analysis to evaluate alternative implementation strategies for the new integrated case management system. USCIS anticipates that its current case management systems will be decommissioned by fiscal year 2011. The Background Check Service system automates and manages the submission of all security checks including name and fingerprints from the FBI and Interagency Border Inspection System. The Background Check Service system will track and store security check responses in a centralized system. USCIS is preparing to initiate the testing and implementation phase, but USCIS must first select a hosting and production facility for the system. As of August 2005, USCIS estimates the deployment of the Background Check Service system to be December 2005. The Biometric Storage System allows USCIS to store biometrics information for verification of identity and for future form submissions. Biometric storage capacity will be expanded to allow storage of biometric information for all USCIS customers, allowing information to be resubmitted for subsequent security checks. The system will capture 10- prints for FBI fingerprint checks and image sets (photograph, press-prints, and signatures). According to USCIS, the Biometric Storage System repository will be located with the United States Visitor and Immigrant Status Indicator Technology and Automated Biometric Identification System Programs to enable data sharing and more detailed background check and authentication processes. As of August 2005, USCIS estimated that the Biometric Storage System will become operational in August 2006. In addition to those named above, David Alexander, Leo Barbour, Karen Burke, Virginia Chanley, Frances Cook, Nancy Finley, Kathryn Godfrey, Clarette Kim, Marvin G. McGill, Eva Rezmovic, E. Jerry Seigler, James Ungvarsky, and Robert E. White were key contributors to this report.
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Long-standing backlogs of immigration benefit applications result in delays for immigrants, their families, and prospective employers who participate in the legal immigration process. In response to a statutory mandate to eliminate the backlog, the U.S. Citizenship and Immigration Services (USCIS) set a goal of September 30, 2006, to eliminate the backlog and adjudicate all applications within 6 months. This report examines (1) the status of the backlog, (2) actions to achieve backlog elimination and prevent future backlogs, (3) the likelihood of eliminating the backlog by the deadline, and (4) USCIS's quality assurance programs to achieve consistency of decisions while eliminating its backlog. By June 2005, USCIS estimated it had reduced its backlog from a peak of 3.8 million cases to about 1.2 million. However, this estimate is not a measure of the number of pending cases older than 6 months--the definition of backlog used by the Immigration Services and Infrastructure Improvements Act of 2000. USCIS's current data systems cannot provide precise data on the age of all application types. A proposed technology transformation offers an opportunity to develop a case management system with this capability. USCIS has reduced its backlog mainly by increasing and realigning staff. To prevent future backlogs, USCIS will rely on additional staffing reallocation and technology transformation. However, the technology plan is in the early planning stages, and USCIS has not finalized its estimated cost or identified the gains it could yield. Despite progress, it is unlikely that USCIS will completely eliminate the backlog by the 2006 deadline. While it met fiscal year 2006 targets for half of the 15 backlogged application types, USCIS may have difficulty eliminating its backlog for two complex application types that constitute nearly three-quarters of the backlog. A backlog may also remain in offices where the volume of cases exceeds adjudicator staff capacity. Other factors, such as lengthy background checks, could also hinder USCIS's ability to achieve and maintain its backlog elimination goals. USCIS officials noted that its current plan is premised on current legislation and would be affected by proposed legislative changes that could impose additional demands on the agency. Aside from regular supervisory review, USCIS operates two programs to ensure the quality of its postadjudication decisions, yet neither program provides a systematic and inclusive review of all application types. One program reviews adjudicators' compliance with standard processes for two application types, and the other evaluates compliance with standard processes and the reasonableness of decisions rendered, but only for selected applications processed in four centers.
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DOE is responsible for the nation's nuclear weapons programs. The National Nuclear Security Administration (NNSA), a semi-autonomous administration within DOE, carries out these responsibilities. The primary mission of the NNSA's Albuquerque Operations Office is the stewardship and maintenance of the nation's nuclear weapons stockpile. As part of that mission, the Albuquerque Operations Office oversees two of DOE's major nuclear weapons laboratories, the Los Alamos National Laboratory, located in Los Alamos, New Mexico, and the Sandia National Laboratory, located in Albuquerque, New Mexico. These laboratories were established in the 1940s as part of the Manhattan Project to design, test, and assemble nuclear weapons. Los Alamos National Laboratory officials estimate that the laboratory has about 7 million classified documents, while Sandia National Laboratory officials estimate that the laboratory has over 2.5 million classified documents. DOE policies for information security are contained in DOE Order 471.2A, Information Security Program. DOE supplements its order with DOE M 471.2-1C, Classified Matter Protection and Control Manual. The manual provides requirements for the protection and control of classified matter and applies to contractors with access to classified matter, including the contractors operating the national weapons laboratories. The DOE manual requires that access to classified matter be limited to persons who possess appropriate access authorization and who require such access, that is, have a need to know, in the performance of official duties. Need to know is defined as a determination made by an authorized holder of classified information that a prospective recipient requires access to specific classified information in order to perform or assist in a lawful and authorized governmental function. Access is defined as the ability or opportunity to gain knowledge of classified information. The DOE manual states that control systems are to be established and used to prevent unauthorized removal of classified information. The manual also requires that certain classified material be put in accountability, which is a system of procedures to provide an audit trail for classified matter when it is originated, reproduced, transmitted, received, or destroyed. DOE revised the manual several times in the 1990s to change the accountability requirements for top secret and secret information. The latest revision was issued in April 2001. DOE has also required the laboratories to implement several enhancements in response to a recent security incident. In June 2000, DOE discovered that two computer disks containing sensitive weapons information were missing. These disks, which were subsequently found, are used by DOE's Nuclear Emergency Search Team and its Accident Response Group. These groups are responsible for responding to nuclear weapon emergencies around the world, such as terrorist threats. In response to this occurrence, in June 2000, the former Secretary of Energy announced the following six security enhancements: Institute a system to record all personnel's entry and exit from vaults containing emergency response assets (such as laptop computers and hard drives), nuclear weapons design information, weapons use control systems, security vulnerabilities, or top secret information. Require that all open vaults containing emergency response assets, nuclear weapons design information, weapons use control systems, security vulnerabilities, or top secret information, be controlled at all times by at least one person with appropriate clearance and need to know, and when not controlled, be locked and alarmed. Require that DOE field offices evaluate vaults and security containers for compliance with DOE requirements. Place removable electronic media in separate storage (not commingled with other classified material) under accountability and conduct a baseline inventory of the removable electronic media. Place Nuclear Emergency Search Team and Accident Response Group material under accountability and conduct an inventory of that material. Require National Security Agency-approved encryption for high-volume media containing certain classified information, including emergency response assets, nuclear weapons design information, weapons use control systems, security vulnerabilities, and top secret information. Our review at the Sandia and Los Alamos National Laboratories indicates that existing DOE access controls and need-to-know requirements for both vaults and classified computer systems are being carried out in practice and the laboratories have implemented the Secretary's six security enhancements. Recent DOE inspections and surveys resulted in similar conclusions. However, these conclusions may not be especially meaningful because DOE's need-to-know requirements are general, allowing laboratory managers wide latitude in interpretation and implementation. Our review found that need-to-know determinations ranged from detailed, specific, individual justifications to "blanket" need to know for hundreds of employees—an entire organization—to have access to all classified information for long or open-ended periods of time. This could allow employees access to classified information that they do not need to perform their current tasks. DOE's security requirements state that access to classified information shall be granted only to persons who possess the appropriate clearances and need to know. Supervisors and other responsible officials who are knowledgeable about the classified information and the responsibilities of the individual may determine need to know. Implementing guidance provided by the Sandia and Los Alamos National Laboratories echoes the DOE requirements. For example, the Sandia National Laboratory manual for classified information states that employees may only grant access to classified information to other individuals with similar work needs, and it cautions that possession of a security clearance does not give that person a right to have access to classified information unless the person has a legitimate work need. We found that DOE’s access control and need-to-know requirements were being followed for the vaults and classified computer systems at Sandia and Los Alamos National Laboratories. Line managers had certified that staff had proper clearances and a need to know before access to vault and classified computer systems—and the information contained therein—was granted. In addition, we found that the former Secretary of Energy's June 2000 enhancements had been implemented to the extent possible. The first enhancement required instituting a system to record all persons entering and leaving vaults containing certain highly sensitive classified information. The laboratories have required that all vaults have systems for recording the entrance and exit of personnel, and all the vaults we reviewed had implemented either an electronic or manual system to record the entrance and exit of all staff and visitors. For the second enhancement, all open vaults containing certain highly sensitive classified information were required to be controlled by at least one person with appropriate clearance and need to know, and when not controlled, to be locked and alarmed. The laboratories have instituted this requirement and have forbidden a previous practice of leaving an uncontrolled vault locked, but not alarmed, for several hours during the normal working day. For the third enhancement, DOE field offices were required to evaluate vaults and security containers. The Albuquerque Operations Office has reviewed vaults and security containers at the Sandia and Los Alamos National Laboratories and found that DOE requirements for vaults and security containers were being followed. In addition, the Albuquerque Operations Office's Kirtland Area Office has evaluated about 35 percent of Sandia National Laboratory's vaults and found that they met or exceeded current DOE requirements for vault configuration and operation. The fourth enhancement required that removable electronic media, such as computer disks, not be commingled with classified documents and that these media be placed in accountability and be inventoried. This enhancement has been implemented. Removable electronic media have been placed in separate storage and in an accountability system, and inventories have been completed. The requirement for separate storage was rescinded on October 2, 2000, because it was believed that security measures already in place were adequate and that separate storage did not provide more security. The fifth enhancement required that classified equipment and information belonging to the Nuclear Emergency Search Team and Accident Response Group be kept in separate storage, be placed in accountability, and be inventoried. This requirement has been completed at both Sandia and Los Alamos National Laboratories. Finally, under the sixth enhancement, certain classified electronic media were required to be encrypted. Both laboratories had implemented this requirement to the extent possible. Part of the enhancement covered databases deployed with DOE emergency response teams. Encryption technologies for classified electronic media must be approved by the National Security Agency. There is a National Security Agency-approved encryption technology for one of the computer operating systems that the laboratories use for these databases and encryption is in place on that system at both laboratories. Another part of the enhancement covered highly classified information on other computer operating systems. However, all computer systems could not be encrypted because the National Security Agency has not approved encryption software for these other computer operating systems. The agency has told DOE that it is working on a hardware-based solution and that the time frame for availability is not currently known. In the meantime, those systems may be encrypted with an interim solution software until the National Security Agency’s hardware-based solution is available. Recent inspections by DOE's Office of Independent Oversight and Performance Assurance and surveys by DOE's Albuquerque Operations Office generally had similar observations on access, need to know, and the June 2000 enhancements. An October 2000 report by the Office of Independent Oversight and Performance Assurance on Sandia National Laboratory did not cite any problems related to implementation of DOE vault or classified computer network access or need-to-know requirements. The report also indicated that the June 2000 security enhancements had been implemented at the Sandia National Laboratory. A July 2000 Albuquerque Operations Office survey report on the Sandia National Laboratory similarly had no vault or computer network access or need-to-know findings and found that the laboratory had successfully implemented the DOE-mandated enhanced protection measures. In August 2000, reporting on the Los Alamos National Laboratory, DOE's Office of Independent Oversight and Performance Assurance had no specific recommendations concerning compliance with DOE access or need-to-know requirements. The Office also found that Los Alamos National Laboratory had completed the former Secretary of Energy's June 2000 security enhancements. The Albuquerque Operations Office September 2000 security survey at Los Alamos National Laboratory inspected containers storing classified documents and had no findings. That survey did not review the security enhancements. We found that line managers at the laboratories were making and approving need-to-know determinations in accordance with DOE's requirements. However, the nonspecific nature of those requirements allowed wide latitude in their implementation. While differences in the type of work performed may justify some differences and required some flexibility in implementation, it is difficult to determine if the differences were warranted because the need-to-know determinations were inconsistent in documenting (1) the reasons an individual's work requires access to classified information, (2) time during which an individual has a need to know, and (3) information that an individual has a need to know. In addition, in some cases, the use of "blanket" need-to-know authorizations resulted in the undocumented authorization of all personnel in a laboratory division or department to access all classified information indefinitely. DOE and the Sandia and Los Alamos National Laboratories require managers to determine that an individual's work requires a need to know the classified information before the individual is granted access to the information. There is no requirement on how this determination should be documented and what criteria should be used. As a result, the degree of specificity in documenting need-to-know determinations varied widely. For example, at one vault, a justification form, which specifies the nature of each individual's work and states specifically why the individual has a need to know the classified information in the vault, is required before vault access is permitted. In contrast, at other vaults, documentation consisted only of a list of persons granted access by the signing manager. Each individual on the list may have a legitimate need to know as determined by that individual's manager; however, there is no documentation to justify that determination. Need-to-know determinations for some classified computer systems were also not documented. One classified computer system required that the manager approve each individual for access to the system. The manager certified that the individual had appropriate clearance, but there was no documented reason provided for why the access was necessary or justification of the individual's need to know based on the work being done. We also noted a wide variation in the degree of documentation of need-to- know time limitations. Both laboratories require that access be limited to the term that the individual has a legitimate work-related need to know, but the documentation on need-to-know time limitations varied. At one vault, access time was specifically limited to the exact calendar days an individual had a work-related need to know for classified data in the vault. In contrast, for another vault, the manager initially determines that an individual has a need to access the information. An annual review is conducted to determine if all personnel still have a work-based need to know. For another classified computer system, virtually open-ended access is granted. The manager initially signs a form stating that the individual has a clearance. This form authorizes access to the system. The form does not specify a time period for which the individual will require access to the system—only that the manager will notify the system manager when the individual transfers, terminates, or no longer requires access to the system. Similarly, DOE's requirements for determining what specific classified information an employee has a need to know do not specify a process or procedure. DOE and both laboratories require that an individual be allowed access to only the classified information for which that individual has a work-based need to know. However, the determination is generally not documented, and the degree of specificity varied. In one vault where specific determinations were made, all classified information was stored in individually locked safe drawers. Staff could access only the drawers containing the information for which they had been determined to have a need to know. More typical, however, were vaults where staff had access to thousands of documents in open storage. At some vaults, need-to-know time determinations combined nonspecific justifications, time duration, and access to information. Need to know was authorized to entire groups—rather than to only those who had been individually justified—for all classified information in a vault for long or indefinite periods of time. This practice has been referred to as a "blanket" or common need to know. At one vault we reviewed, 250 staff—basically the division's entire roster of nuclear engineers, nuclear physicists, and physicists—were granted access to all information (about 50,000 documents) in the vault for a period of 1 year without any specific documentation. Laboratory officials told us that the list of staff with need to know and access to the vault is reviewed annually. Laboratory officials explained that management has determined that the entire staff's work is relevant to all information stored in the vault. The Los Alamos National Laboratory has issued two criteria for using blanket need to know: "Project activities are sufficiently integrated as to require that all program staff may require access to any project-related classified matter at any time. project is of a research nature and as such project staff may require access to all project-related classified matter at any time." According to our review of their usage patterns, however, it does not appear that all staff require unlimited access to classified data. At the Los Alamos vault, all 250 staff with "Q" clearances in the group were granted access to all 50,000 classified documents in the aforementioned vault, but only about 25 division staff access information in the vault on a regular basis, according to the vault custodian. This could indicate that these 25 individuals are the only staff that actually do have a need to access the information in the vault on a continuing basis. Others could be granted access for specific periods of time—as they need it. In addition, without more detailed documentation, it is not clear that the 25 individuals who access the vault regularly or others who use the vault less often, need access to all 50,000 documents in the vault. DOE is upgrading its protection and control of classified information. DOE has issued a revision of its classified matter protection and control requirements to increase security and accountability for top secret information. However, the revision lacks several top secret security access controls that were in place prior to 1998. These controls, if reinstituted, would provide a more traceable record of the document in the event it becomes lost. In addition, DOE has worked with the Department of Defense and is revising an order to increase security for compilations of the most sensitive classified information, to be designated "Sigma 16." However, the Sigma 16 initiative has been in process for almost 8 years, and according to DOE officials, the order will not be issued until the fall of 2001, at the earliest. Before the order can be issued, DOE must finish drafting the order, distribute it for comment, resolve the comments, and obtain the concurrence of all affected organizations, processes that often take many months to complete. Until the order is issued, these documents will be provided a lower degree of protection. DOE issued its revised Classified Matter Protection and Control Manual on April 17, 2001. The manual requires the following new requirements for top secret information: conduct an annual inventory of all top secret documents; establish control stations to maintain records and control top secret matter received by or dispatched from facilities; and maintain accountability records to record when top secret documents are originated, reproduced, transmitted, received, destroyed, or changed in classification. Prior to 1998, DOE required accountability for top secret information that included annual 100-percent inventories, accountability records, unique identification numbers, a top secret control officer, records of individuals who have access to the documents, internal transfer receipts, external transfer receipts, and approval for reproduction. In 1998, DOE removed top secret matter from accountability, which eliminated many of these requirements. According to DOE officials, the time and cost of performing the requirements did not sufficiently add to the assurance that the information was being controlled. While the revised Classified Matter Protection and Control Manual reinstates some of these security procedures, it does not include two pre- 1998 requirements. The revised manual does not require approving reproduction of top secret documents and maintaining an access list for each top secret document. DOE officials informed us that these requirements were not reinstituted because they were not cost effective— the additional cost was not justified by the additional protection provided. In addition, a DOE official said that under the new requirements, each organization that has top secret documents will maintain accountability for these documents. The DOE official also said that if a top secret document should not be reproduced, it should be specifically marked that reproduction is not allowed without the originator's approval. Finally, according to the DOE official, a top secret access list was a formality to document need to know. Supervisors are currently responsible for determining need to know. DOE's argument that these requirements are not cost effective is not supported by a cost-benefit analysis or a study, and DOE officials could not provide us with cost estimates for implementing the requirements. Although DOE has decided not to reinstitute these requirements, some organizations have determined that these procedures are necessary. For example, the Sandia National Laboratory maintains top secret access lists and requires pre-approval for the reproduction of top secret documents. DOE's Office of Defense Programs also maintains top secret access lists. Security officials at Sandia and Defense Programs said that they maintained these controls on top secret documents, even though they were not required, because they believed those procedures are necessary to adequately protect and control top secret information. These accountability measures provide an additional level of control for top secret information. A top secret access list would further enhance security of top secret matter by documenting which staff are authorized and required to have access to a specific top secret document. Reproduction approval ensures that only authorized copies of top secret documents are made and that those copies are properly entered into accountability. On December 7, 1993, the former Secretary of Energy announced an "Openness Initiative" in an effort to make information in areas of concern to the public more accessible. As a result, large numbers of classified documents were declassified and released. A DOE official told us that because so many documents were being declassified, DOE officials believed that the more sensitive documents should be better protected. Subsequently, in response to the National Industrial Security Program Operating Manual, DOE and the Department of Defense began discussing clearances and access to classified information. In January 1997, DOE recommended more stringent security measures be implemented for the protection of 137 classified information topics that had been identified as the most sensitive. By 1999, DOE and the Department of Defense had reduced the number of topics to 65, but, according to DOE officials, the potential costs of implementing a program to better protect such information "choked" the project, and a joint DOE/Department of Defense group was formed to look at feasible alternatives. According to members of this group, rather than not do anything about a large number of topics, the group decided to increase security for a smaller number of items. The group agreed to create a new designation—Sigma 16—for these items. Sigmas are categories of information related to the design, manufacture, or utilization of atomic weapons or nuclear explosive devices that require different or more stringent protection. Sigma 16 will be a new category comprised of documents containing (1) nuclear weapons design specifications that would permit the reproduction and function of the weapon and (2) aggregations of design information that provide comprehensive insight into nuclear weapon capability, vulnerability, or design philosophies. According to DOE officials, when the designation becomes effective, all Sigma 16 documents at all classification levels (top secret, secret, and/or confidential) would be placed in accountability, including inventories and documentation of reproduction, transfers, and destruction. Access lists will be required and single scope background investigations will be required for access. One person will be identified to ensure accountability of Sigma 16 documents. These additional security measures are not currently required for these documents. DOE and the Department of Defense approved Sigma 16 on December 7, 2000. The category will not be in effect until DOE issues a revised Control of Weapon Data Order (currently DOE 5610.2, dated Aug. 1, 1980). DOE does not expect to issue the revised order before October 2001. However, before the order can be issued, DOE must finish drafting the order, distribute it for comment, resolve the comments, and obtain the concurrence of all affected organizations, processes that often take many months. Although the Sandia and Los Alamos National Laboratories have implemented DOE's requirements for access and need to know for vaults and classified computer networks, DOE does not have requirements for documenting need-to-know determinations. Without such requirements, the justification for granting need to know was not documented in many cases and DOE cannot ensure that access to classified information is limited only to individuals who have appropriate clearances and whose work requires access to specific classified information for a specific period of time. In addition, the use of blanket need-to-know determinations allows groupwide determinations to be made for access to all information in a vault on a continuing basis. However, blanket determinations bypass documentation of the specific considerations necessary to ensure that only the personnel who actually have a need for specific classified information are granted access for the time they actually require and therefore should be used only as an exception to individual need-to-know determinations. Additional guidance is needed to define when such exceptions would be appropriate. DOE has recently enhanced security for top secret information, but it did not reinstate the requirements for a top secret access list and reproduction of top secret documents only with authorization. DOE's statement that these requirements are not cost effective is not supported by cost data or a cost-benefit analysis or study. We believe reinstituting these procedures would increase security for top secret documents by providing better day- to-day control of these documents and better records for tracking the documents if they are ever missing. In view of the potential benefits of these controls, DOE needs to support its position that these controls are not cost effective. This is particularly important, given that these requirements are still being performed in some organizations because they are considered to be effective. Finally, DOE is revising an order that would increase security for certain classified information, to be designated as Sigma 16. This classified information will not receive increased security until the order is approved. DOE has many processes to complete before the revisions to the order are final, approved, and implemented. Given the importance of the order, however, DOE needs to make sure that it meets its fall 2001 deadline for implementation. To improve classified document security and accountability, we recommend that the Secretary of Energy: Issue more specific requirements for documenting need-to-know determinations. Provide guidance on when the use of "blanket" need-to-know approvals for large numbers of employees is appropriate and how it should be documented. Conduct cost-benefit analyses for reinstituting the requirements for top secret access lists and approval for reproduction of top secret documents. Ensure the issuance of the revised Control of Weapon Data order establishing Sigma 16 by fall 2001. We provided DOE with a draft of this report for its review and comment. In general, the Department disagreed with three of our recommendations—the need for more specific requirements for making need-to-know determinations, the use of blanket need-to-know justifications, and the reinstatement of certain top secret security requirements. First, DOE misunderstood the intent of our recommendation concerning requirements for need-to-know determinations. We are not recommending that DOE should adopt more stringent rules for granting need to know. We believe that DOE needs to require better documentation of the analysis and justifications for granting need to know. We acknowledge that there are differences in the type of work performed that may justify some differences and require some flexibility in need-to-know implementation. However, it is difficult to determine if the differences in implementation are warranted because need-to-know determinations are not documented the same at and within various DOE sites. We have clarified our recommendation that the Secretary of Energy should issue more specific requirements for documenting need-to-know determinations. Second, DOE disagreed with our recommendation for guidance on the use of blanket need to know. DOE stated that there are situations in which broad, or blanket, need-to-know access is granted but that these are restricted to very specific situations, (for example, X-Division at Los Alamos National Laboratory) where large organizations are collaborating on one program–such as nuclear weapons stockpile stewardship. DOE believes that there should not be more “granular” access to the 50,000 classified documents within the X-Division vault, because the information is derived from a fairly common foundation (weapons physics) and represents the underlying science applied to a wide variety of test shots and other analytical activities. Also, DOE stated that combining more restrictive access with a requirement to limit the time period for access does not consider that many of the staff involved spend their entire careers in a particular aspect of national security. We do not dispute that in some situations blanket need to know may be warranted. However, DOE has no guidance or criteria to allow a determination of these situations. DOE’s comments cited X-Division at the Los Alamos National Laboratory as an example of where blanket need to know is appropriate. Our review of X-Division, however, revealed no documentation that justifies the need for every person in X-Division to have access to all the division’s classified documents at all times. DOE, in its comments, acknowledges that clarification of the roles and responsibilities and the use of blanket authorizations may be necessary. It stated that clarification, if necessary, will be issued in the first quarter of fiscal year 2002. DOE also disagreed with the recommendation to conduct a formal cost- benefit analysis for the reinstitution of the requirements regarding a top secret control officer, top secret access lists, and pre-approval for the reproduction of top secret information. DOE believes that its current policy has reasonably and responsibly defined the objectives and requirements for protecting classified information, including top secret. DOE also stated that a requirement for a top secret control officer is not cost effective at facilities that have a small number of top secret documents because the revised Classified Matter Protection and Control Manual required establishment of control stations that carry out functions similar to control officers. We do not agree that the requirement by itself for control stations provides security and control similar to that previously provided by the top secret control officers. However, the requirement for control stations in conjunction with the April 2001 reinstatement of accountability for top secret documents meets the intent of our recommendation. Accordingly, we have deleted our recommendation that DOE do a cost-benefit study of reinstituting the top secret control officer. Regarding conducting a cost-benefit study of reinstituting the requirements for top secret access lists and pre-approval for reproduction of top secret documents, DOE has no basis to support its belief that access lists and reproduction approval are not cost effective. We have not recommended that DOE reinstitute this requirement. However, we maintain that these requirements, which were in effect until 1998, have the potential to increase control over top secret documents and that DOE should conduct a study of their costs and benefits. DOE agreed to ensure the issuance of the revised Control of Weapon Data order by November 2001. To answer your questions, we visited DOE's Germantown, Maryland, and Washington, D.C., offices; obtained documents, DOE orders, and DOE manuals; and interviewed cognizant officials about DOE's requirements for need to know and access controls. We also visited the Los Alamos and Sandia (New Mexico) National Laboratories, obtained documents and requirements, and interviewed cognizant laboratory officials concerning their access controls and need-to-know requirements. During our visits to the laboratories, we inspected and observed operating procedures for vaults containing the most sensitive classified information, as determined by laboratory officials. GAO has designated information security as a high-risk area because growing evidence indicated that controls over computerized federal operations were not effective and because related risks were escalating. This report does not address computer operations at DOE facilities. Rather, as agreed with your staff, we evaluated the administrative requirements and managerial decisions on who is allowed access to classified information on DOE's classified computer systems. In this regard, we reviewed DOE's administrative requirements and the laboratories' compliance with those requirements. We have also issued a report that described vulnerabilities in DOE's systems for unclassified civilian research, and as a high-risk area, over the next few years, we plan to continue to examine information security at DOE and other federal agencies. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies of the report to the Ranking Minority Member, House Committee on Energy and Commerce; the Secretary of Energy; and the Director, Office of Management and Budget. We will also make copies available to others on request. The following are GAO’s comments on the letter dated August 13, 2001, from the Director, Office of Security and Emergency Operations. 1. We recognize that our recommendation, if implemented, would result in additional policies and requirements. Compliance with these additional policies and requirements could result in changes in operations in some organizations, but other organizations’ current operating procedures would comply without significant changes. These inconsistencies are the reason additional guidance is necessary. While additional guidance may go beyond what is required in other agencies, given the nature of the classified information held by DOE and its contractors and the consequences that could result from its unauthorized release, we believe additional guidance is necessary. This view is also held by DOE’s own Office of Independent Oversight and Performance Assurance. In a June 2000 report, the Office stated: “The current national requirements for controlling classified matter are not as stringent and clear as needed in light of DOE’s particularly sensitive nuclear-weapons-related information; improvements in policy are needed to further enhance security at DOE sites.” 2. As we noted on page 16 of this report, we recognize that blanket need to know may be warranted in certain cases. We are concerned, however, that DOE has no guidance or criteria for judging when that blanket need to know is appropriate or how it should be documented. 3. We believe that DOE has misinterpreted our views of the laboratories’ implementation of DOE’s need-to-know requirements. We have clarified the wording of our recommendation. We are recommending that DOE provide guidance on documenting need-to-know determinations. As the guidance is currently implemented, in many cases, the lack of documentation makes it impossible to determine (1) the basis for granting need to know, (2) the specific information for which access was granted, and (3) the time period for which access was granted. The flexibility that DOE says it requires would not be limited by a requirement to document the basis and nature of the need- to-know determination. Such documentation would allow, and better justify, granting need to know in the wide range of activities conducted at DOE’s laboratories. 4. By nature, blanket need to know lacks specific determinations for individual access. The Los Alamos National Laboratory’s criteria for using blanket need to know specifically states that blanket need to know is granted to “all program staff” for “all project-related classified matter at any time.” Los Alamos National Laboratory does not document the specific justification for each individual included in a blanket need to know. 5. The DOE Classified Information Systems Security Manual contains a requirement for annual revalidation of classified computer system accounts by verifying the user’s phone number, address, and sponsor. There is no requirement to revalidate the user’s need to know. In fact, the manual provides for removing the user’s account only when the user leaves the organization or loses access to the system “for cause.” In practice, we found that access to the classified computer system discussed on page 9—once granted—remained valid until the employee transferred or was terminated, or someone made a determination that the employee should no longer have access. 6. As we noted on page 16 of this report, the requirement for control stations in conjunction with the April 2001 reinstitution of accountability for top secret documents appears to meet the intent of the recommendation that was contained in our draft report. Accordingly, we have deleted that recommendation from this report. 7. As suggested, we have modified our statement to change “procedures” to “requirements.” The question of whether these requirements are new is a matter of semantics. These security processes were required prior to 1998 when accountability for top secret matter was no longer required. They were eliminated in 1998 and were not required again until April 2001, when most of them were reinstituted. In the sense that they were not required from 1998 to 2001, they are new requirements. 8. Our statement that in 1998, DOE eliminated procedures for protecting top secret information is correct. The 1998 and 1999 iterations of the Classified Matter Protection and Control Manual required accountability records, inventories, and control stations only for top secret matter stored outside of “limited areas,” that is, areas with higher levels of physical protection. All DOE and laboratory areas storing top secret matter that were included in the scope of our review were inside limited areas. Reinstituting accountability for top secret inside limited areas did not occur until April 2001. Therefore, from 1998 until April 2001 accountability records, inventories, and control stations were not required for top secret information stored inside limited areas, including the areas that were part of our review. 9. As noted on page 16 of this report, the use of control stations combined with DOE’s April 2001 reinstitution of accountability for top secret information meets the intent of the recommendation that was contained in our draft report. We have deleted that recommendation. 10. As noted on page 16 of this report, the use of control stations combined with DOE’s April 2001 reinstitution of accountability for top secret information meets the intent of the recommendation that was contained in our draft report. We have deleted that recommendation. We continue to believe that DOE should conduct an analysis of the costs and benefits of reinstituting top secret access lists and pre- approval for the reproduction of top secret information. These procedures were required prior to 1998 and are currently used by some DOE organizations and contractors to control top secret information.
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The Department of Energy (DOE) maintains millions of classified documents containing highly sensitive nuclear weapons design and production information. Allegations that the Peoples Republic of China obtained nuclear warhead designs from an employee of DOE's Los Alamos National Laboratory, as well as the disappearance of two computer hard drives containing highly sensitive weapons information from that same laboratory, have raised concerns about how effectively DOE protects classified information, particularly the most sensitive classified information that is contained in vaults and computer systems. DOE's security program consists of many strategies for protecting and controlling classified information, such as controlling access to classified information through physical and administrative barriers and determining whether a person's work requires a "need to know" the information. DOE has recently increased protection for top-secret documents by revising its Classified Matter Protection and Control Manual, which provides detailed requirements for the protection and control of classified matter. This report reviews the (1) extent to which DOE's Sandia and Los Alamos National Laboratories have implemented DOE's established access controls and need-to-know requirements for classified vaults and computer systems containing the most sensitive classified information as well as the adequacy of these requirements and (2) steps DOE is taking to upgrade the protection of its classified information. GAO found that the Los Alamos and Sandia National Laboratories have implemented DOE's access controls and need-to-know requirements for both vaults and classified computer systems containing the most sensitive classified information. However, DOE's requirements for documenting need to know lack specificity, allowing laboratory managers wide variations in interpretation and implementation and. DOE has recently taken, and continues to take, steps to upgrade protection and control over its classified information, but additional steps are needed.
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The Recovery Act provided the Secretary of Transportation $1.5 billion for the purpose of awarding discretionary grants on a competitive basis. Eligible projects included capital investments in roads, highways, bridges, or transit; passenger and freight rail; and port infrastructure, as well as bicycle and pedestrian-related improvements. The TIGER program’s purpose was to fund merit-based projects that would provide a significant impact on the nation, a metropolitan area, or a region and required DOT to develop criteria to evaluate the merits of and select grants that would meet the goals of the program. The Recovery Act also directed the Secretary to meet several statutory requirements in making the final award selections including: 1. ensuring an equitable geographic distribution of funds; 2. achieving an appropriate balance in addressing the needs of urban and 3. giving priority to projects for which federal funding would be required to complete an overall financing package that includes nonfederal sources; and 4. giving priority to projects that are expected to be completed within 3 years of enactment of the act and obligating all TIGER funds by September 30, 2011. The Recovery Act also allowed DOT to provide up to $200 million to support projects eligible for federal credit assistance. The legislation required that DOT make individual awards of no less than $20 million and no more than $300 million. However, the legislation gave the department discretion to waive the minimum grant size for the purpose of funding significant projects in smaller cities, regions, or states, and DOT opted to do so in certain cases. Traditionally, federal surface transportation funding has been primarily delivered through formula grant programs—about $40 billion annually— based on distributions prescribed by federal statute. In addition, to address concerns about the “equity” of how federal aid is distributed among states, Congress has included legislative provisions for geographic distribution in every surface transportation reauthorization act since 1982. For highway programs, DOT’s distribution formulas include provisions to ensure that states receive a guaranteed portion—92 percent since fiscal year 2008—of the estimated share of taxes highway users in each state contributed for a subset of highway programs. The grant funds are then administered by the state or passed through an intermediary or subrecipient, such as a local government. Compared with formula programs, discretionary grant programs are rarely used to distribute surface transportation funding. In a discretionary grant program, agencies rely on a competitive process in which Congress gives award discretion to federal agencies to review applications in light of legislative and regulatory requirements as well as published selection criteria established for a program. The review process gives agencies the discretion to determine which applications best address the program requirements and are, therefore, most worthy of funding. The TIGER program was a new discretionary grant program for DOT, wherein DOT had to establish criteria and an evaluation process that could be used to assess applications from several different transportation modes. By including the requirement that awards achieve an equitable geographic distribution, among others, DOT had to design a process that addressed both competitive selection criteria and statutory requirements. The Recovery Act set short time frames for DOT to implement the TIGER program so that these funds—like other programs in the Recovery Act— would produce a stimulative effect on the economy. Specifically, the act required DOT to announce all projects selected to be funded by TIGER grants by February 17, 2010, 1 year after enactment and to obligate all TIGER funds by September 30, 2011. DOT published its Notice of Funding Availability on June 17, 2009; applications were due by September 15, 2009, and awards announced by the statutory deadline (see fig. 1 for a timeline of TIGER activities). The Consolidated Appropriations Act for fiscal year 2010 appropriated $600 million to DOT for National Infrastructure Investment grants in support of a TIGER II discretionary grant program. Similar to the TIGER program’s structure and objectives, these grants were to be awarded on a competitive basis for projects that are expected to have a significant impact on the nation, a metropolitan area, or a region. TIGER II had many of the same statutory requirements that TIGER had, as well as some additional ones, including a requirement that DOT ensure selection of a variety of transportation modes. To meet the Recovery Act requirement that DOT develop criteria to evaluate the merits of TIGER program applications and select grants, DOT published criteria in a May 2009 interim Notice of Funding Availability after the passage of the Recovery Act, and in June 2009, when DOT published its final Notice of Funding Availability, we evaluated the criteria. We concluded that DOT had followed key federal guidance and standards for developing selection criteria. For example, DOT’s criteria clearly indicated that projects should produce long-term benefits such as improving the state of repair of existing transportation infrastructure, reducing fatalities and injuries through safety investments, and increasing economic competitiveness by improving the efficient movement of workers or goods. In addition, a benefit-cost analysis was generally required to determine if a project’s expected benefits outweighed its costs. Developing rigorous criteria for discretionary grants is important because criteria focus the competitive selection process and helps agencies, like DOT, address national and regional priorities and achieve the highest possible return on federal investments. As we have reported, many federal surface transportation programs do not effectively address key challenges because federal goals and roles are unclear, programs lack links to performance, and some programs do not use the best tools and approaches to ensure effective investment decisions. For these and other reasons, surface transportation funding remains on GAO’s high-risk list. Our previous work has called for a more performance-oriented approach to funding surface transportation, and in particular policies that ensure that goals are well-defined and focused on the federal interest and that recipients of federal funds are accountable for results. Specifically, we have recommended that a criteria-based selection approach—like that developed in TIGER—be used to direct a portion of federal funds in programs designed to select transportation projects with national and regional significance. Such an approach—one rarely used to fund surface transportation— represents a significant departure from the formula-based approach regularly used to fund the nation’s surface transportation program. Formula programs distribute over $40 billion annually to states and urbanized areas for highway and transit projects (compared with the $1.5 billion one-time appropriation provided for TIGER). In fiscal year 2009, this included almost $36 billion for highway infrastructure projects through the Federal Highway Administration (FHWA) and approximately $10 billion in transit grants to urbanized areas and states through the Federal Transit Administration. The Federal-Aid Highway Program in particular poses considerable challenges to introducing a merit-based performance orientation for selection of projects of national or regional significance. This is because this program distributes funding through a complicated process in which the underlying data and factors are ultimately not meaningful because they are overridden by other provisions designed to yield a largely predetermined outcome—that of returning revenues to their state of origin. Moreover, once the funds are apportioned, states have considerable flexibility to reallocate them among highway and transit programs. As we reported in June 2010, this flexibility, coupled with a rate-of-return orientation, essentially means that the Federal-Aid Highway Program functions, to some extent, as a cash transfer, general purpose grant program. This formula-based approach can potentially result in meritorious projects of national or regional significance—in particular those involving multiple modes of transportation or those that cross state boundaries—not competing well at the state level for available funds. TIGER selection criteria reflected federal interest in specific goals, such as improving the state of repair of transportation infrastructure. Specifically, DOT developed and applied two primary criteria—(1) long-term outcomes and (2) job creation and economic stimulus—and two secondary criteria— innovation and partnerships. DOT further defined its primary and secondary criteria with the concepts described in table 1 to help TIGER reviewers determine how well a proposed project aligned with each criterion. DOT described these criteria in its final Notice of Funding Availability, noting that primary criteria were weighted more heavily than secondary criteria, while the concepts defining each selection criterion were weighted equally. The criteria were designed to help DOT reviewers and applicants determine which projects were closely aligned with the goals of the TIGER program. Some criteria assessed the direct effects—such as reductions in travel time and the number of fatalities and injuries—that are common metrics used in evaluating the performance of transportation projects. For example, to assess whether a project achieved a “state-of-good repair” within the long-term outcomes criterion, evaluators had to determine if a project was relevant to regional, state, or local efforts to maintain transportation facilities; if failing to rehabilitate the condition of infrastructure would threaten future economic growth and stability; and if a sustainable source of revenue was available for the long-term operation and maintenance of the infrastructure, among other issues. The Beartooth Highway Reconstruction Project in Park County, Wyoming, a project awarded $6 million, proposed to improve the state of repair of a 7-mile segment of a highway, including replacing a critical bridge in deficient condition, connecting Yellowstone National Park with the Shoshone National Forest by completing its reconstruction. FHWA deemed this segment of highway inadequate and substandard in 1994. Other criteria were intended to help DOT assess the potential for a project to produce indirect effects such as improved quality of life, coordinated economic development, and better land use. One factor also within the long-term outcomes criterion—fostering livable communities or “livability”—represented a new focus for DOT projects. DOT defined livability as: enhancing mobility through the creation of more convenient transportation options for travelers, increasing modal connectivity between various transit and other transportation options, improving accessibility to transportation for economically disadvantaged populations, and coordinating transportation and land-use planning decisions. For example, the Saint Paul, Minnesota, Union Depot Multi-Modal Transit and Transportation Hub, a project awarded $35 million, was given funding to renovate the city’s historic Union Depot to colocate Amtrak, intercity bus carriers, local buses, light rail services, taxis, and bicycle accommodations, as well as offer new space for commercial development. The award announcement indicated that colocating these transportation services would increase connectivity between transportation modes and create commercial space that would promote economic growth and redevelopment in the downtown area. For more discussion of how DOT defined its criteria, see appendix III, which shows the score sheet Evaluation Teams used to assess applications. To meet the Recovery Act’s direction that the Secretary meet several statutory requirements in making the final award selections, DOT published and made potential applicants aware of these requirements in its Notice of Funding Availability. In addition, DOT developed internal guidance to clarify these requirements in the award process. For example, according to officials, DOT defined achieving an equitable geographic distribution of funds by establishing four regions based on a methodology that accounted for population sizes, geographic proximities, and the existing distribution of federal surface transportation formula funds. In addition, DOT sought to ensure within regions that awards were not clustered in one or two states, but were reasonably well distributed within a region. To give priority to projects for which federal funding would be required to complete an overall financing package, DOT gave priority to projects that included significant state, local, or private co-investment, required projects to demonstrate “independent utility,” meaning that projects created a complete and operable segment that would produce significant transportation benefits upon completion, according to officials. In some cases, this meant DOT funded a project in its entirety, while in others it funded a segment of a larger application as long as that segment resulted in complete and operable infrastructure. DOT’s process for competitively selecting applications involved several teams of reviewers—Evaluation Teams assessed and rated applications and a senior-level Review Team made final award recommendations. In addition, other teams evaluated the consistency of the ratings and assessed the accuracy of applicants’ economic analyses and project readiness. The TIGER selection process is described in figure 2. DOT used 10 Evaluation Teams of five reviewers each—primarily career employees with technical knowledge—who represented the different DOT operating administrations, including the Federal Highway Administration, Federal Railroad Administration, Federal Transit Administration, the Maritime Administration, and the Office of the Secretary of Transportation (OST). This team design meant that applications were reviewed by an intermodal team that included members with subject matter expertise from several different transportation modes. Although applications were assigned randomly, DOT did ensure that at least one team member had expertise in the mode presented in the application. The teams assessed over 1,450 applications that requested almost $60 billion, and each team evaluated approximately 150 applications. Evaluation Team members were directed to select projects that they judged had the greatest potential to meet the primary and secondary criteria. Individual team members provided a rating of “highly recommended,” “recommended,” “not recommended,” or “negative” for each of the elements defining the primary and secondary criteria—for instance, state of good repair, livability, and others—and an overall score based on these criteria. Individuals also drafted short narratives supporting their assessment. Table 2 presents the definition of each adjectival rating Once the team members completed their individual evaluations, the team met as a whole to come to consensus on an overall team rating for each application and a narrative describing their assessment of each project. The Evaluation Teams prioritized applications receiving an overall team rating of highly recommended and advanced these projects to the Review Team for further evaluation. In determining the overall project rating, DOT’s guidance encouraged Evaluation Teams to identify and advance for further review projects that best met the merit-based criteria. These applications were to be ranked “highly recommended” and were to be subject to additional review by additional teams on a wide range of factors—a time-consuming process that needed to be reserved for a smaller group of applications. DOT’s guidance to individual Evaluation Team members indicated they should in general give an overall rating of highly recommended to projects that receive a highly recommended in multiple selection criteria and that a negative score on any of the selection criteria reduced the likelihood that the project would receive a highly recommended overall rating. Furthermore, DOT’s guidance stated that Evaluation Teams generally should advance projects that received an overall highly recommended score from four to five of the individual team members. Those receiving three highly recommended overall scores were to be advanced only on a case-by-case basis in consultation with other teams involved in the review process. Projects receiving one to two highly recommended overall scores generally were not to be advanced. Finally, DOT’s guidance noted that Evaluation Teams should not advance any project unable to demonstrate a likelihood of significant long-term benefits in the long-term outcome criterion. As the Evaluation Teams’ primary responsibility was to conduct a merit- based technical review of applications based on the criteria DOT developed, according to DOT officials, they were not responsible for addressing other factors in the TIGER review: The Evaluation Teams were directed to consider information presented in the applications—including project benefits and costs and the project’s completion of National Environmental Policy Act requirements—but not confirm its accuracy. Evaluation Teams were told that separate Economic Analysis and Environmental Teams would determine the accuracy of the benefits and costs and would validate projects’ environmental readiness. The Evaluation Teams were not responsible for ensuring that applications selected would meet the Recovery Act’s statutory requirements, including achieving an equitable geographic distribution of funds and balancing the needs of urban and rural communities. The teams did contribute to prioritizing projects expected to be completed within the 3-year time frame as part of project readiness, but they did not have to ensure projects met this requirement. Finally, with regard to prioritizing applications in which TIGER funding would complete a funding package, while the Evaluation Teams could make recommendations on funding levels and whether segments of a project (rather than the entire project) should be funded, determining what level of funding to present to the Secretary of Transportation as part of an award fell primarily to the senior-level Review Team. A Control and Calibration Team—led by a Deputy Assistant Secretary for Policy with two staff members from OST’s Office of Policy—also reviewed and advanced applications, and it did so both during the Evaluation Teams’ assessments as well as later in the process when the Review Team identified projects for award. According to DOT officials, the Control and Calibration Team advanced applications primarily in two ways: It used a statistical analysis to assess the ratings across the 10 Evaluation Teams and ensure that projects of similar types and quality were advanced consistently to the Review Team. This analysis was also intended to make certain that there were no significant disparities in ratings among the different transportation modes—an issue that, while not a requirement in TIGER, officials believed was worth monitoring given TIGER’s unique approach. The Control and Calibration Team also advanced projects at the request of the Review Team. In several cases, the Review Team asked to assess projects of similar types in an effort to ensure that the most meritorious projects of this type were selected for award. For instance, the Review Team requested an analysis of the effect on port projects of the expansion of the Panama Canal as well as a side-by-side comparison of all streetcar applications and projects on Indian Reservations and federal lands. The Review Team also asked the Control and Calibration Team to identify additional projects to help them meet statutory requirements such as geographic distribution and providing some funding in the form of credit assistance. In response, the Control and Calibration Team, in consultation with the Evaluation Team leads, identified additional projects beyond those initially advanced by the Evaluation Teams for the Review Team to consider, which resulted in additional projects being advanced that received an overall ranking from the Evaluation Teams of recommended rather than highly recommended. DOT required applicants to include a description of the status of environmental approvals as well as information on the project’s benefits and costs. Applications advanced to the Review Team were reviewed by an Environmental Analysis Team that assessed each advanced project’s ability to substantially meet federal environmental readiness requirements. In addition, an Economic Analysis Team composed of nine DOT economists—including the Chief Economist and economists from relevant operating administrations—assessed the economic analysis from each advanced application to determine whether the analysis was “useful” or “not useful” in its presentation of information and variables considered and whether the total benefits of a proposed project were reasonably likely to outweigh its costs. DOT required applicants to provide different types of information of benefits and costs depending on the amount the application requested. Specifically, projects requesting more than $100 million were required to calculate the net benefits of a project, indicate the value assigned to qualitative benefits, and describe the methodology used to arrive at this calculation. DOT directed applicants requesting more than $20 million and less than $100 million to provide estimates of expected benefits in the five long-term outcomes. Applicants requesting less than $20 million did not have to submit a benefit-cost analysis. The Economic Analysis and Environmental Analysis Teams presented their findings to the Review Team, which considered this information along with other factors in its assessment of applications. The Review Team consisted of 12 senior DOT staff, including the Deputy Secretary, Under Secretary, three Assistant Secretaries, the Chief of Staff, the General Counsel, and Administrators from the cognizant operating administrations—the Federal Highway Administration, Federal Railroad Administration, Federal Transit Administration, Maritime Administration, and the Research and Innovative Technology Administration. This team assessed all applications advanced by the Evaluation Teams and Control and Calibration Team. The Review Team was responsible for addressing four broad areas: First, it was responsible for ensuring that the award recommendations made to the Secretary, taken as a whole, met all statutory requirements, including ensuring an equitable geographic distribution of funds, balancing the needs of urban and rural communities, prioritizing projects for which federal funding would complete an overall funding package that included nonfederal sources, and prioritizing projects that could be completed within 3 years of the act’s enactment. Second, it assessed the merits of advanced projects by considering the TIGER criteria applied by the Evaluation Teams and whether project benefits outweighed costs. It accomplished this by receiving technical presentations from the Evaluation Team leaders and the Economic Analysis Team. Third, it had to ensure that potential awardees were in fact eligible, ready- to-go, and that information in the application—such as expected benefits—was accurate. To accomplish this, the Review Team requested more information on some advanced projects. For example, in some cases, validating environmental readiness required a follow-up conversation with applicants to obtain clarification about the documentation submitted or assurances provided in their applications. Fourth, it recommended to the Secretary of Transportation which projects to fund and whether an application should receive partial or full funding. The Review Team’s initial assessments were conducted during a series of meetings that occurred over about 2 months. In each meeting, the Review Team evaluated about 6 to 12 projects, discussed project strengths and weaknesses, identified areas for clarification or follow-up, and ranked each project in a tier based on the likelihood that the team would fund the project. At the conclusion of its assessment, the Review Team developed a memo with a final list of projects that it recommended for award. This memo included a description of each project’s strengths, benefits, and how the project aligned with TIGER criteria. This memo was sent to the Secretary of Transportation who approved all the recommended projects and announced the TIGER recipients and award amounts in February 2010. Of the 1,457 applications submitted, 8 percent or 115 applications received an overall team rating of highly recommended and were advanced by the Evaluation Team for further review. These 115 applications made requests for funding that totaled about $7.7 billion—about five times the $1.5 billion available for award. About 33 percent of the 1,457 applications received an overall team rating of recommended. The remaining 59 percent received a not recommended or negative rating or were excluded from evaluation for reasons such as eligibility, readiness, or other factors that made the application not acceptable to receive funding. Table 3 shows how all applications were rated by the Evaluation Teams. In addition to projects advanced by the Evaluation Team, the Control and Calibration Team advanced 50 recommended projects and 1 not recommended project to the Review Team, for a total of 166 advanced projects. As noted, the Review Team ultimately selected for approval by the Secretary of Transportation 51 of the 166 advanced projects for award. The Secretary approved awards for each of these 51 applications. TIGER awards were distributed across the country with 41 states and the District of Columbia receiving awards and with roughly equal funding levels (from 20 to 27 percent of funding) going to the four geographic regions DOT established, as shown in figure 3. Awardees represented a balance between the needs of urban and rural communities, as both groups received awards in about the same proportion as applications submitted and advanced. However, rural projects tended to receive smaller awards and received 11 percent of the total funds. The average TIGER award was just under $30 million. The largest award was $105 million for a large freight rail project in two states that would improve intermodal domestic rail service. The smallest award was $3.15 million for a project to improve a road and waterfront bike path in Vermont. Figure 3 shows the distribution of awards by region, jurisdiction size, transportation mode, and funding level. While there was no requirement to distribute awards across different modes of transportation, TIGER funding supported highway, transit, rail, port, and other projects—including bridge replacements, streetcar lines, and bicycle-pedestrian networks (see table 4). Transit projects received the most funding with 12 projects receiving $469 million. Although TIGER grants were not awarded to intercity passenger rail projects, freight rail projects received about 25 percent of the total award funds. Although these projects received less funding overall than transit, funding levels tended to be higher per project with 5 freight projects receiving a total of $354 million. In addition, TIGER-funded projects were eligible for federal credit assistance through the Transportation Infrastructure Finance and Innovation Act (TIFIA), which provides direct loans, loan guarantees, and standby lines of credit to finance surface transportation projects of national and regional significance. TIGER funds used for TIFIA grants allow DOT to make a smaller financial commitment to support much larger projects—specifically, DOT estimates that each dollar of federal funds can provide up to $10 in TIFIA credit assistance. DOT offered TIFIA awards to five applicants in the amount of either $10 million or $20 million each. One applicant had applied for and received a TIFIA award, and four applicants, while applying for a regular grant, were offered an opportunity to use the grant funds as a TIFIA award, at their discretion. Three of these four applicants opted to take the award as a grant and one took a TIFIA award. DOT officials said that, as required by the Recovery Act and part of DOT’s partnership criterion, applicants who had secured funding commitments from third parties such as state and local government and private industry fared better in the TIGER process. Specifically, DOT noted in the Review Team’s memo to the Secretary that 11 of the 51 awardees had arranged funding partnerships for their projects and were seeking TIGER funding to complete a funding package. While all TIGER awards were directed to projects that applicants indicated could be completed as a result of the award, these 11 awardees received 40 percent of the awarded funds. See appendix IV for additional information on the awardees and selection process and appendix V for information on the status of obligations and outlays for TIGER grants. The Review Team selected 26 awardees from the pool of 115 highly recommended applications advanced by the Evaluation Teams’ competitive review process. These applicants received about $950 million of the funds. The other 25 applications selected for award, which received about $549 million of TIGER funds, were from the pool of applications advanced by the Control and Calibration Team. Applications advanced by the Control and Calibration Team included 50 that received an overall rating of recommended from the Evaluation Teams and one that received a not recommended rating: Cincinnati’s streetcar project. DOT officials said this project was advanced to the Review Team because it provided additional context for the Review Team’s analysis of streetcar projects, and it was not awarded a TIGER grant. Figure 4 shows the results of the TIGER selection process, including applications advanced by the Evaluation Teams and the Control and Calibration Team. The recommended projects advanced by the Control and Calibration Team tended to fare less well in the technical review process. As mentioned earlier, each project received an overall rating from individual Evaluation Team members as well as a consensus overall rating from the team as a whole. The recommended projects advanced by the Control and Calibration Team not only received lower overall consensus ratings from the Evaluation Teams (recommended versus highly recommended), they also received fewer overall highly recommended ratings from individual Evaluation Team members. For example, as shown in table 5, the 51 projects advanced by the Control and Calibration team received a highly recommended overall rating from individual team members less than one- fourth of the time. By comparison, projects advanced by the Evaluation Teams received highly recommended overall ratings from individual team members about two-thirds of the time. Because the Review Team was responsible for considering a wider range of factors than the Evaluation Teams, it is not unreasonable to expect that the Review Team’s deliberations could produce a different result. However, while DOT thoroughly documented the Evaluation Teams’ assessments and the reasons for its decisions and the Review Team’s memo to the Secretary described the strengths and benefits of projects recommended for award, DOT did not document the Review Team’s reasons for its decisions, including the reasons for selecting recommended projects over highly recommended ones. Most significantly, DOT did not document Review Team meetings in which final decisions to recommend or reject a project for award were made. Documentation of the Review Team’s deliberations was limited to draft minutes from the team’s initial assessments of advanced projects—a process that occurred in meetings held over a period of about 2 months. The minutes were never finalized or approved and were provided to us in draft form. We analyzed these draft minutes and found that they reflected questions Review Team members raised about the strengths and weaknesses of various applications—questions consistent with TIGER criteria and requirements. For instance, the Review Team raised questions about the following projects, none of which received an award: The extent to which financial commitments of project partners had been secured. For instance, the Coos Bay Rail Line Rehabilitation Project in Oregon proposed rehabilitating track so that a shortline railroad could serve regional industrial operations, distribution facilities, and marine terminals around the Coos Bay harbor and other locations in southwest Oregon. The project would also have reconnected these facilities to the national rail system. The Review Team raised questions about the project’s financial commitments—specifically, whether there would be any significant cost-sharing by the state or other commitments to the project. Whether projects were sufficiently ready-to-go. For example, the North Corridor Commuter Rail Project in North Carolina proposed to upgrade 25 miles of rail to permit faster passenger operations as well as construct new passenger and maintenance facilities and acquire additional equipment. The Review Team was concerned that this project would require an environmental impact statement to satisfy the environmental readiness requirements, which could substantially delay the project’s initiation. Whether a project’s economic benefits were overstated. The West Shoreway Project in Cleveland, Ohio, proposed to reconstruct 2.5 miles of limited access highway along Cleveland’s lakefront into a boulevard with six intersections, providing improved waterfront access. However, the Economic Analysis Team characterized the analysis provided by the applicant as “not useful” and therefore insufficient to demonstrate that the project’s benefits exceeded its cost. In response, the Review Team asked whether more data could be found on the potential benefits and economic merits of the project. According to DOT officials, producing a useful benefit-cost analysis was a challenge for many TIGER applicants. (See appendix I for a discussion of steps DOT took to improve applicant benefit-cost analyses in TIGER II.) Our review of these narratives suggests that, on the whole, the team asked reasonable questions and raised some valid concerns about many of the projects they did not recommend for award. However, DOT officials told us that these questions did not necessarily reflect the reason a project was ultimately recommended or rejected for award. Furthermore, some of the draft minutes simply noted that the Review Team did not see what made a certain project more compelling than similar projects—a comment that yields limited insight into why certain projects were selected and others rejected. To gain insight into the Review Team’s final decisions, we asked DOT officials with the Control and Calibration Team overseeing the TIGER process to reconstruct and discuss the reasons why projects were recommended or rejected for award by the Review Team. While these discussions offered some insight, such information has significant limitations. Specifically, it is testimonial in nature and reflects officials’ recollections from several months after the completion of the TIGER grant awards. It may therefore contain a greater level of uncertainty and error than documentation created while decisions were being made. According to these DOT officials, one important factor affecting award decisions was the need to achieve an equitable geographic distribution of funds (which, as noted earlier, DOT defined as distributing funding in roughly equal amounts across four regions and without concentrating projects in any one state within a region). DOT met this requirement by rejecting some highly recommended projects to limit the number of awards to regions that would have been overrepresented and by making awards to recommended projects in regions that would have been underrepresented. Specifically, officials stated that that 15 highly recommended projects in the West and the Central regions were rejected to limit the awards to these regions. In addition, although the Evaluation Teams advanced 23 highly recommended projects from the South, the Review Team recommended only 2 of these projects for award. DOT officials indicated that these projects were rejected for a wide range of reasons such as limited financial partnerships or the availability of other funding sources such as tolls or user fees to support the project, among others. As a result, the South was underrepresented for awards. To address this, officials told us they advanced 14 additional Southern region applications that had received lower overall ratings of recommended from the Evaluation Teams, and 6 of these 14 recommended projects received an award. While the DOT’s draft minutes and our discussions with OST officials provide some insight into the deliberations of the Review Team, because there was no internal documentation from the Review Team meetings in which final decisions to recommend or reject projects for award were made, DOT cannot definitively demonstrate the basis for its award selections, particularly the reasons why recommended projects were selected for half the awards over highly recommended ones. For example, without documentation DOT cannot demonstrate why statutory requirements such as geographic distribution and other priorities such as projects being ready-to-go and documenting their benefit costs analysis could not have been achieved by selecting $1.5 billion of applications from among the $7.7 billion in highly recommended applications advanced by the Evaluation Teams. As our previous work has noted, documentation of agency activities is a key part of accountability for decisions. Furthermore, DOT’s Office of Inspector General (OIG) has published several documents in which it raised questions about DOT’s discretionary grant selections, noting that projects were not always selected based on the relative priority assigned in a technical review. According to the OIG, when decisions to fund projects deemed to be of lower-priority in a technical review over higher-priority projects, a more thorough review and analysis of project alternatives and documentation of the rationale used to support decisions are necessary. DOT’s March 2009 Financial Assistance Guidance Manual also stresses the importance of documenting such decisions. This manual provides a standardized set of procedures for DOT in processing and awarding grants, and it states that decisions not to fund projects with the highest priority from a technical review shall be documented. The absence of an insightful internal record of award decisions and the reasons why final selections differ from the priorities recommended from the technical review can give rise to challenges to the integrity of the decisions made. DOT’s lack of documentation of key decisions—particularly those in which it selected recommended projects for award over those receiving a highly recommended rating in the technical evaluation—makes it vulnerable to criticism that projects were selected for reasons other than merit. DOT externally communicated information on the TIGER evaluation criteria and selection process, and some of the applicants we interviewed, each of which received awards, said they understood the criteria and found DOT’s guidance helpful. According to grant policies and guidance from the Office of Management and Budget, funding announcements that clearly state selection criteria promote competition and fairness in the selection of grantees. DOT’s Notice of Funding Availability for TIGER included information on all of the statutory requirements and competitive criteria that DOT used to evaluate the applications, as well as the relative weights of the competitive criteria, and some of the applicants we interviewed specifically said they understood the criteria and found the information clear. For example, a Burlington Vermont Waterfront Transportation Improvements North project official said that they were able to find information on all of the criteria and application process through publicly available sources, including the DOT Web site that posted several “Questions and Answers” regarding TIGER. Several applicants we interviewed said that DOT officials responded to questions in writing online for the benefit of all applicants. DOT made less information publicly available on the outcome of its selection process—for instance, it did not publish the reasons for the Review Team’s decisions or why some applications were selected while others were rejected. However, in our review, we did not find any requirements or guidance instructing federal programs to publicly disclose the reasons for their selection decisions. Congress and the President have emphasized the need for accountability, efficiency, and transparency and have made these a central principle of the Recovery Act, but the act did not define the attributes of transparency or how deep into the deliberative process an agency’s actions should be transparent. To assess the extent to which DOT publicly communicated outcome information, we compared the information TIGER externally communicated to the information communicated by 22 other similar Recovery Act competitive grant programs (for a list of these programs, see app. II). Only one of the programs communicated more outcome information on technical scores and comments. Although it was not required in the Recovery Act to do so, the Department of Education’s Race to the Top grant fund published all of its ratings and decisions regarding its applicants on its Web site, including the application, the score sheet summarizing how the application was rated, narratives on the application that describe the ratings, the application’s progression through the selection process, and whether each applicant received an award. In addition to these Recovery Act grant programs, we also compared the TIGER program to the Federal Transit Administration’s discretionary New Starts program—the federal government’s primary program for supporting capital investments in rail and bus rapid transit systems. Like Race to the Top, DOT’s New Starts program also published all scores. However, the evaluations in these two programs were not structured identically to TIGER. Specifically, New Starts did not have a second round of review and used the ratings from its evaluative process as the basis for recommending awards to Congress. Race to the Top used a different approach from TIGER to gain further insight into applicants being considered for award— namely, it invited small groups of applicants to give oral presentations to a panel before awards were finalized. DOT officials told us they took actions to provide feedback to applicants but have not yet developed a strategy for disclosing additional information to the public. Specifically, officials noted that they provided one-on-one discussions between DOT staff and applicants that requested feedback on their TIGER applications. However, DOT officials also told us they recognize that they will need to make the process more transparent. For instance, officials told us they are exploring plans to increase the program’s level of communication with the public for TIGER II and future discretionary grant programs, although they have not yet decided what additional information they would make available. Officials said they are considering providing a summary abstract for each TIGER II application that describes the project and its strengths and also indicates the rationale for why it was selected or not selected. Officials said this approach could increase transparency, show accountability for DOT’s decisions, and offer an opportunity to improve applications in subsequent discretionary programs. However, DOT officials also expressed concern that public disclosure of considerations or opinions—favorable or unfavorable— taken into account by individuals or groups during the application review and selection processes could hamper deliberation in future discretionary grant selection processes. Although DOT is not required to make this kind of complete and detailed information public, in not doing so, it may be missing an opportunity to better meet Congress’ and applicants’ needs. TIGER is a unique program that distributes surface transportation funds based on merit and performance across many modes of transportation on a competitive basis—a new approach for DOT. TIGER also made federal investments in projects like ports and freight rail infrastructure that rarely compete for federal transportation funds. Congress expressed an interest in continuing this new approach when it enacted TIGER II, and DOT has proposed a new $2 billion discretionary grant program in its fiscal year 2012 budget modeled after TIGER. Were DOT to make additional information on its selection decisions publicly available, Congress would have more information to help them better understand the basis on which the funding is being distributed, and thus would have additional information about the merits of this new approach and more confidence in the outcome. In addition, the demand for TIGER funds was substantial, with over 1,450 applications received. Were DOT to make additional information on its selection decisions publicly available, potential applicants would have better information on how to develop and submit well-developed projects that address significant regional and national transportation challenges. The TIGER program represented an important step toward investing in projects of regional and national significance on a merit-based, competitive basis. Allocating federal funding for surface transportation based on performance in general, and directing some portion of federal funds on a competitive basis to projects of national or regional significance in particular, is a direction we have recommended to more effectively address the nation’s surface transportation challenges. TIGER—and the TIGER II program that followed—was a novel approach to funding surface transportation in that it distributed funds across many modes of transportation and allowed projects like ports and freight railroads that rarely compete for existing federal transportation funds to participate. While Congress, when it enacted TIGER II, and the Administration have expressed an interest in this new approach, the role of discretionary grants in the funding the nation’s overall surface transportation program is evolving. Formula funding is—and will likely continue to be—the primary mechanism for distributing federal funds for surface transportation. Congress has struck a careful balance in formula programs to achieve equity among the states in how surface transportation funds—in particular, highway funds—are distributed and to allow states to select projects that reflect state and local priorities. There is a natural tension between providing funding based on merit and performance and providing funds on a formula basis to achieve equity among the states. Consequently, meritorious projects of national or regional significance, in particular those involving multiple modes of transportation or those that cross geographic boundaries, may not compete well at the state level for formula funds. Given that the Recovery Act was intended to create and preserve jobs and promote economic recovery nationwide, Congress believed it important that TIGER grant funding be geographically dispersed. In the future, however, surface transportation competitive grant programs provide Congress the opportunity to consider the appropriate balance between funding projects based on merit and performance and providing funds to achieve equity among the states. TIGER was a new program for DOT, and the Recovery Act set short time frames for establishing and administering the program. DOT met these deadlines and developed a sound set of criteria to evaluate the merits of applications and select grants that would meet the goals of the program. Furthermore, it maintained good documentation of the criteria-based evaluation conducted by its Evaluation Teams in the technical review and effectively communicated information about its criteria to applicants—an important step in promoting competition and fairness. By thoroughly documenting how its technical teams considered and applied the criteria, clearly communicating selection criteria to applicants, and publicly disclosing some information on the attributes of the projects that were selected, DOT took important steps to build the framework for future competitive programs and its institutional capacity to administer them. This foundation is important if there are going to be future rounds of TIGER or similarly structured programs. Congress needs to have the best information on how well the TIGER program has worked, and DOT needs to gain the confidence of Congress and the public so that it can fairly and expertly administer a multi-modal, multi-billion dollar discretionary program. The absence of documentation—in particular, the lack of documentation regarding decisions to select recommended projects for half the awards over highly recommended ones—can give rise to challenges to the integrity of the decisions DOT made and subject it to criticism that projects were selected for reasons other than merit. Documenting key decisions, as good internal control practices and DOT’s guidance already require, could provide a roadmap for administering future competitive grant programs and help build confidence in DOT’s institutional ability to administer this type of program. Furthermore, while federal agencies rarely publicly disclose the reasons for their selection decisions in a competitive review process, the uniqueness of the TIGER approach and DOT’s limited experience with it suggests that publicly disclosing additional information about selection decisions would give Congress a better basis to assess the merits of this new approach and the information it needs to judge whether and how to continue with it. Given DOT’s concerns about the potential effect on internal deliberations, the decision of what information to disclose publicly is best made by DOT in consultation with the Congress, balancing DOT’s concerns with the Congress’ need for information. If Congress enacts competitive discretionary grant programs such as the TIGER program in the future, it may wish to consider balancing the goals of funding projects through merit-based selection with achieving an equitable geographic distribution of funds by establishing thresholds and other mechanisms to limit, as appropriate, the influence of geographic considerations. To ensure that future rounds of the TIGER program or other similarly structured competitive grant programs are accountable to Congress, transparent to the public, and provide meaningful feedback to applicants, we recommend that the Secretary of Transportation (1) document key decisions for all major steps in the review of applications, particularly the reasons for acceptance or rejection of applications and decisions in which lower-rated applications are selected for award over higher-rated applications, and (2) in consultation with the Congress, develop and implement a strategy to disclose information regarding award decisions. GAO provided DOT with a draft of this report for its review and comment. DOT officials provided technical comments via e-mail which we incorporated as appropriate. DOT officials stated the department would consider our recommendations. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to congressional subcommittees with responsibilities for surface transportation issues and the Secretary of Transportation. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made significant contributions to this report are listed in appendix VI. The Department of Transportation (DOT) identified several challenges during the Transportation Investment Generating Economic Recovery (TIGER) evaluation process that it sought to address as “lessons learned” in the TIGER II process. In TIGER, many projects were given a full review multiple times before DOT determined their eligibility and readiness. The Evaluation Teams tried to identify projects that were not eligible or were not ready-to-go with respect to environmental approvals or securing other financial commitments. However, some of these applications still advanced to the Review Team and were thus reviewed again by the Economic Analysis Team or the Control and Calibration Team before their final status was determined. The solution in TIGER II was to implement a pre-application process that required applicants to provide documentation that would determine if each project or planning activity was (1) eligible, (2) ready-to-go, and (3) had secured the necessary nonfederal funding match claimed in the application. As stated in the TIGER and TIGER II Notice of Funding Availability (NOFA), DOT officials required documentation such as project schedules, environmental and legislative approvals, state and local planning, and technical and financial feasibilities for review. DOT officials said this pre-application process provided more assurance that the final applications being reviewed were eligible and ready-to-go, which improved efficiency and allowed teams to focus on the merits of qualified applications. A second challenge resulted from the fact that applications were randomly assigned to the 10 Evaluation Teams, which also caused DOT to have to review them a number of times. As a result of the random assignment, each Evaluation Team reviewed projects from a mix of transportation modes, which prevented a side-by-side comparison of the merits and benefits for similar types of projects. Although the Evaluation Teams assessed all applications and advanced only highly recommended projects for further review, the Review Team wanted to review certain projects that had significant similarities to ensure that the most meritorious projects had in fact been advanced. For example, the Control and Calibration Team advanced five recommended streetcar applications and several recommended port projects that cited benefits from the expansion of the Panama Canal. The Review Team reevaluated them all to determine which projects were the most meritorious. The solution in TIGER II was to assign similar types of projects to Evaluation Teams so that the initial review assessed the merits of applications from the same types of projects side- by-side at the beginning of the process. Projects advanced for further review were evaluated all together without respect for mode. DOT officials told us this change allowed them to substantially improve the efficiency of the review process and make awards expeditiously in TIGER II. A third challenge in TIGER was for DOT to meet the statutory requirement to prioritize awards to projects for which federal funding would complete a funding package—a challenge, in part, because of the high demand for TIGER funds and the statutory requirement that funds be equitably distributed across the nation. In TIGER, DOT interpreted this requirement to mean that it would give priority to projects that included substantial co- investment, and that it would fund discrete project segments from within larger applications as long as these segments demonstrated “independent utility,” which DOT defined as a segment of a larger application that provided significant transportation benefits and created an operable project when completed. However, although the TIGER NOFA did state it would consider one or more components of a large project that met selection criteria, it did not explicitly state that DOT would consider funding project segments. Further, DOT officials said that the extent to which applications provided information on how projects could be segmented varied. As a result, DOT had to contact some applicants the Review Team was considering for award to discuss whether projects could be segmented to achieve operable and complete projects and at what funding level. In TIGER II, DOT provided explicit guidance in the NOFA defining independent utility and the potential for large applications to receive partial funding. Further, TIGER II guidance requires the applicant to identify and clearly describe the benefits of each discrete project segment and how this segment aligns with selection criteria. According to DOT officials, a final challenge in TIGER was that many applications evaluated by the Economic Analysis Team were deemed to not have useful analyses of expected project benefits and costs. Further, DOT economists stated that many applicants also substituted economic impact analyses, which typically focus on local and regional benefits rather than national benefits. Because of this, the Economic Analysis Team individually assessed the economic analyses from the 166 advanced applications to determine the actual benefits and costs to present accurate information to the Review Team, which they stated was a time-consuming process. DOT officials thought the limited usefulness of applicants’ economic analyses was largely a consequence of applicants lacking familiarity with how to properly conduct such analyses. For TIGER II, DOT provided specific benefit-cost guidance that roughly accounted for about one-third of the information in the TIGER II NOFA. DOT also provided question and answer webinars on how to conduct a benefit-cost analysis. Lastly, DOT provided training seminars for applicants explaining the differences between benefit-cost and other analyses, the standards for conducting proper benefit-cost analyses, and the characteristics of a useful benefit-cost analysis. DOT also indicated in these sessions and in its guidance that not including useful benefit-cost analyses might be the basis for denying an award. As a result, DOT officials hoped to improve the quality of the benefit-cost analyses applicants provided and that it would be able to conduct an efficient assessment of them. To determine what criteria and processes were used in evaluating applications and making award selections, we reviewed goals and objectives for the TIGER program provided in the law, the Federal Register, and DOT documents. We also reviewed guidance and documentation of training provided to individuals serving as reviewers in the grant evaluation process. Further, we reviewed prior GAO work evaluating DOT’s TIGER grant criteria and guidance developed by DOT and the Office of Management and Budget on leading practices for managing discretionary grant programs. To describe the outcomes of DOT’s evaluation process, we requested documentation of the Evaluation and Review Teams’ assessments of applications. Due to the level of documentation DOT maintained, our ability to analyze this information differed substantially between the two teams. Evaluation Teams: DOT maintained thorough documentation of the Evaluation Teams’ reviews, including individual team member and team ratings, as well as associated narratives describing the strengths and weaknesses of each application. We assessed the reliability of these data by interviewing the leaders of each of the 10 Evaluation Teams, as well as DOT officials who helped develop the process for Evaluation Teams to record their assessments. Ratings of each application by each individual team member were recorded in spreadsheets along with narratives describing the individual team member’s assessment. Then, when the entire Evaluation Team met to discuss scores and develop team ratings, these scores and accompanying narratives were also recorded in a spreadsheet. We reviewed these data for missing information, errors, and other indicators of reliability. We determined that the data were sufficiently reliable for the purposes of this report. We used these data to summarize information on the initial pool of applicants, those advanced to the Review Team, and those selected for an award. Specifically, we categorized projects by award amount, region, transportation mode, jurisdictional size, and other measures to describe patterns in the characteristics of the projects and patterns of awards. Review Team: DOT provided draft minutes that were never finalized or approved from 15 of the 16 Review Team meetings. In each of these meetings, the Review Team evaluated about 6 to 12 projects and made an initial assessment and as needed identified issues in need of follow-up, such as confirming financial commitments. The minutes did not include what we understood was the final meeting to rate the remaining applications (about 15 projects did not appear in the draft minutes). The minutes also did not include information about the final award decisions. Because DOT did not document the rationale for selecting recommended projects for award over highly recommended ones, to gain insight into award decisions, we asked DOT officials to reconstruct and discuss why projects were recommended or rejected for award. This approach provided some insight, but such information also has significant limitations. Specifically, it is testimonial in nature and reflects officials’ recollections from several months after the completion of the TIGER grant awards. It may therefore contain a greater level of uncertainty and error than documentation created while decisions were being made. We also examined the extent to which DOT’s competitive selection process helped DOT to achieve statutory requirements for TIGER as defined in the American Recovery and Reinvestment Act of 2009 (Recovery Act). We accomplished this by analyzing data on geographic location, jurisdiction size, and other factors among applications submitted, advanced, and awarded. We summarized information on the extent to which DOT officials documented their decisions to advance applications for the next round of review, and to select applications for an award. To determine the extent to which DOT communicated the criteria, process, and outcomes to applicants and the public, we compared application review documents, including technical evaluation guidance and information used to make awards decisions, with information communicated to potential applicants through the Federal Register. In addition, we interviewed DOT program officials, including technical evaluation panelists, as well as examined outreach presentations and documentation to understand the level of communication between potential applicants and DOT officials regarding the TIGER process and outcomes. We also interviewed a judgmental selection of TIGER awardees to get their perspective on DOT’s level of communication. We spoke to eight awardees because they could discuss the entire process and outcomes. We judgmentally selected awardees based their funding level, region, transportation mode, and jurisdiction size. Because this was not a random or representative sample, the views of these applicants cannot be generalized. We also reviewed other Recovery Act discretionary grant program Web sites—22 in total—as well as DOT’s New Starts discretionary grant program to determine the types of information these programs make publicly available, and compared this level of communication to the TIGER grant program. Table 6 lists these programs. To determine what challenges DOT faced and the steps DOT took to address them in TIGER II, we interviewed relevant DOT officials involved in the TIGER evaluation process, including all 10 of the Evaluation Team leaders and 2 members of the Review Team. We also reviewed DOT webinars, reviewed guidance DOT issued in the form of “Question and Answer” documents on the TIGER Web site, and reviewed supplemental guidance. We also made comparisons between the TIGER and TIGER II guidance documents to understand what had been changed or clarified from the first round of review to the second. We conducted this performance audit from June 2010 through March 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. DOT’s TIGER program received 1,457 applications requesting almost $60 billion. The applications were distributed among the regions with the South submitting both the highest number of applications and the highest percentage of the total funding request. See table 7 for a summary of the regional distribution of the applications. Highway project applications by far represented the largest number of applicants by project type comprising over half the number of applicants and amount requested. Transit projects accounted for the second largest percentage with about 15 percent of applications and almost one-fifth of the amount requested. See table 8 for a summary of the distribution of project types among the applications submitted. Considering the size of jurisdiction, urban areas made up the majority of applications and funding requests with rural areas representing slightly over one-quarter of applications and slightly less than one-quarter of funds. From this initial applicant pool, DOT officials from both the Evaluation Teams and the Control and Calibration Team advanced 166 applications requesting approximately $11 billion in TIGER funds for further review. Of these, DOT advanced just over one-fifth of applications from the Northeast, Central, and South regions. The West region, however, had more applications advanced than the other regions. The Northeast, Central, and West regions requested around the same proportion of funds requested by forwarded applications, but the South requested substantially more, around one-third of the total. The requested amounts for advanced projects were roughly in line with the funding requests for all applicants within each region. As discussed in the report, decisions on which applications to advance were a combination of the applications’ ratings against DOT’s selection criteria and other factors such as geographic distribution requirements. See table 9 for a summary of the regional distribution of the advanced applications. Approximately 40 percent of the advanced applications were for highway projects. Transit projects were about one-quarter of the total advanced applications and requested funds. Rail, port, and other projects each had about one-tenth of applications forwarded. These applicants also requested less funding overall. See table 10 for a summary of the distribution of project types among the advanced applications. Both urban and rural applications were advanced in roughly the same proportion in number and funding level requested as they had applications submitted. DOT officials selected 51 projects to receive about $1.5 billion in TIGER funds. Of the many characteristics of the TIGER awardees, there was one discernable trend with respect to which projects were selected to receive the most funds. DOT officials said that awardees with significant leveraged funds from third parties fared well in the process. For example, while DOT noted leveraging or partnerships for 11 of the 51 awardees in its decision rationale document, these 11 awardees received 40 percent of the distributed funds. DOT officials said that this trend occurred because they selected applicants that could leverage funding from third parties, allowing DOT to complete funding packages for more applicants. In conjunction with the tendency to select leveraged projects, DOT also awarded partial funding to all but six applicants. The average amount of funds made available was about half of what had been requested with some applicants receiving only 3 percent of what they had requested. However, DOT officials said that all awards went to applicants that could complete a project with independent utility. TIGER awards ranged from 20 percent to 27 percent of funds awarded over the four geographic regions. The four regions received roughly the same percentage of TIGER funds with the Northeast and the West receiving 27 percent each and the South receiving 20 percent. Of note, while the South requested 39 percent of funds in the initial application pool and 33 percent of funds for advanced applications, it ultimately received about one-fifth of the funding. This was due in part to questions about the economic benefits of projects and additional funds of some highly recommended Southern applications, as well as lower evaluative ratings for Southern projects overall. See table 11 for a summary of the regional distribution of the awardees. Funding awards among selected project types ranged from 7 percent to 31 percent. For example, transit projects received about 31 percent of the total funds, whereas port projects received 7 percent of the total. See table 12 for a summary of the distribution of project types among the TIGER awardees. There was no discernable trend for urban or rural projects in terms of the number of projects selected for funding, as both locality groups received funding amounts in about the same proportions as applications submitted and advanced. However, rural projects tended to be smaller and received only 11 percent of the TIGER funds. As of February 2011, DOT had executed all but two of the 59 grant agreements and obligated $1,468 million in TIGER funds. In addition, DOT has outlayed $39 million of the obligated funds. DOT delegated responsibility for completing grant agreements, obligating funds, and overseeing the projects to the operating administrations based on the project’s transportation mode and the applicant. The Federal Railroad Administration (FRA) and Maritime Administration have executed all of their grant agreements and obligated all of their funds. The two outstanding grant agreements are both Transportation Infrastructure Finance and Innovation Act (TIFIA) projects, which required additional time to complete. For example, one project in Colorado opted to use its $10 million grant as TIFIA assistance, and doing so required additional traffic and revenue studies before the agreement could be finalized. Recovery.gov tracks the amount of funds obligated by state, but not the grant agreements. DOT divided oversight responsibilities among the operating administrations, depending upon the transportation mode of the project in each grant agreement as well as prior institutional relationships between the applicant and DOT. Specifically, DOT considered the capacity of the operating administrations and whether there was an existing oversight relationship between a grantee and a federal agency. For example, some rail projects were delegated to the Federal Highway Administration (FHWA) because FHWA has existing relationships with the relevant states and freight railroads, and FRA has limited capacity for overseeing grants, especially with the large volume of High Speed and Intercity Passenger Rail grants FRA is overseeing. Also, projects such as improving grade crossings can be overseen by FHWA because FHWA has a history of oversight with these types of projects as they affect both rail and highways. According to officials, DOT is interested in performance measurement and is taking steps to begin building knowledge on this subject across the department. Our prior work has shown that measuring performance allows organizations to track the progress they are making toward their goals and gives managers crucial information on which to base their organizational and management decisions. TIGER presents an opportunity to focus on performance and results in transportation projects, and DOT officials incorporated performance measurements into grant agreements. Officials believe that every TIGER project can incorporate and collect performance measures, but regions and states have varying capabilities. For example, localities with existing data collection programs and resources may be able to collect and manage performance information; however, other localities may find such a task more challenging, according to DOT officials. In these cases, DOT has asked these awardees to collect information that would serve as a precursor to performance measurements, which should help to build capacity and experience among these localities. DOT is currently developing and experimenting with the best methods for measuring objectives and collecting data, and it is working collaboratively with applicants to weigh different options for performance measurements. In addition to the contact named above, GAO staff who made major contributions to this report are Steve Cohen (Assistant Director), Joah Iannotta (analyst-in-charge), Carl Barden, Aisha Cabrer, David Hooper, Sarah Jones, SaraAnn Moessbauer, Amy Rosewarne, and Max Sawicky.
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In February 2009, the American Recovery and Reinvestment Act (Recovery Act) appropriated $1.5 billion for discretionary grants for capital investments in surface transportation projects of national and regional significance, including highways, transit, rail, ports, and others. The act required the Department of Transportation (DOT) to develop criteria to award these grants--known as the Transportation Investment Generating Economic Recovery (TIGER) grants--and to meet several statutory requirements. GAO was asked to review (1) the criteria and process used to evaluate applications and award grants, (2) the outcome of the process, and (3) the extent to which DOT communicated information to applicants and the public. GAO reviewed documentation of the award process and selection documentation and interviewed key DOT officials. DOT developed criteria to evaluate TIGER applications, such as improving the state of repair of critical infrastructure, reducing fatalities and injuries, and increasing economic competitiveness by improving the efficient movement of workers or goods. GAO has called for a more performance-oriented approach to funding surface transportation and has recommended that a merit-based competitive approach--like TIGER--be used to direct a portion of federal funds to transportation projects of national and regional significance. This is a departure from the formula-based approach regularly used for surface transportation in which funds are largely returned to their state of origin and states have considerable flexibility in selecting projects for these funds--an approach that can potentially result in projects of national or regional significance that cross state lines and involve more than one transportation mode not competing well at the state level for these funds. DOT provides over $40 billion annually in formula funds to states and urbanized areas for highway and transit projects; by contrast, TIGER provided $1.5 billion on a one-time basis. However, TIGER was part of the Recovery Act, which was intended to provide economic stimulus across the nation, and the act required TIGER to balance using a competitive approach with achieving an equitable geographic distribution of funds. DOT has proposed a discretionary grant program like TIGER in its fiscal year 2012 budget, which means that DOT and Congress have the opportunity to consider how to balance the goals of merit-based selection of projects with geographic distribution of funds. Of the 51 applications that received awards, 26 were from the highly recommended applications advanced by the Evaluation Teams and the other 25, which received one-third of TIGER funds, were from the recommended applications advanced by the Control and Calibration Team. While DOT thoroughly documented the Evaluation Teams' assessments and the Review Team's memo described the strengths of projects recommended for award, it did not document the Review Team's final decisions and its rationale for selecting recommended projects for half the awards over highly recommended ones. Internal documentation of the Review Team's deliberations was limited to draft minutes from the team's initial assessments of projects. These draft minutes, which were not complete and never finalized or approved, reflect questions Review Team members raised about the strengths and weaknesses of various applications. For example, the Review Team questioned the extent to which financial commitments of project partners had been secured, whether projects were "ready-to-go," or whether a project's economic benefits were overstated. However, these questions did not necessarily reflect the reason a project was ultimately recommended or rejected for award. In addition, DOT officials told us that some highly recommended projects were not selected to achieve an equitable geographic distribution of award funds. In particular, DOT officials stated that some highly recommended projects from the Central and Western regions were rejected to prevent these regions from being overrepresented and that they advanced recommended projects from the South because projects initially selected for award underrepresented this region. DOT's TIGER program externally communicated outcome information similar to other Recovery Act competitive grant programs GAO examined, including the Review Team's memo to the Secretary and the amount of funding awarded. As with most other programs, DOT did not publish the reasons for the Review Team's decisions or why some applications were selected while others were rejected. GAO found no requirements for federal programs to externally communicate the reasons for their selection decisions and federal agencies rarely publicly disclose the reasons for their selection decisions.
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The term “broadband” commonly refers to Internet access that is high speed and provides an “always-on” connection, so users do not have to reestablish a connection each time they access the Internet. Broadband speeds are described in download and upload capabilities, and are defined as the maximum rates at which data are delivered over the Internet. A higher speed indicates a faster information delivery rate. For example, a 10 megabits per second (Mbps) service should deliver ten times as much data as a 1 Mbps service in the same period of time. Internet service providers (ISP) have marketed and competed with one another on the speed of their various broadband plans. Advances in technology, such as the use of fiber (described below) and new wireless technologies, have allowed ISPs to offer increasingly faster speeds that support new services and applications, such as streaming video. FCC takes those advances into account as part of its required inquiry into whether “advanced telecommunications capability” is being deployed to all Americans in a reasonable and timely fashion. Pursuant to this inquiry, FCC recently updated the minimum speed benchmark it uses to measure the availability of advanced telecommunications capability. In addition to speed, a number of factors can be used to evaluate broadband performance. See table 1. Consumers generally subscribe to broadband in two ways: Fixed: In-home fixed Internet plans are often sold as a monthly subscription by cable television or telephone companies. Service from cable television companies is generally provided through the same coaxial cables that deliver television programming. Service from telephone companies is generally provided through traditional copper telephone lines—commonly referred to as digital subscriber line (DSL) service—or fiber-optic lines, which convert electrical signals carrying data into light and send the light through glass fibers. These network technologies generally have higher speeds than mobile networks. Consumers can connect a variety of devices to in-home fixed networks through a wired connection or wireless Wi-Fi connection (see fig. 1). Consumers are increasingly using the Internet to supplement or replace their use of traditional services, such as traditional telephone and cable TV service. Mobile: Traditionally, mobile providers sold access to the Internet as an add-on to mobile telephone service plans that may or may not include a multiyear contract. Mobile service is provided through cell tower coverage with data sharing through radio spectrum. A number of devices may connect to mobile broadband networks, such as smart phones, tablets, and mobile devices that enable laptops to connect to mobile networks (see fig. 2). The 2014 American Customer Satisfaction Index (ACSI)with respect to fixed broadband service, consumer satisfaction regarding data speeds and video streaming increased from 2013 to 2014. However, ACSI also found that during this time period, customer satisfaction related to service interruptions and outages, speed and service reliability, and peak evening-hour performance declined. With respect to mobile broadband providers, ACSI reported that customer satisfaction related to speed for downloading data and streaming content increased from 2013 reported that to 2014; however, ACSI also reported that the customer satisfaction scores indicated that improvements were still needed in speed and reliability. Broadband performance problems can manifest in a number of ways, such as slow loading of content, lost connections, and pauses in streaming video and audio. FCC, ISPs, content providers, and researchers have noted that a variety of factors can affect broadband performance, such as accessing the Internet during peak usage times, outdated equipment in the home, or multiple users in the same household accessing the Internet simultaneously. In addition, mobile broadband performance will vary based on the location of the phone or device. Running multiple applications at once or having multiple users in a household may require greater speeds. Different types of Internet applications use varying amounts of data and require different minimum speeds to operate properly (see table 2). For example, email and web- browsing use small amounts of data, while watching movies uses larger amounts of data. Use of data-intensive broadband applications is projected to grow. FCC has noted that consumers are increasingly using broadband applications that require large amounts of data, such as streaming video content, which can require more consistency of service and be more visibly affected by technical problems. In addition, congestion at various points on the network can affect a user’s broadband performance. In order to connect their customers to the Internet, ISPs link with other networks, including “backbone providers” that move Internet traffic long distances and interconnect with other networks. Companies may use a number of options to deliver their content across the Internet, such as connecting with a backbone provider (directly, or through an ISP), connecting directly to the consumer’s ISP, or paying a content delivery network to deliver their content to ISPs. See figure 3 for a simplified illustration of how content moves from websites and applications to consumers. Congestion occurring within the content provider’s network, at points of interconnection between the networks, or within the ISP’s network can all affect a consumer’s broadband performance. ISPs’ traffic management policies can also affect a consumer’s broadband performance. This issue is discussed later in the report. FCC has primary responsibility for regulating broadband. In response to a requirement in the American Recovery and Reinvestment Act of 2009, FCC staff developed The National Broadband Plan, which includes a series of recommendations aimed at ensuring all Americans have access to broadband. In addition, section 706 of the Telecommunications Act of 1996, as amended, directs FCC “to encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans” through a variety of measures, including measures that promote competition in the local telecommunications market. FCC has repeatedly noted the connection between informed consumers and increased competition, noting that the latter is an important part of promoting broadband deployment. Preserving the Open Internet, Report and Order, 25 FCC Rcd. 17905 (2010), aff’d in part, vacated and remanded in part sub nom, Verizon v. FCC, 740 F.3d. 623 (D.C. Cir. 2014). incentive and ability to act in ways that limit Internet openness (e.g., by blocking or discriminating against unaffiliated applications and services). Consumers can access information on broadband performance from a number of sources, including their ISPs, third-party websites, and FCC reports. FCC adopted a transparency rule requiring ISPs to provide consumers with information on their services’ performance characteristics. However, the information available to consumers is not standardized, and some stakeholders stated that this lack of standardization makes it difficult for consumers to compare broadband services. In addition, the information available through speed tests may not accurately reflect the end-user’s actual experience. FCC has taken steps to measure and report on the extent to which ISPs are providing the speeds they advertise. However, the reports are not targeted toward consumers, and stakeholders stated that consumers might not be aware of the information. Consumers interested in purchasing broadband service can go to providers’ websites to get information on performance, including speed and latency, as well as information on availability and price. ISPs may also provide tools for selecting the correct package based on use and information on factors that affect broadband performance. ISPs told us that consumers may also call and speak to a representative to determine the best package for their needs, and existing customers may call for help troubleshooting problems with their broadband service. FCC’s 2010 Open Internet Order included a transparency rule intended to provide consumers with more information on broadband performance. The rule requires that fixed and mobile providers “publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services…” In response to concerns from ISPs regarding the burden associated with specific requirements, FCC did not require ISPs to disclose specific information in a standardized format. Instead, the 2010 Open Internet Order stated that FCC expected disclosures to include some or all of certain types of information, such as actual speed, to be timely and prominently disclosed in plain language accessible to consumers and to, at a minimum, be provided through a publicly available, easily accessible website. As part of its 2014 Open Internet NPRM, FCC proposed enhancing the transparency rule and requested comment on a variety of options, some of which are discussed later in this report. In the resulting February 2015 Open Internet Order, FCC adopted enhancements to the transparency rule, and stated that ISPs are required to disclose certain information under the transparency rule. Specifically, FCC now states that disclosures of network performance should include actual speed, latency, and packet loss, and disclosures should also include network management practices applied to specific users or user groups (for example, users in a particular service plan or geographic location). FCC also requires ISPs to develop a mechanism for directly notifying consumers if their individual use of a network will trigger a network practice that is likely to have a significant impact on the consumer’s use of the service. Currently, ISPs’ disclosures vary with respect to length, content, and where they are placed on ISPs’ websites. In addition, according to public interest groups we spoke with, the complexity of this information and its lack of standardization across ISPs can make it difficult for consumers to find and use the information to compare broadband products and services. Some groups also raised concerns that consumers have difficulty understanding the information. However, some of the ISP and trade associations we spoke with questioned the rationale for more specific disclosure requirements, stating that consumers have access to the information they need or that flexibility is important, given the difficulties in explaining technical performance information to consumers. In addition, some ISPs and a trade association argued in written comments filed with the FCC that a standardized disclosure requiring specific information from ISPs could overlook features that may be of greater importance to consumers (such as nationwide wireless access) or confuse consumers by providing highly technical information. However, other ISPs were open to adopting a standardized label (as discussed below), with one ISP stating in written comments that it might help consumers make informed choices. FCC’s Open Internet Advisory Committee’s Transparency Working Group studied how ISPs’ present performance and pricing information and issued a report in which it recommended that FCC promote a voluntary labeling program to help consumers more easily compare and select broadband service offerings. The working group suggested the program be voluntary and result in a label that would include information on an ISP’s upload and download speed, price, and usage restrictions. However, the report also noted a number of complexities associated with implementing a standardized label program, such as accounting for variability in broadband speeds, as well as for factors beyond the ISP’s control, and the potential for consumers to purchase more expensive packages due to a lack of consumer education on what speeds they need. FCC officials told us that they have considered standardized labels, but developing a label that is easy to use, useful for consumers with differing broadband needs, and relevant in a changing environment is complicated. Researchers have noted that standardized performance information could help third parties develop tools and information that allow consumers to compare multiple broadband services. FCC requested comment on the working group’s label proposal as part of its 2014 Open Internet NPRM. In its 2015 Open Internet Order, FCC established a voluntary safe harbor for the format and nature of the required disclosure to consumers. To take advantage of the safe harbor, a broadband provider must provide a consumer-focused, stand-alone disclosure. FCC, however, did not mandate the exact format of such disclosure at this time. Instead, it directed its Consumer Advisory Committee to develop and submit to the commission a voluntary disclosure format that ISPs could use to ensure compliance with the transparency rule no later than October 31, 2015. Online third-party speed tests allow consumers to test the performance of their broadband service by sending and receiving data between the consumer’s device (such as a laptop or smart phone) and a test server. For example, www.speedtest.net measures users’ broadband speed, and www.pingtest.net tests other parameters and provides an overall grade that includes information on which applications may be affected by the user’s broadband performance characteristics. FCC also released an application that allows users to test the speed, latency, and packet loss of their mobile broadband.to help consumers understand their broadband performance. In some cases, third parties have created sites that rank broadband providers based on the results of speed-test data. For example, OOKLA’s www.netindex.com uses data from its speed test and consumer surveys to create country, state, and city-level rankings of fixed and mobile broadband providers in terms of upload and download speed, as well as other performance measures. This allows consumers to compare providers based on their performance in the consumer’s local area. RootMetrics.com provides similar data on mobile broadband, including assessments of the mobile ISPs’ speed and reliability. In addition, ISPs may provide speed test tools However, the information from speed tests may not provide consumers with the information they need to understand what factors are affecting their broadband performance. Studies we reviewed and stakeholders we spoke with noted that speed tests can be affected by a variety of factors, which makes it difficult for consumers to identify what specific problem is affecting their broadband performance. For example, researchers have noted that online speed tests can be affected by the home equipment and the number of users accessing the Internet in the home; however, these tests may not enable consumers to discern that these factors are affecting their speeds. In addition, speed tests can be limited in reflecting the end-user’s actual experience because speed tests vary methodologically, and different tests can provide differing results, depending on the location of the speed test server. If a speed test server is located outside the consumer’s ISP network, then the results could be affected by congestion occurring on networks outside of the ISP’s control. For example, when using third-party speed tests, a consumer’s traffic may travel over networks that are not controlled by their ISP, and congestion on those networks may have an effect on the speed test. On the other hand, speed tests hosted by an ISP may only test the performance of the ISP’s network, and thus do not capture congestion that may be affecting a consumer’s ability to access content outside of their ISP’s network. Stakeholders we interviewed noted that consumers may experience performance problems due to disputes between ISPs and content providers regarding interconnection (interconnection disputes) that lead to network congestion when consumers are accessing specific sites, and these problems may not be reflected in speed tests. Congestion at interconnection points has been identified as a problem contributing to poor broadband performance, particularly with respect to streaming video content. Such congestion may not be adequately captured by third-party or ISP speed tests, since it may be limited to a specific interconnection point not used by the speed test server. Some content providers, such as Google, have provided alerts to consumers when Internet congestion is affecting their broadband performance. However, information regarding interconnection agreements can be subject to non-disclosure agreements, and there have been several disputes regarding who is responsible for addressing interconnection congestion. In June 2014, FCC released a statement asserting that these interconnection disputes can affect consumers’ broadband performance and that in the interest of providing consumers with more transparency, FCC was obtaining copies of interconnection agreements to further its understanding of interconnection disputes. Separately, in the 2015 Open Internet Order, FCC stated that it would hear interconnection disputes on a case-by-case basis. ISPs’ traffic management policies can also affect the results of speed tests, making comparisons across providers difficult. In August 2014, a public interest group announced it was filing a complaint against T- Mobile. According to the group, T-Mobile was slowing down the broadband speeds provided to mobile broadband subscribers that had however, T-Mobile did not slow down traffic reached their usage limits; coming from speed test applications. Thus, if a T-Mobile customer whose broadband was being slowed down accessed a speed test to try and determine their broadband speed, their speed test would show a higher speed than the customer was actually receiving. The public interest group stated that this was a violation of the transparency rule, because consumers were not receiving accurate information regarding network performance. In November, FCC issued a press release stating that T- Mobile agreed to take several actions to ensure consumers were able to obtain accurate measures of their speed, including providing a link to a speed test that would reflect the speed reduction. There have also been press reports that backbone networks’ traffic management policies have affected speed test results, and researchers have noted that ISPs can design their networks to provide better speed test results. Since 2011, FCC has published annual reports with broadband performance results from its Measuring Broadband America (MBA) The MBA program compares fixed ISPs’ average delivered effort.download and upload speeds against their advertised speeds (for a 24- hour period, as well as for the peak usage time of 7 PM to 11 PM on weeknights), and provides additional information on measurements of latency and website loading time. FCC is working to expand its MBA effort to include mobile broadband providers and, as part of that process, has released an app for consumers to download and test their mobile broadband speeds. MBA developed out of a recommendation in the 2010 National Broadband Plan to improve the availability of information for consumers about their broadband service. At the time, there were concerns that ISPs were not delivering their advertised speeds, and data were not available to determine whether this was the case. FCC officials stated that MBA allowed them to verify the accuracy of ISPs’ advertising claims. FCC collaborated with industry and public interest stakeholders when designing the MBA program. The sample population is drawn from subscribers of 14 of the largest ISPs (which serve over 80 percent of the residential marketplace) and consists of about 6,000 volunteers. Unlike online speed tests that consumers may access from a variety of websites, MBA only tests elements under the direct or indirect control of a consumer’s ISP, from the consumer’s gateway—the modem or router used by the consumer to access the Internet—to a nearby major Internet gateway point. Thus, the results are not affected by congestion occurring outside of an ISP’s network. In 2014, FCC found that the ISPs included in the report were, on average, delivering 101 percent of advertised download speeds during the peak usage hours. FCC, ISPs, and public interest group representatives stated that the transparency provided through MBA spurred competition among providers and led to improved speeds, which benefit consumers. In addition, ISPs that participate in the MBA effort can provide consumers with their MBA results in order to comply with the transparency rule’s disclosure requirements. Researchers have used raw data from MBA to conduct in-depth analyses of broadband performance. FCC officials also told us that it uses the information from the MBA report to inform its rulemakings on broadband, such as raising the broadband speed for providers to be eligible for the Connect America Fund, which supports telephone and broadband service for rural residents. FCC is also in the process of considering next steps for the program. As noted above, in order to provide comparable results across ISPs, the MBA initially only measured the ISP’s network. Thus, delays incurred in the consumer’s home or in segments of the Internet outside an ISP’s network were excluded from the results. For example, in the 2014 MBA report, FCC noted that it excluded data from the report after discovering some testing servers (and thus, any measurements taken using these servers) were affected by congestion at interconnection points where ISPs exchange traffic with Internet backbone providers. FCC acknowledged that consumers accessing services and content over the affected paths would likely see a significant degradation in their service, but FCC stated that it did not include the results from these servers in its report because it aims to provide an analysis of average network performance. Two public interest groups we interviewed raised concerns that the MBA results were not reflecting the experience of consumers whose broadband performance was negatively affected by interconnection disputes. In the 2014 MBA report, FCC noted that while MBA was initially focused on measuring broadband performance from the consumer to the end of the service provider’s network, Internet services and applications rely on a complex and variable arrangement of interconnected networks to reach consumers. FCC stated that it is exploring options to leverage its MBA effort to gain more insights into the evolving performance of the Internet and provide better information to consumers. For example, FCC officials told us that it is testing an expansion of the MBA program to include measuring broadband performance when a consumer is using streaming video services. According to FCC, this congestion was caused by business disputes between ISPs and a backbone provider. FCC did collect results from the affected servers and released the data for use by academics and others examining such congestion issues. Although the program initially was developed to provide consumers access to broadband performance information, many of the various stakeholders we interviewed, as well as FCC, generally agreed that most consumers are unaware of the MBA report and do not rely on it to obtain broadband performance information. MBA reports are highly technical and include detailed appendices and raw data. FCC and some of the ISPs and public interest groups we interviewed noted that information collected through the MBA program may reach consumers through secondary sources, such as ISPs’ advertising and transparency rule disclosures, news reports, and tech blogs. In addition, as noted above, FCC and many of the ISPs and public interest groups stated that the program has spurred competition among providers and led to improved speeds. However, ISPs’ offerings and performance can vary geographically, and in the Open Internet comments we reviewed, two stakeholders raised concerns that the MBA reports do not provide consumers with information about broadband performance at the local level. The National Broadband Plan recommended that FCC’s broadband performance reporting effort should include “detailed information about the actual performance of the country’s top broadband service providers in different geographic markets (e.g., by county, city or [Metropolitan Statistical Area]).” In the 2014 MBA report, FCC stated that the data are not collected in a way that permits meaningful conclusions about broadband performance at the local level and that this limitation was a result of cost issues and the finite number of measurement devices that could be deployed over the course of the project. A report on the MBA effort that was commissioned by FCC and conducted by the North Carolina State University’s Institute for Advanced Analytics primarily reviewed MBA’s methodology, but also made some suggestions for making the data more consumer-friendly, including the use of a tool developed by the group to help consumers compare ISPs’ performance in their states (when enough data were available to allow for statistically valid comparisons). FCC has taken steps to determine whether its efforts to provide consumers with broadband performance information—such as the transparency rule and MBA program—are effective and meeting consumers’ needs. Specifically, FCC has reviewed consumer complaints and requested stakeholder comments on this issue in several recent rulemaking proceedings. However, FCC’s ability to evaluate its efforts is limited by a lack of useful performance information. In addition, FCC established strategic objectives related to informing consumers in its strategic plan, but lacks performance goals and measures to monitor the effectiveness of its efforts to provide consumers with broadband performance information. Additional actions—such as conducting or commissioning objective consumer research and establishing performance goals and measures—could help FCC evaluate whether its efforts to provide consumers with broadband performance information are effective and meeting consumers’ needs. FCC has requested stakeholder comments in rulemaking proceedings and reviewed consumer complaints filed with the commission to determine whether its efforts to provide consumers with broadband performance information—such as its transparency rule and MBA program—are effective and meeting consumers’ needs. According to FCC officials, FCC relies heavily on stakeholder comments to inform and explain decisions underlying the commission’s orders; however, FCC may also request stakeholders’ comments to develop a body of knowledge on issues of interest to the commission. In several recent rulemaking proceedings, FCC has requested comments from stakeholders on (1) consumers’ broadband performance information needs, (2) best practices for presenting and displaying performance information to consumers, and (3) potential improvements to FCC’s efforts to provide consumers with broadband performance information, among other things. For instance, FCC officials told us that stakeholder comments were used as part of FCC’s determination to enhance its transparency rule. Table 3 summarizes some of the consumer-related issues and questions FCC has raised and requested stakeholder comments on in recent years. According to FCC officials, FCC also relies on consumer complaints filed with the commission to determine whether its efforts to provide consumers with broadband performance information are effective and meeting consumers’ needs. For example, in the 2014 Open Internet NPRM, FCC stated that it had received and analyzed hundreds of consumer complaints related to ISPs’ disclosures under the transparency rule and that these complaints were part of the agency’s rationale for tentatively concluding the rule should be strengthened. In addition, officials told us that consumer complaints have indicated that service reliability is now as important to consumers as speed due to the popularity of video-streaming services, such as Netflix, and that as a result, they are exploring ways to further incorporate service reliability information into the MBA program. They also told us that based on consumer complaints, they knew that consumers could not easily access—and in some cases were not provided—certain performance information (e.g., ISPs’ network management practices, data limits, etc.), and FCC tried to address this issue through the transparency rule. We have previously found that leading organizations that have progressed toward results-oriented management use performance information as a basis for decision-making and that the usefulness of performance information can be affected by its completeness, accuracy, consistency, validity, and credibility, among other things. For example, performance information can focus on various dimensions of performance, such as outcomes, outputs, quality, or customer satisfaction, and can help agencies monitor their progress in meeting programmatic and operational goals. Although stakeholder comments and consumer complaints can provide FCC with valuable insights on topics of interest to the commission, the information FCC obtains from these sources lacks some of the characteristics of useful performance information, such as consistency and completeness. Our review of selected stakeholders’ Open Internet comments found that they generally provided inconsistent views regarding the effectiveness of FCC’s efforts to provide consumers with broadband performance information. For instance, some public interest groups and content providers argued that FCC’s transparency rule was not providing consumers the information they need to make informed decisions regarding broadband services. In their view, FCC should have required ISPs to provide additional technical information—such as detailed information on network congestion—under the transparency rule. However, ISPs countered that this level of technical detail would be confusing to consumers and that the transparency rule had been effective in providing consumers with the information they need. For example, Cox Communications, an ISP, stated that, “most of the expanded disclosure proposals included in the NPRM would impose burdensome obligations that are highly unlikely to prove useful to consumers and would only degrade the overall effectiveness of the transparency rule.” FCC has acknowledged that it has not received consistent information in response to its requests for comments. For instance, in its 2010 Open Internet Order, FCC states that despite broad agreement that broadband providers should disclose information sufficient to enable end users and content providers to understand the capabilities of broadband services, commenters disagree about the appropriate level of detail required to achieve this goal. As a result, FCC decided to continue to allow ISPs flexibility in the implementation of the transparency rule while providing guidance regarding acceptable disclosure methods. Similarly, in its 2015 Open Internet Order, FCC noted that despite its efforts to seek comment on this issue, the record was lacking with respect to specific details on how such a disclosure should be formatted. Thus, as previously mentioned, FCC asked its Consumer Advisory Committee to propose a disclosure format. As noted above, in the 2014 Open Internet NPRM, FCC cited consumer complaints as a basis for tentatively concluding that the transparency rule should be strengthened. However, in the NPRM FCC also acknowledged that its analysis of consumer complaints provided limited insight into the issues that consumers were experiencing. Specifically, FCC stated that since the transparency rule took effect, it had received a “significant number” of consumer complaints about provider speeds, charges, and other practices that the rule was designed to disclose. However, FCC also stated that in some cases, it is difficult to discern from the complaints “whether the consumer’s frustration is with slow speeds or high prices generally, or instead with how the service as actually provided differs from what the provider has advertised.” Moreover, because consumer complaints reflect the perspective of a non-representative sample of consumers—i.e., those who have experienced broadband issues and have chosen to report those issues to the FCC—they do not fully capture the effectiveness of FCC’s efforts for a broader range of consumers. Consequently, several Open Internet comments we reviewed filed by ISPs and industry associations questioned FCC’s reliance on complaints as a basis for decision-making. In addition, we have previously noted concerns with FCC’s complaint process. In 2009, we found that many wireless phone service consumers were not aware that they could file complaints with FCC when they encountered problems. We also found that FCC did not complete in- depth analyses of consumer complaints and lacked goals and measures that clearly identified the intended outcomes of its complaint-processing efforts. As a result, we noted that FCC may not be aware (1) of emerging trends in consumer problems, (2) if specific rules are being violated, or (3) if additional rules are needed to protect consumers. We made a number of recommendations to help address these issues, and FCC has indicated that it is in the process of reforming the agency’s complaint process. For example, in January 2015, FCC launched a new online consumer-help center. According to FCC, the online center will make it easier for consumers to file complaints with FCC, improve communications between consumers and FCC representatives, and help streamline FCC’s process for synthesizing and analyzing trends in consumer complaints. While these steps may enhance FCC’s ability to assess the effectiveness of its efforts among the subset of consumers who file complaints, they will not provide FCC information regarding the effectiveness of its efforts for a broader range of consumers. Without consistent and complete information regarding the effectiveness of its efforts to provide consumers with broadband performance information, FCC’s ability to evaluate its efforts and make performance- based decisions about these efforts is limited. In addition, FCC may find it difficult to convince stakeholders that enhancements to its transparency rule and MBA program are warranted. As we reviewed industry groups’ Open Internet comments, we found many stating that FCC did not provide adequate evidence that ISPs’ disclosures under the transparency rule were ineffective and that enhancements or changes to the rule were needed. For example, Cisco, an equipment provider, stated that FCC’s concerns regarding the accuracy of information some consumers received under the transparency rule do not imply that additional disclosures are called for, but rather that the commission may need to enforce the requirements instead. In contrast to the approaches FCC typically relies on to evaluate the effectiveness of its efforts to provide consumers with broadband performance information, other government entities have undertaken extensive, qualitative, and quantitative consumer research to evaluate the effectiveness of their efforts to inform consumers and ensure that consumers’ information needs are being met. For example: Ofcom—the United Kingdom’s (UK) communications regulatory agency—has conducted qualitative and quantitative research to determine consumers’ use and understanding of ISPs’ traffic management information and the effectiveness of a standardized form that all major UK ISPs voluntarily use to publish their traffic management information. For instance, in 2013, Ofcom commissioned a study that involved qualitative workshops with 135 participants and a representative survey of UK broadband consumers. The study found that consumers had problems understanding some aspects of the standardized form and suggested several potential improvements that could make the information more understandable to consumers, such as adding a summary to the form explaining the relevance of traffic management policies to broadband products. The U.S. Consumer Financial Protection Bureau (CFPB) conducted qualitative and quantitative consumer research when revamping mortgage disclosure forms. The CFPB tested the prototype of the revised disclosure form through 10 rounds of qualitative testing in nine cities. After issuing the revised forms the CFPB also conducted a large-scale quantitative validation test—that included 858 consumers in 20 locations—to compare the revised forms with the disclosures that were currently in use. Some stakeholders we spoke with and whose comments we reviewed also suggested that FCC should undertake consumer research to inform and evaluate its efforts to provide consumers with broadband performance information. In 2009, the Federal Trade Commission filed comments with FCC stating that research has shown that well-designed standardized disclosures can improve consumer understanding and facilitate competition; however, to be most effective, these disclosures should be developed and revised based on controlled, quantitative, objective tests of consumer understanding. In addition, representatives from one industry association we spoke with stated that FCC’s analytical framework, which largely consists of requesting and reviewing stakeholder comments, is not consumer-centric and may not be the most productive process for obtaining an accurate representation of consumers’ information needs. These representatives noted that given the time, effort, and money ISPs expend to collect broadband performance data for FCC’s MBA program, it is important to make sure that the data are presented in a way that is meaningful to consumers. In their view, FCC should also be conducting consumer research, such as focus groups, to make sure that its MBA effort produces a report that consumers can understand. According to FCC officials, FCC’s goal is to improve the accessibility, accuracy, and relevance of the broadband performance information available to consumers. Because consumers’ decision-making processes are complex and can vary, FCC has not attempted to formally evaluate whether its efforts to provide consumers with broadband performance information are meeting consumers’ needs. Officials also told us that they do not believe this type of research has been conducted outside of FCC. FCC’s current strategic plan includes strategic objectives related to informing consumers about broadband networks—reflecting its position that informed consumers help facilitate competition in the broadband market. Specifically, FCC includes “ensure effective policies are in place to promote and protect competition” and “take action where competition is not sufficient to protect the public interest, including ensuring that consumers remain informed” as two of its 17 strategic objectives and states that it will continue to engage consumers though its outreach and education initiatives to facilitate informed choice in the competitive communications marketplace. However, FCC does not include any performance goals under these strategic objectives that define desired outcomes for its efforts to provide consumers with broadband performance information, such as its transparency rule and MBA program. Consequently, FCC also lacks relevant performance measures under these strategic objectives that would allow it to monitor the impact and effectiveness of its efforts. We have previously reported that effective performance goals and measures possess certain characteristics. These include the following: 1) performance goals should clearly define the organization’s desired outcomes, and 2) each performance goal should have a few performance measures that clearly tie back to the goal, cover key performance dimensions, and take different priorities into account.Without performance goals and measures that allow FCC to monitor its progress on its goals related to providing consumers with broadband performance information, FCC has limited assurance that its efforts to provide consumers with broadband performance information are effective and meeting consumers’ needs. In addition, FCC cannot demonstrate that it is achieving its objectives to ensure consumers are informed as envisioned in its strategic plan. In recent years, the broadband market has undergone significant changes. More Americans are accessing broadband and relying on their broadband service for an increasingly diverse range of uses, including education, medicine, public safety, and entertainment. As broadband traffic grows, consumers’ broadband performance issues—such as slower than expected speeds and disruptions to video-streaming services—may simultaneously become more prevalent and more critical to resolve. However, broadband performance can be affected by a number of complicated, technical factors that are not readily apparent to most consumers. FCC has maintained that informed consumers play an important role in facilitating competition in the broadband market and has undertaken efforts to provide consumers with broadband performance information, such as the transparency rule and the MBA program. However, FCC lacks useful performance information and relevant performance goals and measures to evaluate the effectiveness of these efforts and monitor their impact. As a result, FCC cannot be assured that its efforts to provide consumers with broadband performance information are effective and meeting consumers’ needs, and its ability to make performance-based decisions will remain limited. Moreover, FCC may find it difficult to convince stakeholders that its enhancements to the transparency rule are warranted and address their concerns that FCC has not provided adequate evidence to support these enhancements. To help FCC determine whether its efforts to provide consumers with broadband performance information are effective and meeting consumers’ needs, and whether additional efforts—such as a standardized label suggested by FCC’s transparency working group— could benefit consumers, FCC should take the following two actions: 1. conduct or commission research on the effectiveness of FCC’s efforts to provide consumers with broadband performance information and make the results of this research publicly available, and 2. establish performance goals and measures under the agency’s relevant strategic objectives that allow it to monitor and report on the impact and effectiveness of its efforts. We provided a draft of this report to FCC for review and comment. In its written comments, reproduced in appendix II, FCC generally concurred with our recommendations. FCC described its various consumer outreach and education efforts and agreed that extensive research would be helpful in evaluating the effectiveness of its efforts to inform consumers. FCC stated that it will evaluate consumer research on broadband performance and move expeditiously to take action. FCC also stated that it would use consumer research, consumer comments, and in-person feedback at consumer-related events to establish performance measures that will allow it to monitor and report on its progress. FCC also provided an appendix with details about its outreach efforts as well as technical comments that were incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Chairman of the Federal Communications Commission and the appropriate congressional committees. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The objectives of this report were to examine (1) what information is currently available to consumers regarding broadband performance and the limitations of this information, if any, and (2) how does the Federal Communications Commission (FCC) evaluate its efforts to provide consumers with broadband performance information? To assess what information is currently available to consumers regarding broadband performance and any limitations of this information, we reviewed prior GAO reports on this issue, relevant FCC rulemaking proceedings, including its 2014 Open Internet proceeding, FCC’s transparency rule and Measuring Broadband America reports, Internet service providers’ (ISP) websites, information provided by companies, including Netflix and Google, and third-party sites that provide broadband performance information to consumers. We also conducted a literature review to identify articles and studies relevant to broadband performance measurement and disclosure of broadband performance information to consumers. We used key-word searches to identify peer-reviewed articles and other work in relevant databases and reviewed the websites of researchers identified by FCC as conducting work relevant to our review. We also interviewed representatives from FCC, public-interest and consumer-advocacy groups, industry associations, content or equipment providers, and broadband providers. We identified stakeholders to interview based on our review of comments filed in FCC’s 2014 Open Internet and related proceedings, as well as based on recommendations from other organizations we interviewed. Finally, we reviewed a judgmental sample of comments filed in FCC’s 2014 Open Internet proceeding. In this proceeding, FCC requested comment on the effectiveness of its efforts to provide broadband performance information to consumers, including its transparency rule and its Measuring Broadband America program, and its proposed enhancements to these efforts. We ran key-word searches that included terms related to transparency and disclosure for consumers to identify relevant comments, and selected comments from a variety of stakeholders, including public interest groups, ISPs, content providers, trade associations, and consumer representatives. We reviewed these comments to identify statements regarding the effectiveness of FCC’s efforts to provide broadband performance information to consumers, including comments supporting and opposing FCC’s proposed enhancements to these efforts. To determine how FCC evaluates its efforts to provide consumers with broadband performance information, we interviewed FCC officials regarding their efforts to provide consumers with broadband performance information and evaluate and monitor the effectiveness of these efforts and reviewed relevant FCC documents, including its strategic and performance plans, consumer surveys, and resources available to consumers on FCC’s website. We also reviewed FCC’s requests for comment on consumers’ information needs and the effectiveness of FCC’s efforts to provide consumers with broadband performance information, as well as selected comments filed in response to these proceedings (as described above). To determine what additional actions, if any, FCC could take to evaluate its efforts to provide consumers with broadband performance information, we interviewed representatives from the stakeholder groups identified above, as well as officials from the Federal Trade Commission and National Telecommunications and Information Administration regarding their efforts to inform consumers about broadband issues and to evaluate the effectiveness of those efforts. In addition, we reviewed reports and studies on consumer disclosures conducted by FCC’s Transparency Working Group; foreign telecommunications-regulatory bodies, including those in the United Kingdom and European Union; and other federal agencies, such as the Consumer Financial Protection Bureau. We also reviewed prior GAO reports on FCC and results-oriented management and compared FCC’s use of performance information and measures to performance management best practices outlined in previous GAO work. We conducted this performance audit from July 2014 to April 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. Mark L. Goldstein, (202) 512-2834 or [email protected]. In addition to the contact named above, Teresa Anderson, Assistant Director; Steve Brown; Crystal Huggins; Bert Japikse; Sara Ann Moessbauer; Jaclyn Nidoh; Josh Ormond; Cheryl Peterson; Amy Rosewarne; and Hai Tran made key contributions to this report.
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Broadband is increasingly seen as an essential communications service, with applications in education, medicine, public safety, and entertainment. However, consumers can experience broadband performance problems. FCC, which has primary responsibility for regulating broadband, has taken steps to measure broadband performance and to require that ISPs give consumers information about the performance of their services. GAO was asked to review issues related to broadband performance information. This report examines (1) broadband performance information available to consumers and its limitations, if any, and (2) FCC's actions to evaluate its efforts to provide consumers with broadband performance information. To address these objectives, GAO reviewed FCC proceedings; conducted a literature review; analyzed comments filed with FCC regarding broadband performance information; and interviewed FCC officials and various stakeholders from industry and public interest groups. Consumers can access broadband performance information from several sources, including Internet service providers (ISP), online speed tests, and the Federal Communications Commission (FCC); however, the information has some limitations. For example: ISP information: FCC's transparency rule requires ISPs to disclose broadband performance information, but ISPs' disclosures vary, and some stakeholders said that the lack of standardization of disclosures can make it difficult for consumers to compare broadband services. Some ISPs, however, question the need and benefit of standardized disclosures. FCC recently adopted enhancements to the transparency rule, such as specifying what information ISPs must disclose, and FCC is considering potential disclosure formats. Speed tests: Consumers can use information from these tests to verify their broadband speeds. However, speed tests can be affected by many factors and may not detect congestion affecting a specific website. Thus, it can be difficult for consumers to identify the cause of their broadband performance problems. FCC reports: Through the Measuring Broadband America (MBA) program, FCC tests ISPs' networks and compares their actual and advertised speeds in an annual report . However, the report is not targeted toward consumers, and stakeholders stated that consumers may not be aware of the report. FCC has taken steps to evaluate its efforts to provide consumers with broadband performance information, such as its transparency rule and MBA program; however, FCC's ability to evaluate its efforts is limited by a lack of useful performance information and relevant performance goals and measures. For instance, while FCC obtains information about the effectiveness of its efforts from stakeholders' comments and consumers' complaints, FCC has not sought performance information from more objective sources, such as consumer research—as has been done by other government entities. Further, although consumer complaints can provide FCC with valuable insights on topics of interest to the commission, FCC has acknowledged that complaints may not provide a complete picture of consumer's information needs and some industry stakeholders have questioned FCC's reliance on complaints as a basis for making decisions. In addition, although FCC's strategic plan includes strategic objectives related to informing consumers about broadband networks, FCC lacks performance goals and measures to monitor the impact and effectiveness of its efforts to provide consumers with broadband performance information. GAO has previously reported that critical elements of effective performance management include information that is complete and consistent, with performance measures linked to goals. Without such information and measures, FCC cannot be assured that its efforts to provide consumers with broadband performance information are effective and meeting consumers' needs. FCC should take additional steps to evaluate its efforts to provide consumers with broadband performance information. This should include: (1) conducting or commissioning research on the effectiveness of its efforts and making the results publicly available, and (2) establishing performance goals and measures that allow FCC to monitor and report on these efforts. FCC concurred with GAO's recommendations.
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The fiscal year 1997 Army, Navy, and Air Force budgets for spare parts can be reduced by $723 million for the following reasons: A 1993 Air Force Audit Agency (AFAA) report found that program directors maintained aircraft in reconstitutable storage categories (i.e., aircraft with potential contingency, mobilization, or conversion use) even though they had not identified future requirements for the aircraft and had not regenerated an aircraft from reconstitutable storage for the active force in 25 years. AFAA recommended that the Air Force Materiel Command delay procurement of current and future spare parts requirements, valued at $388 million, that were available for reclamation and initiate screening of excess aircraft and engines containing parts that could satisfy spare parts requirements. In a February 1996 follow-up report, AFAA found that Air Force personnel did not release excess aircraft for programmed reclamation screening as recommended. Additionally, the Air Force Materiel Command did not initiate screening of excess aircraft and engines for serviceable spare parts. As a result, timely reclamation was not scheduled for 816 aircraft classified as having no future operational use. Air Force management has initiated action to correct this problem. However, the changes are not reflected in the fiscal year 1997 budget request. Therefore, Congress could reduce the Air Force’s fiscal year 1997 budget request by $388 million to reflect the value of reclaimed spare parts that could be used to satisfy other requirements. The Air Force, in determining its spare and repair parts budget request, does not consider parts on hand at the depot maintenance facilities as an offset to spare and repair parts requirements. Although Congressional Committees have made several attempts to change this policy, the Air Force continues to exclude depot-level assets in its requirements data and budget computations. Our analysis showed that the Air Force overstated its fiscal year 1996 spare parts budget request by $72 million because parts on hand for depot maintenance were not offset against budget requirements. In our March 1996 report, we also reported that the Navy spare parts requirements and budget request for fiscal year 1997 were overstated by at least $60 million. This occurred because the Navy duplicated depot maintenance requirements in its requirements and budget computations. The depot-level assets were included once as recurring demands, based on past depot maintenance usage, and again in a planned program requirements category that is not based on recurring demands. As a result of these duplications, the Navy’s fiscal year 1997 requirements and budget estimates were overstated by at least $60 million. The Air Force and the Navy overstated their spare parts budget requests because inaccurate lead times, demand rates, due-out quantities, and inventory on hand and on order were used in the requirements determination process. The use of inaccurate data resulted in overstated requirements of $8 million and $7 million for the Air Force and the Navy, respectively. The Army budget stratification reports that are used to determine spare and repair parts budget requests are based on inaccurate data. When an item’s available inventory is not sufficient to meet the requirements, the item is considered to be in a deficit position and the aggregate value of items in a deficit position is the basis for determining the budget request. Our review of 258 items with a reported deficit value of $519 million showed that the deficit position for $211 million of the items was incorrect. If accurate requirements and inventory data had been used, the inventory deficit for these items would have been $23 million rather than the $211 million reported. As a result, the fiscal year 1996 budget request included $188 million ($211 million minus $23 million) for items that were not in a deficit position. Because corrective actions were not taken in time to affect the fiscal year 1997 budget request, we believe the fiscal year 1997 request is also overstated. Therefore, Congress may want to reduce the Army’s spare and repair parts budget request by the $188 million it was overstated in fiscal year 1996. The Army, the Navy, and the Air Force O&M budget requests for bulk fuel could be reduced by $522.3 million for the following reasons: In September 1995, we reported that for fiscal year 1996, the Army, the Navy, and the Air Force budget requests for bulk fuel totaled about $4.12 billion. Of this, $4.01 billion was to be used to buy fuel from the Defense Fuel Supply Center (DFSC), with the remaining $107 million used to buy fuel from commercial sources. Based on historical usage data, DFSC estimated that the services’ fuel purchases would be about $3.57 billion, or about $440 million less than the services requested in their budgets, as shown below. As a result of the information in our September 1995 report, Congress reduced the Navy’s fiscal year 1996 fuel budget by $100 million. However, in February 1996 we found that the services’ fuel requirements had been reduced, and there is still about $340 million in the services’ fiscal year 1996 budgets that exceeds their fuel needs. In view of the above, Congress may want to offset the $340 million against the fiscal year 1997 request as follows: Army—$80.7 million, Navy—$124.6 million, and Air Force—$134.3 million. For fiscal year 1997, the services have again requested more funds for fuel than they will need. They budgeted for 117.8 million barrels of fuel at a cost of $3.796 million. However, DFSC estimates that the services will buy 113.2 million barrels at a cost of about $3.613 billion, or $183 million less than the services estimate. As a result, Congress may want to reduce the services’ fiscal year 1997 budget requests by the amounts shown in table 3. This reduction would be in addition to the off-set to the fiscal year 1996 budget. Unobligated balances of expired prior years’ O&M appropriations are generally not available for new obligations but may be used for upward adjustments to existing obligations for the specific fiscal year of the appropriation. These expired unobligated balances may be used to fund upward adjustments for 5 fiscal years after the year of appropriation. At the end of 5 years, the remaining balances are canceled. As of September 30, 1995, the Army, the Navy, and the Air Force had unobligated balances from prior year appropriations totaling $2.2 billion. Service officials stated that the unobligated balances were needed to satisfy upward adjustments to obligations that were incurred in the specific fiscal year but have not yet been liquidated. Our analysis shows that unobligated balances have been increasing rather than decreasing and that the average annual increase over the last 4 years has been $200.24 million for the Army, $150.42 million for the Navy, and $151.57 million for the Air Force. The reason for the increasing balances is that the amount of the liquidations is generally less than the amount initially obligated. Our analysis showed that the average annual increase in unobligated balances was $502 million. In view of this overall trend in inaccurately establishing either requested amounts or obligations for specific projects, Congress could reduce the services’ O&M funding request to amounts that more accurately reflect what is actually needed. The Air Force’s O&M budget request could be reduced by $376.2 million if some aircraft were retired and others placed in storage until needed. The Air Force plans to upgrade its B-1B bombers to play a greater role in combat interdiction. In a recent report, we suggested that instead of upgrading the bombers, the Air Force should retire them. We reported that upgrading the bombers will only marginally increase combat interdiction when compared to total interdiction capabilities that already exist. On the other hand, retiring the aircraft could save the Air Force about $1 billion annually in operating costs, including approximately $366.7 million in O&M costs. The Air Force currently assigns attrition aircraft to active and reserve units where they are flown and maintained as combat designated aircraft. In fiscal year 1997, the Air Force plans to have 126 attrition attack and fighter aircraft in the active force inventory. In 1995, we reported that storing attrition aircraft could be a money-saving alternative to assigning aircraft to active units. A 1992 Air Force study concluded that the costs to store and reconstitute F-15 and F-16 aircraft were 1.9 percent and 2.1 percent of the aircraft’s operation and maintenance costs, respectively. In addition, the Navy found that storing excess aircraft was the most cost-effective way of managing them. Historical attrition rates indicate that some of the attrition aircraft will not be needed until the year 2002. Therefore, Congress may want to reduce the Air Force’s fiscal year 1997 budget by $9.5 million ($75,000 multiplied by 126 aircraft) to encourage the Air Force to store its attrition aircraft. Our analyses of the operating and maintenance costs is based on the funding the Air Force gave Air National Guard units for additional attrition aircraft—about $75,000 per aircraft. The Defense Business Operating Fund (DBOF) is a revolving account that provides various types of services and materials to the military, which pays for these items with O&M funds. The Air Force’s fiscal year 1997 O&M budget request includes a one-time increase of $194.5 million that will be passed through to DBOF so that it can recover prior years’ operating losses and will not have to increase the surcharge rate it charges its customers. Additionally, the Army’s fiscal year 1997 O&M budget request includes $58.9 million for pass-through to DBOF to cover the cost of unutilized plants. According to an Army official, the Army requested the pass-through rather than having to pass the costs on to its customers through increased surcharge rates. For fiscal year 1997, the Army changed its policy regarding unutilized plants. The change in policy is intended to encourage DBOF activities to put unused plants and equipment into standby, idle, or layaway status. Prior to fiscal year 1997, the Army could pass the costs of unutilized plants on to customers through increased DBOF rates. We have previously reported that we do not agree with the practice of using the O&M appropriation process to finance DBOF losses. Doing so fails to focus on DBOF’s actual results of operations, diminishes its incentive to operate efficiently, and makes it more difficult to evaluate and monitor DBOF operations. Our long-standing position has been that DBOF managers should be required to request funds for and justify the need to recover the prior years’ losses to Congress rather than covering such losses with an O&M pass-through to DBOF. In view of our long-standing position that DBOF managers be required to request supplemental appropriations to cover losses associated with Air Force and Army DBOF activities, Congress may want to reduce the Air Force’s O&M budget request by $194.5 million and the Army’s O&M budget request by $58.9 million. The Army’s, the Navy’s, the Air Force’s, and DOD’s fiscal year 1997 budget requests for civilian personnel could be reduced by $245.5 million because (1) the projected civilian personnel levels at the beginning of fiscal year 1997 will be less than those the services used to determine their budget requests ($185.5 million) and (2) the amount requested in the budget submission differs from the amount shown in the budget justification documents ($60 million). Based on the number of Navy and DOD personnel onboard as of April 1996, and Army and Air Force personnel onboard as of May 1996, we estimate that the actual end strength at the end of fiscal year 1996—the beginning figure for fiscal year 1997—will be 7,331 personnel less than the number used by the services to determine their fiscal year 1997 budget request. Because the services used a larger beginning figure, the number of work years used in the budget request is also overstated by 3,665 work years, or $185.5 million. Additionally, we found that the amount shown in the President’s budget for civilian personnel was $60 million more than the amount shown in the justification documents. Table 4 shows the effect of the overstatement of work years and the variance between the President’s budget presentation and the supporting documentation. In view of the overstated personnel requirements, Congress may want to reduce the Army’s budget request for civilian personnel by $33.3 million, the Navy’s by $108.3 million, the Air Force’s by $70 million, and other DOD agencies by $33.9 million. The Army uses the Training Resource Model (TRM) to compute its operating tempo (OPTEMPO) requirements. OPTEMPO refers to the pace of operations and training that units need in order to achieve a prescribed level of readiness. We reported that TRM contained outdated assumptions that resulted in an overstatement of training requirements. Although the Army is in the process of implementing corrective measures, TRM remains outdated and the Army continues to overestimate the amount of OPTEMPO funds it needs. For fiscal year 1997, the Army requested $2.61 billion for ground OPTEMPO based on a training rate of 800 miles per vehicle per year. However, the Army only obligated 91 percent of its OPTEMPO funds in fiscal year 1995. In addition, one of the Army’s major commands planned to execute a training rate of only 720 miles for fiscal year 1996. Based on the fact that TRM has not been updated to more accurately reflect actual training requirements and the Army’s average percentage of OPTEMPO funds obligated for fiscal year 1995 was 9 percent less than the Army planned to spend, we estimate the Army’s fiscal year 1997 request could be reduced about $235 million ($2.61 billion multiplied by 9 percent). The U.S. Transportation Command (USTRANSCOM) is responsible for providing air, land, and sea transportation services to the military forces. These services are provided through USTRANSCOM’s three component commands: the Military Traffic Command (MTMC), the Air Mobility Command (AMC), and the Military Sealift Command (MSC). USTRANSCOM operates under the DBOF system of financial management whereby DOD customers request transportation services from USTRANSCOM’s component commands, which contract for the services and bill the customers for those services. DOD guidance requires that USTRANSCOM recover its total cost from its customers. Customers generally pay for the transportation services with O&M funds. In February 1996, we reported that DOD customers pay USTRANSCOM substantially more—from 24 percent to 201 percent—than it costs USTRANSCOM to provide the transportation services. For example, customers may pay MTMC and MSC $3,800 to arrange for shipment of a container load from California to Korea. However, the commercial carrier may charge USTRANSCOM only $1,250 for providing the transportation service. Factors that increase the transportation costs to the customers include (1) fragmented transportation processes, (2) multiple organizational elements to implement these processes, and (3) component commands’ organizational structure that requires duplicative administrative and support activities. DOD and USTRANSCOM are reengineering the component commands’ transportation business processes, but are delaying organizational changes that would eliminate duplicative and redundant functions existing among the component commands. We believe that waiting to address the issues of organizational structure will be a significant barrier to achieving the full benefits of the reengineering efforts. In order to encourage USTRANSCOM to make the needed organizational changes, Congress may want to reduce USTRANSCOM’s DBOF budget by $250 million, or 5 percent. If the changes are made, the services would need less O&M funds to pay for the more efficient and less costly USTRANSCOM transportation services. The reduction should be made based on the percent of total transportation services that each of the military services obtain from USTRANSCOM: Army $92.5 million, Navy $25 million, Marine Corps $12.5 million, Air Force $55 million, and Defense-wide $65 million. DOD officials said that reducing the services’ O&M budgets has the effect of penalizing the services for USTRANSCOM’s inefficient operations. They recommended and we agree that if the services’ O&M budget requests are reduced, USTRANSCOM should rebate a like amount to each service. In March 1996, we reported that the Army’s budget request does not consider the funds contributed by the Shell Oil Company for its share of the cleanup costs at the Rocky Mountain Arsenal. According to Army officials, there is about $80 million in the Shell account and these funds are used to supplement funds transferred to O&M from the Defense Environmental Restoration Account (DERA). The Army rolls up the Arsenal’s requirements for appropriated funds into a consolidated DOD budget request and according to Army officials, the Shell funds are not visible in the budgeting process and do not influence funding decisions. Army officials also said that, in most instances, it is not feasible to use the Shell funds to offset budget requirements because the funds do not represent a steady fixed flow and are not fiscal year specific. Although the Shell contribution may not represent a fixed flow of funds, there are about $80 million in the account, and this is more than the Arsenal’s allocation for environmental cleanup in fiscal year 1996—about $75 million. In view of the fact that the $80 million Shell contribution to the cleanup costs at the Arsenal has not been considered in determining total requirements, Congress may want to reduce the amount of funds transferred to Army O&M from the Environmental Restoration Account in the fiscal year 1997 budget request by $80 million. The Army and the Defense-wide fiscal year 1997 O&M budget requests for flying hours can be reduced by $58.3 million for the following reasons: The Army traditionally requests more funds for its flying hour program than it obligates. For example, in fiscal year 1995, the Army planned to fly 807,000 hours but only flew 748,419 hours, a 7-percent reduction. In fiscal year 1996, the Army’s budget request was based on 690,667 flying hours. However, after the budget was submitted, the Army adjusted its flying hour program downward by 5 percent. Additionally, the Army flew about 5 percent fewer hours in the first quarter of fiscal year 1996 than it planned. In view of the fact that the Army flew fewer hours than funded in fiscal year 1995 and it appears that the Army will fly fewer hours than funded in fiscal year 1996, Congress may wish to reduce the Army’s fiscal year 1997 flying hour budget by $40.3 million (5 percent of the $805 million requested). The Defense Health Program’s flying hour program supports the aeromedical evacuation system, which provides air transportation for injured, sick, and wounded active-duty members of the armed forces in the United States. A joint review conducted by the DOD Inspector General (DOD-IG) and the Air Force Audit Agency concluded that the Defense Health Program’s aircraft were being flown in excess of previous and current training requirements and that the flying hour program should be reduced from 17,211 hours to 8,550 hours—a savings of $20.2 million. In response to the report, the DOD Comptroller reviewed the aeromedical flying hour program budget request for fiscal year 1997 and reduced the aeromedical flying hour program by 3,500 hours—a reduction of $2.2 million. Because the DOD-IG recommended a $20.2 million reduction and the DOD Comptroller only reduced the flying hour program by $2.2 million, Congress may want to further reduce the program’s fiscal year 1997 flying hour program by $18 million. Until 1992, Air Force F-15 and F-16 aircraft wings consisted of 3 squadrons, with 24 combat aircraft in each squadron. In 1992, the Air Force began reducing each squadron to 18 combat aircraft, or 54 combat aircraft in each wing. Our May 1996 report showed that the current F-15 and F-16 squadron configuration is less efficient and more costly than the former configuration of 24 aircraft in each squadron. Our review of Air Force base closure capacity data indicated that most fighter wings in the United States could increase squadron size to previous levels with little or no additional costs. In fact, wing personnel at 2 Air Force bases indicated that their installations could absorb 18 aircraft per wing at no additional cost. If the Air Force changed its wing configuration back to the previous level of 72 aircraft, it could close 1 base, reduce maintenance personnel and equipment requirements, and save about $48 million in fiscal year 1997. Accordingly, Congress may want to reduce the Air Force’s fiscal year 1997 O&M request by $48 million. The real property maintenance program funds the maintenance, repair, and minor construction of facilities and properties. The Navy’s Pacific Fleet’s real property maintenance account is divided into 19 categories, 18 of which identify specific projects in areas such as troop housing, utility systems, and maintenance. The remaining category is identified as “other.” For fiscal year 1997, the Navy’s budget request included $27.9 million for the other category. We requested the list of projects to be funded from the other category. Pacific Fleet officials told us that a list does not exist for the other category. We also asked Navy Comptroller officials to provide documentation to support the $27.9 million request. At the time we completed our review in July 1996, the requested documentation had not been provided nor could the Navy explain how the money would be used. Therefore, Congress may wish to reduce the Navy’s O&M request by $27.9 million. The Army’s fiscal year 1997 O&M budget request includes $20 million to operate, support, and store the Hunter Unmanned Aerial Vehicle system. In 1995, the Joint Chiefs of Staff (JCS) and the Joint Requirements Oversight Council (JROC) recommended terminating the Hunter program and reprogramming the funds to other warfighting priorities. Their memorandum directed that equipment already delivered should be placed in an inactive storage status. In January 1996, the DOD Acquisition Decision Memorandum approved termination of the Hunter program after delivery of seven systems. The memorandum also approved the operational use of one system until a new unmanned aerial vehicle becomes available and authorized the use of other assets for testing as well as operator and maintenance training. Our evaluations of the Hunter program disclosed numerous deficiencies. In December 1993, we reported that test results identified deficiencies that could jeopardize the system’s ability to meet military requirements. In March 1995, we reported that the Hunter system was logistically unsupportable and that tests had identified serious performance problems that adversely impacted the system’s effectiveness. Our analysis showed that $19.5 million of the $20 million the Army requested will be used for depot operations, field training support, and logistics support. The remaining $500,000 will be used for inactive storage. In view of the numerous logistics and operational problems highlighted in our reports and the fact that the JCS and the JROC recommended that the Hunter program be terminated, Congress may want to reduce the Army’s budget by $19.5 million. The fiscal year 1997 Army and National Guard O&M budget requests for training rotations can be reduced by $16.7 million for the following reasons: Two Army units (one active unit and one National Guard unit) that were scheduled to attend the National Training Center (NTC) in fiscal year 1997 are not ready for NTC training and will not go. Because other units will not be sent in place of the two units, the number of NTC training rotations has been reduced to 10 instead of 12 during fiscal year 1997. As a result, the Army will not incur about $7.2 million of O&M training costs related to transportation, maintenance, and sending opposing force augmentees to NTC. The National Guard planned to send a brigade to the Army’s Joint Readiness Training Center (JRTC) in fiscal year 1997. After the Army submitted its operating budget for JRTC, a decision was made to not send the brigade and no other unit will be sent in its place. As a result, the Army will not incur about $900,000 of costs that were included in the fiscal year 1997 budget. The Army agrees that its budget request is overstated by $8.1 million due to changes in training rotations. However, Army officials said that they would like to retain $3 million of the $8.1 million to meet other unfunded requirements. In addition to the costs incurred by the active Army for sending units to the training centers, the National Guard also incurs costs for sending its units to the training centers. The Army National Guard is allocated a training rotation each year at NTC and JRTC. According to the National Guard Bureau, it costs the National Guard about $8.6 million more than normal annual training expenses to send two brigades to the training centers. Because of the decision not to send a brigade to NTC and JRTC in fiscal year 1997, the National Guard budget could be reduced by $8.6 million. The Army currently has seven prepositioning ships that were activated from the Ready Reserve Force (RRF). The Army plans to use these ships until it takes delivery of five large, medium speed, roll-on/roll-off (LMSR) ships. At that time, the Army will transfer the materials from the seven existing ships to the five LMSR ships and return the seven ships to RRF. The Army’s fiscal year 1997 O&M budget request includes $173.8 million to lease and operate the prepositioning ships. Included in the $173.8 million is $12.6 million to lease and operate six ships for 30 days to 92 days from the date the ships are unloaded until they are returned to RRF. The Army added costs for 30 to 92 additional days between the unloading date and the date the ships are scheduled for return to RRF, because, according to an Army official, the additional days would be needed if LMSRs are not delivered as scheduled. In addition, the Army’s budget includes $1.1 million to deactivate one ship on the last day of the fiscal year even though the Military Sealift Command has included the deactivation cost for the ship in its fiscal year 1998 budget. In view of the fact that the Army included $12.6 million for additional ship lease and operating costs and $1.1 million for deactivation, which is scheduled for fiscal year 1998, Congress could reduce the Army’s fiscal year 1997 O&M budget request by $13.7 million. The Internal Revenue code imposes a federal excise tax on gasoline and diesel fuel purchased. However, the military services are entitled to a refund for that portion of the fuel used on base. In September 1995, the Air Force Audit Agency and the Army Audit Agency reported that neither service is receiving all the refunds they are entitled to. The Air Force Audit Agency estimated that because the Air Force had not established effective controls to ensure timely filing for the tax refunds, the Air Force could lose about $8.5 million in fiscal year 1997 if corrective actions are not taken. The Army Audit Agency similarly reported that the Army could lose as much as $2.3 million in fiscal year 1997 because of its failure to seek and obtain fuel tax refunds. Therefore, Congress may want to reduce the Air Force’s fiscal year 1997 budget by $8.5 million and the Army’s by $2.3 million to encourage them to improve their fuel tax refund filing procedures. The Air Force included $74.4 million in its fiscal year 1997 O&M budget request for ongoing operations in Bosnia based on fiscal year 1996 cost estimates. In March 1996, we reported that the Air Force’s fiscal year 1996 costs may be significantly less than estimated because (1) per diem costs were less than planned ($89 million instead of $128 million) and (2) the number of flying hours in fiscal year 1996 was reduced by 1,900 hours. We computed the estimated costs for fiscal year 1997 using the Air Force’s updated fiscal year 1996 costs for per diem and transportation, and added an inflation factor of 3 percent. Our computation was $4.7 million less than the Air Force’s estimate. In addition, the Air Force’s cost estimate for the fiscal year 1997 air operations is overstated because the Air Force based its estimate on the fiscal year 1996 program before it was reduced by 1,900 hours (475 per quarter). As a result, air operations, which are planned to end after the first quarter of fiscal year 1997, are overstated by 475 hours, or $910,695. Therefore, Congress may want to reduce the Air Force’s fiscal year 1997 budget request by $5.6 million ($4.7 million plus $900,000). The Army, as the single manager for conventional ammunition, is responsible for managing and maintaining wholesale stocks of conventional ammunition for all the services. Each service provides O&M funds to the Army to pay for maintenance and repair of its ammunition. In June 1996, we reported that the Army plans to spend $1.3 million and the Marine Corps $3.9 million in fiscal year 1997 to restore ammunition items to a usable condition when, at the same time, there are already sufficient excess ammunition items in a ready-to-use condition. Table 5 shows the planned maintenance expenditures and the existing excess ammunition items. In view of the above, Congress may want to reduce the Army’s and the Marine Corps’ fiscal year 1997 O&M requests by $1.3 million and $3.9 million, respectively. The Navy plans to acquire 12 coastal mine hunter ships (MHC) by the end of fiscal year 1999 at a total cost of about $1.5 billion. Although these ships were initially designed for U.S. coastal protection from Soviet mines, the need for them has greatly diminished with the breakup of the Soviet Union. In May 1995, the DOD-IG reported that the Navy could deactivate 5 of the 12 MHC ships and achieve O&M cost avoidance of $69.2 millionduring fiscal years 1996-2001. In March 1996, we recommended that the Navy consider deactivating and storing the five unneeded ships or transferring them to other allied navies through the foreign military sales program. The Navy is currently exploring these options. By the end of fiscal year 1997, the Navy will have received 10 of the 12 ships and has identified a requirement for 7 of them. Our analysis showed that if the Navy deactivated three ships—the number of ships on hand by the end of fiscal year 1997 less the identified requirement—it could save about $4.7 million ($6.9 million total O&M costs less $2.2 million for deactivating the ships). Therefore, Congress may want to consider reducing the Navy’s O&M request by $4.7 million to encourage the Navy to deactivate the unneeded ships. The Army’s morale, welfare, and recreation (MWR) programs are quality-of-life programs that provide a variety of community, soldier, family, recreational, educational, and other support activities. The programs are funded by appropriated funds and/or nonappropriated funds. Appropriated fund support for the MWR programs is included in the Army’s O&M budget request. The Army Audit Agency reported that the Army’s Training and Doctrine Command could reduce its annual MWR overhead costs by $2.1 million if it would transfer MWR accounting functions to a centralized accounting facility at the Red River Army Depot. The Army Audit Agency also reported that the Training and Doctrine Command was the only major Army command in the United States that had not transferred its MWR accounting functions to Red River. In February 1996, the Command agreed to transfer its MWR accounting functions to Red River Army Depot. The transfer will save $2.1 million, which will be available to fund other MWR programs. Because the fiscal year 1997 budget request does not reflect the transfer of accounting functions, Congress could reduce MWR appropriated fund support to the Army by $2.1 million and not adversely affect MWR services. This review is one of a series that examines defense budget issues. Our review approach consisted of interviews with program and budget officials responsible for managing the programs and/or preparing the budget requests; reviews and analyses of financial, budget support, and program documents related to the O&M issues being reviewed; and analysis of prior-year funding levels and obligations to identify trends. In addition, we reviewed our ongoing assignments and recently issued reports as well as recently issued reports of the DOD-IG and the service audit agencies to identify issues with O&M ramifications. Our review was performed at Army, Navy, Air Force, and DOD headquarters; USAREUR; FORSCOM; Atlantic and Pacific Fleets; and Air Combat Command. We performed our review from January to June 1996 in accordance with generally accepted government auditing standards. Representatives of the services and DOD were given an opportunity to comment on the issues in this report. Their comments were incorporated in the report where appropriate. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; the Chairmen and Ranking Minority Members of the House and Senate Committees on Appropriations, Senate Committee on Armed Services, and House Committee on National Security; and other interested congressional committees. Copies will be made available to others upon request. This report was prepared under the direction of Mark E. Gebicke, Director, Military Operations and Capabilities Issues, who may be reached on (202) 512-5140 if you or your staff have any questions. Major contributors to this report are listed in appendix I. Thomas A. Pantelides Robert C. Mandigo, Jr. Cora M Bowman Raul S. Cajulis Linda H. Koetter Jeanett H. Reid 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.
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GAO evaluated the military services' and Department of Defense's (DOD) fiscal year (FY) 1997 operations and maintenance (O&M) budget requests, focusing on whether the O&M accounts should be funded in the amounts requested. GAO found that: (1) GAO identified potential budget reductions of about $3.4 billion to the FY 1997 O&M budget requests; (2) the FY 1997 Army, Navy, and Air Force budgets for spare parts could be reduced by $723 million; (3) the Army, Navy, and Air Force O&M budget requests for bulk fuel could be reduced by $522.3 million; and (4) in view of an overall trend in inaccurately establishing either requested amounts or obligations for specific projects, Congress could reduce the services' O&M funding request to amounts that more accurately reflect what is actually needed. GAO also found other potential reductions in budget requests involving: (1) aircraft storage; (2) Defense Business Operations Fund pass-throughs; (3) civilian personnel requirements; (4) Army operating tempo; (5) U.S. Transportation Command; (6) environmental restoration; (7) flying hours; (8) Air Force aircraft basing; (9) real property maintenance; (10) Hunter Unmanned Aerial Vehicle System; (11) training rotations at the National Training Center and the Joint Readiness Training Center; (12) Army Prepositioning Afloat Program; (13) fuel tax refunds; (14) Bosnia operations; (15) ammunition maintenance; (16) mine hunter ships; and (17) morale, welfare, and recreation.
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The federal responsibility for overseeing nursing homes belongs to HCFA, an agency of the Department of Health and Human Services (HHS). Among other tasks, HCFA defines federal requirements for nursing home participation in Medicare and Medicaid and imposes sanctions against homes failing to meet these requirements. HCFA funds state survey agencies to do the on-site reviews of nursing homes’ compliance with Medicare and Medicaid participation requirements. In California, DHS performs nursing home oversight, and its authority is specifically defined in state and federal law and regulations. As part of this role, DHS (1) licenses nursing homes to do business in California; (2) certifies to the federal government, by conducting reviews of nursing homes, that the homes are eligible for Medicare and Medicaid payment; and (3) investigates complaints about care provided in licensed homes. To assess nursing home compliance with federal and state laws and regulations, DHS relies on two types of reviews—the standard survey and the complaint investigation. The standard survey, which must be conducted no less than once every 15 months at each home, entails a team of state surveyors spending several days on site conducting a broad review of care and services with regard to meeting the assessed needs of the residents. The complaint investigation involves conducting a targeted review with regard to a specific complaint filed against a home. The state and HCFA each has its own system for classifying deficiencies that determines which remedies, sanctions, or other actions should be taken against a noncompliant home. For standard surveys, California’s DHS typically cites deficiencies using HCFA’s classification and sanctioning scheme; for complaint investigations, it generally uses the state’s classification and penalty scheme. Table 1 shows HCFA’s classification of deficiencies and the accompanying levels of severity and compliance status. HCFA guidance also classifies deficiencies by their scope, or prevalence, as follows: (1) isolated, defined as affecting a limited number of residents; (2) pattern, defined as affecting more than a limited number of residents; and (3) widespread, defined as affecting all or almost all residents. Our work indicates that 34 residents—more than half of our sample of 62 of California’s nursing home residents who died in 1993—received unacceptable care. In certain of those cases, the unacceptable care endangered residents’ health and safety; however, without an autopsy that establishes the cause of death, we cannot be conclusive about whether the unacceptable care directly led to any individual’s death. Nevertheless, the care problems we identified were troubling, such as unplanned weight loss and failure to properly treat pressure sores. For example: A resident lost 59 pounds—about one-third of his weight—over a 7-week period. Only a small share of the weight loss was attributable to fluid loss. Until 2 days before the resident’s death, the nursing home staff had not recorded his weight since the day he was admitted to the home or notified the physician of the resident’s condition. A resident was admitted to a nursing home with five pressure sores, four of which exposed the bone. Although the physician ordered pain medication during treatments that removed the blackened dead tissue from her sores, the resident’s medical record indicated that she received pain medication only three times during 5 weeks of daily treatments. The resident, who was not in a condition to verbalize her needs, was reported in the nursing notes to moan whenever this procedure was done without prescribed pain medication. DHS surveyors identified a substantial number of homes with serious care problems through their annual standard surveys of nursing homes and through ad hoc complaint investigations. Our analysis of these data shows that, between 1995 and 1998, surveyors cited 407 homes, or nearly a third of the 1,370 homes included in our review, for serious violations classified under the federal deficiency categories, the state’s categories, or both. (See fig. 1, “Caused Death or Serious Harm.”) These homes were cited for improper care leading to death (26 homes), posing life-threatening harm to residents (259 homes), other serious violations involving improper care (111 homes), or falsifying or omitting key information from medical records (11 homes). Caused Death or Serious Harm (407 Homes) Caused Less Serious Harm (449 Homes) The four wedges in figure 1 correspond to the federal deficiency categories shown in table 1 and include comparable-level deficiencies cited using the state’s separate classification scheme, as shown in table 2. Improper care leading to death, imminent danger or probability of death, intentional falsification of medical records, or material omission in medical records. Violations of federal or state requirements that have a direct or immediate relationship to the health, safety, or security of a resident. California has no state citation directly equivalent to the federal category. California has no state citation directly equivalent to the federal category. Within the “caused death or serious harm” group are homes cited for several types of federal violations, including “improper care leading to death” and “life-threatening harm.” Following is an example from the 26 homes California surveyors cited for improper care leading to death: A resident who was admitted to a home for physical therapy rehabilitation following hip surgery died 5 days later from septic shock, caused by a urinary tract infection. The home’s staff failed to monitor fluid intake and urine output while the resident was catheterized and afterwards. Nursing home staff failed to notify a physician as the resident’s condition deteriorated. When his family visited and found him unresponsive, they informed the staff and his physician was contacted. His physician ordered intravenous antibiotics, but the staff were unable to get the intravenous line in place and continuously functioning until 8 hours had passed. The resident died 3 hours later. physician’s order, or notified the attending physician and family about the resident’s deteriorating condition. We also determined that cases of poor care were not limited to the 407 homes noted. State surveyors documented instances of serious quality problems that they categorized as federal deficiencies in the range of “actual harm” or “potential for more than minimal harm” or as lower-level state violations. Examples of these are included in our report. The deficiencies that state surveyors identified and documented only partially capture the extent of care problems in California’s homes, for several reasons. First, some homes can mask problems because they are able to predict the timing of annual reviews or because medical records sometimes misrepresent the care provided. In addition, state surveyors can miss identifying deficiencies because of limitations of the methods used in the annual review—methods established in HCFA guidance on conducting surveys—to identify potential areas of unacceptable care. One problem masking the extent of poor care involves the scheduling of standard surveys. The law requires that a standard survey be unannounced and that it be conducted roughly every year. Because many California homes were reviewed in the same month—sometimes almost the same week—year after year, homes could often predict the timing of their next survey and prepare to reduce the level of problems that may normally exist at other times. At two homes we visited, we observed that the homes’ officials had made advance preparations—such as making a room ready for survey officials—indicating that they knew the approximate date and time of their upcoming oversight review. After we discussed these observations with California DHS officials, they acknowledged that a review of survey scheduling showed that the timing of some homes’ surveys had not varied by more than a week or so for several cycles. DHS officials have since instructed district office managers to schedule surveys in a way that will reduce their predictability. surveys to make them less predictable and maximize the element of surprise. Subsequently, the Omnibus Budget Reconciliation Act of 1987 (OBRA 87) nursing home legislation and HCFA’s implementing guidance attempted to address the predictability issue. However, a subsequent HCFA-conducted poll of nursing home resident advocates in most states and a 1998 nine-state study by the National State Auditors Association found that predictable timing of inspections continues to be a problem. Inaccurate or otherwise misleading entries in medical records can mask care problems or make it more difficult for surveyors to prove that care problems exist. We found such irregularities among the medical records we reviewed, a problem widely recognized in long-term-care research.Discrepancies appeared in about 29 percent of the 1993 records we reviewed. The following two examples of such discrepancies were found in these records: During the hospital stay of a nursing home resident, doctors discovered that the resident was suffering from a fractured leg and that the fracture had occurred at least 3 weeks before the hospitalization. The nursing home’s records were missing the clinical notes for the same 3-week period preceding the resident’s hospital stay, thus omitting any indication that an injury had occurred, how it might have occurred, or how it might have been treated. Although a resident’s medical record showed that each day she consumed 100 percent of three high-caloric meals and drank four high-protein supplements, the resident lost 7 pounds—10 percent of her total weight—in less than a month. The implausibility of the resident’s weight loss under these conditions raises major questions about the accuracy of the medical records regarding nutritional intake. determined that the staff member was not working at the home when the treatments were reportedly provided. A third monitoring weakness that can hinder surveyors’ detection of care problems involves HCFA’s guidance on selecting cases for review to help surveyors identify potential instances and prevalence of poor care. HCFA policy establishes the procedures, or protocol, that surveyors must follow in conducting a home’s standard survey. However, HCFA’s protocol—designed to increase the likelihood of detecting problems with care—does not call for randomly selecting a sufficient sample of residents. Instead, it relies primarily on the use of the individual surveyor’s professional expertise and judgment to identify resident cases for further review. In contrast, our expert nurses, in reviewing current medical records to identify areas with potential for poor care, took a stratified random sample—cases from different groups of the home’s more fragile as well as average residents. Each sample was of sufficient size to estimate the prevalence of problems identified. In addition, the nurses used a standard protocol to collect and record quality-of-care information from chart reviews, staff interviews, and data analyses to ensure that the information was in a consistent format across the various individuals interviewed and documents reviewed. For two homes receiving their annual surveys, we compared the findings of the DHS surveyors, who followed HCFA’s survey protocol, with the findings of our expert nurse team, who accompanied the state surveyors and conducted concurrent surveys. The methodology our expert nurses used examined primarily quality-of-care outcomes and related issues, whereas state surveyors, following federal guidance, reviewed this and 14 additional areas, such as social services, resident assessment, and transfer and discharge activities. As a result, DHS surveyors sought and found deficiencies in some important areas that our expert nurses did not document. However, in the quality-of-care area, our nurses found serious care problems that DHS surveyors did not find, including unaddressed weight loss, improper pressure sore treatment, and ineffective continence management. We also examined the efforts of the state and HCFA to ensure that the homes cited for serious deficiencies were correcting their problems and sustaining compliance with federal requirements over time. Encouraging sustained compliance and appropriately sanctioning deficient providers are among HCFA’s stated enforcement goals. However, we found that, under HCFA’s policies, enforcement results often fall far short of those goals. Between July 1995 and March 1998, DHS surveyors cited 1 in 11 homes, or 122 homes, in both of their last two surveys for conditions causing actual harm, putting residents in immediate jeopardy, or causing death. These homes represent over 17,000 resident beds. The national compliance rate for about the same period and for the same repeated, serious harm deficiencies was slightly worse: about 1 in 9 homes, representing more than 232,000 beds, were cited. However, HCFA enforcement policies have led to relatively few federal disciplinary actions taken against these homes in California. Before OBRA 87, the only sanction available to HCFA and the states to impose against such noncompliant homes, short of termination, was to deny federal program payments for new admissions. OBRA 87 provided for additional sanctions, such as denial of payment for all admissions, civil monetary penalties, and on-site oversight by the state (“state monitoring”). Nevertheless, these sanctions were seldom applied, even to the 122 homes in our analysis cited twice consecutively for serious harm deficiencies. Specifically, only a fourth—33 homes—had any federal sanctions that actually took effect. for which the state agency is permitted to grant a grace period first to correct deficiencies without the imposition of federal sanctions. To qualify for immediate referral under HCFA policy, homes must have been cited for deficiencies in the immediate jeopardy category or rated as a “poor performer.” The criteria for meeting HCFA’s poor performer definition include an intricate combination of immediate jeopardy and substandard quality-of-care deficiencies. Since July 1995, when the federal enforcement scheme established in OBRA 87 took effect, 59 California nursing homes have been cited for immediate jeopardy deficiencies and about 25 have been designated poor performers. HCFA guidance permits the state to broaden the definition of poor performer, but California has chosen not to do so. Noncompliant homes that are not classified in the immediate jeopardy or poor performer categories do not meet HCFA’s criteria for immediate referral for sanctioning, even though some may have seriously harmed residents. HCFA policy permits granting a grace period to this group of noncompliant homes, regardless of their past performance. Between July 1995 and May 1998, California’s DHS gave about 98 percent of noncompliant homes a grace period to correct deficiencies. For nearly the same period (July 1995 through April 1998), the rate nationwide of noncompliant homes receiving a grace period was higher—99 percent—indicating that the practice of granting a grace period to virtually all noncompliant homes is common across all states. being cited by DHS for the same violations—the unacceptable treatment of pressure sores—4 years consecutively, has continued to receive a grace period to correct its deficiencies following each annual review. We question the wisdom of granting such homes a grace period with no further federal disciplinary action. For the few California homes that have had federal sanctions imposed, HCFA has been less than vigilant. In principle, sanctions imposed against a home remain in effect until the home corrects the deficiencies cited and until state surveyors find, after an on-site review (called a “revisit”) that the home has resumed substantial compliance status. However, if some of the home’s deficiencies persist but are no more serious than those in the “potential for harm” range, HCFA policy is to forgo a revisit and accept the home’s own report of resumed compliance status. HCFA officials told us this policy was put into place because of resource constraints. In California, however, this policy has been applied even to some of the immediate referral homes that, on a prior revisit, had been found out of substantial compliance. 1997, HCFA imposed several sanctions but rescinded them each time it accepted the home’s unverified report of resumed compliance status. Similarly, HCFA’s level of vigilance appears to be inadequate for homes that have been terminated and later reinstated. HCFA has the authority to terminate a home from participation in Medicare and Medicaid if the home fails to resume compliance. However, termination rarely occurs and is not as final as the term implies. In the recent past, California’s terminated homes have rarely closed for good. Of the 16 homes terminated in the 1995 through 1998 time period, 14 have been reinstated. Eleven have been reinstated under the same ownership they had before termination. Of the 14 reinstated homes, at least 6 have been cited with new deficiencies that harmed residents since their reinstatement, such as failure to prevent avoidable accidents, failure to prevent avoidable weight loss, and improper treatment of pressure sores. left sitting in urine and feces for long periods of time; some residents were not getting proper care for urinary tract infections; and surveyors cited the home’s infection control program as inadequate. California DHS officials recognized that the state—in combination with HCFA’s regional office—has not dealt effectively with persistently and seriously noncompliant nursing homes. Therefore, beginning in July 1998 and with HCFA’s approval, DHS began a “focused enforcement” process that combines state and federal authority and action, targeting providers with the worst compliance records for special attention. As a start, DHS has identified about 34 homes with the worst compliance histories—approximately 2 in each of its districts. Officials intend to conduct standard surveys of these homes about every 6 months, rather than the normal 9-to-15-month frequency. In addition, DHS expects to conduct more complete on-site reviews of homes for all complaints received about these homes. DHS officials also told us that the agency is developing procedures—consistent with HCFA regulations implementing OBRA 87 reforms—to ensure that, where appropriate, civil monetary penalties and other sanctions stronger than a corrective action plan will be used to bring such homes into compliance and keep them compliant. In addition, DHS has begun to screen the compliance history of homes by owner—both in California and nationally—before granting new licenses to operate nursing homes in the state. State officials told us that they will require all homes with the same owner to be in substantial compliance before any new licenses are granted. The responsibility to protect nursing home residents, among the most vulnerable members of our society, rests with nursing homes and with HCFA and the states. In a number of cases, this responsibility has not been met in California. We and state surveyors found cases in which residents who needed help were not provided basic care—not helped to eat or drink; not kept dry, clean, or free from feces and urine; not repositioned to prevent pressure sores; not monitored for the development of urinary tract infections; and not given pain medication when needed. DHS surveyors can overlook significant findings because the federal survey protocol they follow does not rely on an adequate sample for detecting potential problems and their prevalence. Together, these factors can mask significant care problems from the view of federal and state regulators. HCFA needs to reconsider its forgiving stance toward homes with serious, recurring violations. Federal policies regarding a grace period to correct deficiencies and to accept a home’s report of compliance without an on-site review can be useful policies, given resource constraints, when applied to homes with less serious problems. However, regardless of resource constraints, HCFA and DHS need to ensure that their oversight efforts are directed at homes with serious and recurring violations and that policies developed for homes with less serious problems are not applied to them. Under current policies and practices, noncompliant homes that DHS identifies as having harmed or put residents in immediate danger have little incentive to sustain compliance, once achieved, because they may face no consequences for their next episode of noncompliance. Our findings regarding homes that repeatedly harmed residents or were reinstated after termination suggest that the goal of sustained compliance often eludes HCFA and DHS. Failure to bring such homes into compliance limits the ability of federal and state regulators to protect the welfare and safety of residents. Our report makes recommendations to the HCFA Administrator to address these issues. Although our report focuses on selected nursing homes in California, the problems we identified are indicative of systemic survey and enforcement weaknesses. Our recommendations therefore target federal guidance in general so that improvements are available to any state experiencing problems with seriously noncompliant homes. Thus, through HCFA’s leadership, federal and state oversight of nursing homes can be strengthened nationally and residents nationwide can enjoy increased protection. In summary, we are recommending that HCFA revise its guidance to states in order to reduce the predictability of on-site reviews, possibly by staggering the schedule or segmenting the survey into two or more reviews; revise methods for sampling resident cases to better identify the potential for and prevalence of care problems; and, for those homes with a history of serious and repeated deficiencies, eliminate the offer of a grace period for resuming compliance and substantiate all of the home’s reports of resumed compliance with an on-site review. HCFA, DHS, and nursing home industry representatives have reviewed our report. Acknowledging that the findings were troubling, HCFA officials informed us that they are planning to make several modifications in their survey and enforcement process. DHS also suggested a number of changes—in addition to its new, focused enforcement program—intended to improve the federal survey and enforcement process. Last week, the administration announced a series of actions related to federal oversight of nursing homes, including night and weekend survey visits and increased inspection of homes with a record of noncompliance. HCFA, DHS, and industry representatives generally concurred with our recommendations, although both HCFA and DHS expressed some reservations about segmenting the standard survey. They contend that dividing the survey into two or more reviews would make it less effective and more expensive. However, we believe that this option—which could largely eliminate the predictability issue and increase the frequency of surveyors’ presence at problem homes—warrants consideration of the benefits to be derived relative to the disadvantages that were raised. Finally, despite the survey and enforcement modifications promised by HCFA and DHS, we remain concerned about the gap between stated goals and results. In 1995, HCFA enunciated its emphasis on encouraging sustained compliance and appropriately sanctioning deficient providers. Its practices since that time, however, argue for swift and significant changes, as illustrated in California by the persistence of problem homes with little federal sanctioning. We support the administration’s recent initiative to strengthen the survey and enforcement process. However, we also believe that continued vigilance by the Congress is needed to ensure that the promised changes in federal and state oversight of nursing home care are implemented. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or the Committee Members may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed its findings on nursing home care in California, focusing on: (1) care problems identified in recent state and federal quality reviews that California conducted in the last 2 or 3 years; (2) obstacles to federal and state efforts to identify care problems; and (3) implementation of federal enforcement policies to ensure that homes correct problems identified and then sustain compliance with federal requirements. GAO noted that: (1) despite the presence of a considerable federal and state oversight infrastructure, a significant number of California nursing homes were not and currently are not sufficiently monitored to guarantee the safety and welfare of nursing home residents; (2) GAO came to this conclusion by using information from California's Department of Health Services (DHS) reviews of nursing home care covering 95 percent of the state's nursing homes, and Health Care Financing Administration (HCFA) data on federal enforcement actions taken; (3) looking back at medical record information from 1993, GAO found that, of 62 resident cases sampled, residents in 34 cases received care that was unacceptable; (4) however, in the absence of autopsy information that establishes the cause of death, GAO cannot be conclusive about whether this unacceptable care may have contributed directly to individual deaths; (5) as for the extent of care problems currently, between July 1995 and February 1998, California surveyors cited 407 homes for care violations they classified as serious under federal or state deficiency categories; (6) moreover, GAO believes that the extent of current serious care problems portrayed in the federal and state data is likely to be understated; (7) the predictable timing of on-site reviews, the questionable accuracy and completeness of medical records, and the limited number of residents' care reviewed by surveyors in each home have each likely shielded some problems from surveyor scrutiny; (8) even when the state identifies serious deficiencies, HCFA enforcement policies have not been effective in ensuring that the deficiencies are corrected and remain corrected; (9) California's DHS, consistent with HCFA's guidance on imposing sanctions, grants 98 percent of noncompliant homes a 30- to 45-day grace period to correct deficiencies without penalty, regardless of their past performance; (10) only the few homes that qualify as posing the greatest danger are not provided such a grace period; (11) in addition, only 16 of the roughly 1,400 California homes participating in Medicare and Medicaid have been terminated from participation, most of them have been reinstated quickly, and many have had subsequent compliance problems; and (12) recognizing shortcomings in enforcement, California officials told GAO that they launched a pilot program in July 1998 intended to target for increased vigilance certain of the state's nursing homes with the worst compliance records.
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Natural gas is primarily composed of methane, with small percentages of other hydrocarbons, including propane and butane. When natural gas is cooled to minus 260 degrees Fahrenheit at atmospheric pressure, the gas becomes a liquid, known as LNG, and it occupies only about 1/600th of the volume of its gaseous state. Since LNG is maintained in an extremely cooled state—reducing its volume—there is no need to store it under pressure. This liquefaction process allows natural gas to be transported by trucks or tanker vessels. LNG is not explosive or flammable in its liquid state. When LNG is warmed, either at a regasification terminal or from exposure to air as a result of a spill, it becomes a gas. As this gas mixes with the surrounding air, a visible, low-lying vapor cloud results. This vapor cloud can be ignited and burned only within a minimum and maximum concentration of air and vapor (percentage by volume). For methane, the dominant component of this vapor cloud, this flammability range is between 5 percent and 15 percent by volume. When fuel concentrations exceed the cloud’s upper flammability limit, the cloud cannot burn because too little oxygen is present. When fuel concentrations are below the lower flammability limit, the cloud cannot burn because too little methane is present. As the cloud vapors continue to warm, above minus 160 degrees Fahrenheit, they become lighter than air and will rise and disperse rather than collect near the ground. If the cloud vapors ignite, the resulting fire will burn back through the vapor cloud toward the initial spill and will continue to burn above the LNG that has pooled on the surface. This fire burns at an extremely high temperature—hotter than oil fires of the same size. LNG fires burn hotter because the flame burns very cleanly and with little smoke. In oil fires, the smoke emitted by the fire absorbs some of the heat from the fire and reduces the amount of heat emitted. Scientists measure the amount of heat given off by a fire by looking at the amount of heat energy emitted per unit area as a function of time. This is called the surface emissive power of a fire and is measured in kilowatts per square meter (kW/m). Generally, the heat given off by an LNG fire is reported to be more than 200 kW/m. The heat from fire can be felt far away from the fire itself. Scientists use heat flux—also measured in kW/m can cause second degree burns after about 30 seconds of exposure to bare skin. This heat flux can be compared with the heat from a candle— if a hand is held about 8 to 9 inches above the candle, second degree burns could result in about 30 seconds. A heat flux of about 12.5 kW/m can damage steel structures. Four types of explosions could potentially occur after an LNG spill: rapid phase transitions (RPT), deflagrations, detonations, and boiling-liquid- expanding-vapor-explosions (BLEVE). More specifically: An RPT occurs when LNG is warmed and changes into natural gas nearly instantaneously. An RPT generates a pressure wave that can range from very small to large enough to damage lightweight structures. RPTs strong enough to damage test equipment have occurred in past LNG spill experiments on water, although their effects have been localized at the site of the RPT. Deflagrations and detonations are explosions that involve combustion (fire). They differ on the basis of the speed and strength of the pressure wave generated: deflagrations move at subsonic velocities and can result in pressures (overpressures) up to 8 times higher than the original pressure; detonations travel faster—at supersonic velocities—and can result in larger overpressures—up to 20 times the original pressure. Methane does not detonate as readily as other hydrocarbons; it requires a larger explosion to initiate a detonation in a methane cloud. A BLEVE occurs when a liquefied gas is heated to above its boiling point while contained within a tank. For instance, if a hot fire outside an LNG tanker sufficiently heated the liquid inside, a percentage of the LNG within the tank could “flash” into a vapor state virtually instantaneously, causing the pressure within the tank to increase. LNG tanks do have pressure relief valves, but if these were inadequate or failed, the pressure inside the tank could rupture the tank. The escaping gas would be ignited by the fire burning outside the tank, and a fireball would ensue. The rupture of the tank could create an explosion and flying debris (portions of the tank). World natural gas reserves are abundant, estimated at about 6,300 trillion cubic feet, or 65 times the volume of natural gas used in 2005. Much of this gas is considered “stranded” because it is located in regions far from consuming markets. Russia, Iran, and Qatar combined hold natural gas reserves that represent more than half of the world total. Many countries have imported LNG for years. In 2005, 13 countries shipped natural gas to 14 LNG-importing countries. LNG imports, as a percentage of a country’s total gas supply, for each of the importing countries ranged from 3 percent in the United States to nearly 95 percent in Japan. In 2005, LNG imports to the United States originated primarily in Trinidad and Tobago (70 percent), Algeria (15 percent), and Egypt (11 percent). The remaining 4 percent of U.S. LNG imports came from Oman, Malaysia, Nigeria, and Qatar. LNG tankers primarily have two basic designs, called membrane or Moss (see fig. 2). Both designs consist of an outer hull, inner hull, and cargo containment system. In membrane tank designs, the cargo is contained by an Invar, or stainless steel double-walled liner, that is structurally supported by the vessel’s inner hull. The Moss tank design uses structurally independent spherical or prismatic shaped tanks. These tanks, usually five located one behind the other, are constructed of either stainless steel or an aluminum alloy. LNG tankers ships are required to meet international maritime construction and operating standards, as well as U.S. Coast Guard safety and security regulations. The six studies we examined identified various distances at which the heat effects of an LNG fire could be hazardous to people. The studies’ variations in heat effects result from the assumptions made in the studies’ models. Some studies also examined other potential hazards such as LNG vapor explosions, other types of explosions, and asphyxiation, and identified their potential impacts on public safety. The studies’ conclusions about the distance at which 30 seconds of exposure to the heat could burn people ranged from about 500 meters (less than 1/3 mile) to more than 2,000 meters (about 1-1/4 miles). The results—size of the LNG pool, the duration of the fire, and the heat hazard distance for skin burn—varied in part because the studies made different assumptions about key parameters of LNG spills and also because they were designed and conducted for different purposes. Key assumptions made included the following: Hole size and cascading failure. Hole size is an important parameter for modeling LNG spills because of its relationship to the duration of the event—larger holes allow LNG to spill from the tanker more quickly, resulting in larger LNG pools and shorter duration fires. Conversely, small holes could create longer-duration fires. Cascading failure is important because it increases the overall spill volume and the duration of the spill. Waves and wind. These conditions can affect the size of both the LNG pool and the heat hazard zone. One study indicated that waves can inhibit the spread of an LNG pool, keeping the pool size much smaller than it would be on a smooth surface, and thereby reducing the size of the LNG pool fire. Wind will tend to tilt the fire downwind (like a candle flame blowing in the wind), increasing the heat hazard zone in that direction (and decreasing it upwind). Volume of LNG spilled. The amount of LNG spilled is one of the factors that can affect the size of the pool. Surface emissive power of the fire. While the amount of heat given off by a large LNG fire is unknown, assumptions about it directly affect the results for the heat hazard zone. It is expected that the surface emissive power of LNG fires will be lower for large fires because oxygen will not circulate efficiently within a very large fire. Lack of oxygen in the middle of a large fire would lead to more smoke production, which would block some of the heat from the fire. The LNG spill consequence studies’ key assumptions and results are shown in table 1. In terms of the studies’ results, we identified the following three key results: Pool size describes the extent of the burning pool—and can help people understand how large the LNG fire itself will be. Heat hazard distance describes the distance at which 30 seconds of exposure could cause second degree burns. Fire duration of the incident describes how long people and infrastructure will be exposed to the heat from the fire. The longer the fire, the greater potential for damage to the tanker and for cascading failure. Although all the studies considered the consequences of an LNG spill, they were conducted for different purposes. Three of the six studies—Quest, Sandia, and Pitblado—specifically addressed the consequences of LNG spills caused by terrorist attacks. Two of these three studies—Quest and Sandia—were commissioned by DOE. The Quest study, begun in response to the September 11, 2001, attacks, was designed to quantify the heat hazard zones for LNG tanker spills in Boston Harbor. Only the Quest study examined how wind and waves would affect the spreading of the LNG on the water and the size of the resulting LNG pool. The Quest study based its wind and wave assumptions on weather data from buoys near Boston Harbor. The Quest study found that, while the waves would help reduce the size of the LNG pool, the winds that created the waves would tend to increase the heat hazard distance downwind. To simplify the modeling of the waves, the Quest study considered “standing” waves (rather than moving waves) of various heights and, therefore, did not consider the impact of wave movement on LNG pool spreading. The ABSC study expressed concern that Quest’s standing wave assumption resulted in pool sizes that were too small because wave movement might help spread the LNG. The 2004 Sandia study was intended to develop guidance on a risk-based analysis approach to assess potential threats to an LNG tanker, determine the potential consequences of a large spill, and review techniques that could be used to mitigate the consequences of an LNG spill. The assumptions and results in table 1 for the Sandia study refer to the scenarios Sandia examined that had terrorist causes. According to Sandia, the study used available intelligence and historical data to develop credible and possible scenarios for the kinds of attacks that could breach an LNG tanker. Sandia then modeled how large a hole each of the weapon scenarios could create in an LNG tanker. Two of these intentional breach scenarios included cascading failure of three tanks on an LNG tanker. In these cases, the LNG spill from one tank, as well as the subsequent fire, causes the neighboring two tanks to fail on the LNG tanker, resulting in LNG spills from three of the five tanks on the tanker. After considering all of its scenarios, Sandia concluded that, as a rule-of-thumb, 1,600 meters is a good approximation of the heat hazard distance for terrorist-induced spills. However, as the table shows, one of Sandia’s scenarios—for a large spill with cascading failure of three LNG tanks—found that the distance could exceed more than 2,000 meters and that the cascading failure would increase the duration of the incident. Finally, the stated purpose of industry’s Pitblado study was to develop credible threat scenarios for attacks on LNG tankers and predict hazard zones for LNG spills from those types of attacks. The study identified a hole size smaller than the other studies that specifically considered terrorist attacks. The other studies we reviewed examined LNG spills regardless of cause. FERC commissioned the ABS Consulting study to develop appropriate methods for estimating heat hazard zones from LNG spills. FERC uses these methods, in conjunction with the Sandia study, to examine the public safety consequences of tankers traveling to proposed onshore LNG facilities before granting siting approval. The two scenarios in the ABSC study illustrate how small holes could result in longer fires, which have a higher potential to damage the tanker itself. One scenario used a hole size of 0.79 square meters and the other a hole size of about 20 square meters. The difference in duration is striking—it takes 51 minutes and 4.2 minutes, respectively, for the fire to consume all the spilled LNG. Finally, the Lehr and Fay studies compared the fire consequences of LNG spills with known information about oil spills and fires. Although most studies made similar assumptions about the volume of LNG spilled from any single LNG tank, Lehr examined a much smaller spill volume—just 500 cubic meters of LNG, compared with a range of 12,500 to 17,250 cubic meters. Three of the studies also examined other potential hazards of an LNG spill, including LNG vapor explosions, other types of explosions, and asphyxiation. LNG vapor explosions. Three studies—Sandia, ABSC, and Pitblado— examined LNG vapor explosions, and all agreed that it is unlikely that LNG vapors could explode and create a pressure wave if the vapors are in an unconfined space. Although the three studies agreed that LNG vapors could explode only in confined areas, they did not conduct modeling or describe the likelihood of such confinement after an LNG spill from a tanker. The Sandia study stated that fire will generally progress through the vapor cloud slowly and without producing an explosion with damaging pressure waves. The study did suggest, however, that if the LNG vapor cloud is confined (e.g., between the inner and outer hull of an LNG carrier), it could explode but would only affect the immediate surrounding area. The ABSC study and the Pitblado study agreed that a confined LNG vapor cloud could result in an explosion. Other types of explosions. Three studies—Sandia, ABSC, and Pitblado— examined the potential for RPTs. The Sandia study concluded that, while RPTs have generated energy releases equivalent to several pounds of explosives, RPT impacts will be localized near the spill. Sandia also noted that RPTs are not likely to cause structural damage to the vessel. The ABSC study noted that their literature search suggested that damage from RPT overpressures would be limited to the immediate vicinity, though it noted that the literature did not include large spills like those that could be caused by a terrorist attack. Only one study, Pitblado, discussed the possibility of a BLEVE. According to our discussions with Dr. Pitblado, an LNG ship with membrane tanks could not result in a BLEVE, but he said that Moss spherical tanks could potentially result in a BLEVE. A BLEVE could result because it is possible for pressure to build up in a Moss tanker. A 2002 LNG tanker truck incident in Spain resulted in an explosion that some scientists have characterized as a BLEVE of an LNG truck. Portions of the tanker truck were found 250 meters from the accident itself, propelled by the strength of the blast. Asphyxiation. Only the Sandia study examined the potential for asphyxiation following an LNG spill if the vapors displace the oxygen in the air. It concluded that fire hazards would be the greatest problem in most locations, but that asphyxiation could threaten the ship’s crew, pilot boat crews, and emergency response personnel. Our panel of 19 experts generally agreed on the public safety impact of an LNG spill and disagreed with a few of the conclusions of the Sandia study. The experts also suggested priorities for future research—some of which are not fully addressed in DOE’s ongoing LNG research—to clarify uncertainties about heat impact distances and cascading failure. These priorities include large-scale fire experiments, large-scale LNG spill experiments on water, the potential for cascading failure of multiple LNG tanks, and improved modeling techniques. Experts discussed two types of fires: vapor cloud fires and pool fires. Eighteen of 19 experts agreed that the ignition of a vapor cloud over a populated area could burn people and property in the immediate vicinity of the fire. While the initial vapor cloud fire would be of short duration as the flames burned back toward the LNG carrier, any flammable object enveloped by the vapor cloud fire could ignite nearby objects, creating secondary fires that present hazards to the public. Three experts emphasized in their comments that the vapor cloud is unlikely to penetrate very far into a populated area before igniting. Expanding on this point, one expert noted that any injuries from a vapor cloud fire would occur only at the edges of a populated area, for example, along beaches. One expert disagreed, arguing that a vapor cloud fire is unlikely to cause significant secondary fires because it would not last long enough to ignite other materials. Experts agreed that the main hazard to the public from a pool fire is the heat from the fire but emphasized that the exact hazard distance depends on site-specific and scenario-specific factors. Furthermore, a large, unconfined pool fire is very difficult to extinguish; generally almost all the LNG must be consumed before the fire goes out. Experts agreed that three of the main factors that affect the amount of heat from an LNG fire are the following: Site-specific weather conditions. Weather conditions, such as wind and humidity, can influence the heat hazard distances. For example, more humid conditions allow heat to be absorbed by the moisture in the air, reducing heat hazard distances. Composition of the LNG. The composition of the LNG can also affect the distance at which heat from the fire is felt by the public. In small fires, methane, which comprises between 84 percent and 97 percent of LNG, burns cleanly, with little smoke. Other LNG components—propane and butane—produce more smoke when burned, absorbing some of the fire’s heat and reducing the hazard distance. As the fire grows larger, the influence of the composition of LNG is hypothesized to be less pronounced because large fires do not burn efficiently. Size of the fire. The size of the fire has a major impact on its surface emissive power; the heat hazard distance increases with pool size up to a point but is expected to decrease for very large pools, like those caused by a terrorist attack. Experts also discussed the following hazards related to an LNG spill: RPTs. Experts agreed that RPTs could occur after an LNG spill but that the overpressures generated would be unlikely to directly affect the public. Detonations and deflagrations. Experts made a key distinction between these types of explosions in confined spaces as opposed to unconfined spaces. For confined spaces, they agreed that it is possible, under controlled experimental conditions, to induce both types of explosions of LNG vapors; however, a detonation of confined LNG vapors is unlikely following an LNG spill caused by a terrorist attack. Experts were split on the likelihood of a confined deflagration occurring after a terrorist attack: eight thought it was unlikely, four thought it likely, and five thought neither likely nor unlikely. For unconfined spaces, experts were split on whether it is possible to induce such explosions; however, even experts who thought such explosions were possible agreed that deflagrations and detonations in unconfined spaces are unlikely to occur following an LNG spill caused by a terrorist attack. BLEVE. Experts were split on whether a BLEVE is theoretically possible in an LNG tanker. Of the ten experts who agreed it was theoretically possible, six thought that a BLEVE is unlikely to occur following an LNG spill caused by a terrorist attack on a tanker. Freeze burns and asphyxiation. Experts agreed that freeze burns do not present a hazard to the public because only people in close proximity to LNG spill, such as personnel on the tanker or nearby vessels, might come into contact with LNG or very cold LNG vapor. For asphyxiation, experts agreed that it is unlikely that an LNG vapor cloud could reach a populated area while still sufficiently concentrated to pose an asphyxiation threat. Experts disagreed with heat hazard and cascading failure conclusions of the Sandia study. Specifically, 7 of 15 experts thought Sandia’s heat hazard distance was “about right,” and the remaining 8 experts were evenly split as to whether the distance was “too conservative” (i.e., larger than needed to protect the public) or “not conservative enough” (i.e., too small to protect the public). Experts who thought the distance was too conservative generally listed one of two reasons. First, the assumptions about the surface emissive power of large fires were incorrect because the surface emissive power of large fires would be lower than Sandia assumed. Second, Sandia’s hazard distances are based on the maximum size of a pool fire. However, these experts pointed out that once a pool fire ignites, its diameter will begin to shrink, which will also reduce the heat hazard distance. Experts who thought Sandia’s heat hazard distance was not conservative enough listed a number of concerns. For example, Sandia’s distances do not take into consideration the effects of cascading failure. One expert suggested that a 1-meter hole in the center tank of an LNG tanker that resulted in a pool fire could cause the near simultaneous failure of the other four tanks, leading to a larger heat hazard zone. Officials at Sandia National Laboratories and our panel of experts cautioned that the hazard distances presented cannot be applied to all sites. According to the Sandia study authors, their goal was to provide guidance to federal agencies on the order of magnitude of the hazards of an LNG spill on water. As they pointed out in interviews and in their original study, further analysis for specific sites is needed to understand hazards in a particular location. Six experts on our panel also emphasized the importance of site-specific and scenario-specific factors. For instance, one expert explained that the 5kW/m hazard distance depends on the size of the tanker and the spill scenario, including factors such as wind speed, timing of ignition, and the location of the hole. Other experts suggested that key factors are spill volume and the impact of waves. Additionally, two experts explained that there is no “bright line” for hazards—that is, 1,599 meters is not necessarily “dangerous,” and 1,601 meters is not necessarily “safe.” Only 9 of 15 experts agreed with Sandia’s conclusion that only three of the five LNG tanks on a tanker would be involved in cascading failure. Five experts noted that the Sandia study did not explain how it concluded that only three tanks would be involved in cascading failure. Three experts said that an LNG spill and subsequent fire could potentially result in the loss of all tanks on board the tanker. Twelve of 16 experts agreed, however, with Sandia’s conclusion that cascading failure events are not likely to greatly increase (by more than 20 to 30 percent) the overall fire size or heat hazard ranges. The four experts who disagreed with Sandia’s conclusion about the public safety impact of cascading failure cited two main reasons: (1) Sandia did not clearly explain how it reached that conclusion and (2) the impact of cascading failure will partly depend on how the incident unfolds. For instance, one expert suggested that cascading failure could include a tank rupture, fireball, or BLEVE, any of which could have direct impacts on the public (from the explosive force) and which would change the heat hazard zones that Sandia identified. Finally, experts agreed with Sandia’s conclusion that consequence studies should be used to support comprehensive, risk-based management and planning approaches for identifying, preventing, and mitigating hazards from potential LNG spills. In the second iteration of the Web-based panel, we asked the experts to identify the five areas related to the consequences of LNG spills that need further research. Then, in the final iteration of the Web-based panel, we provided the experts with a list of 19 areas—generated by their suggestions and comments from the second iteration—and asked them to rank these in order of importance. Table 2 presents the results of that ranking for the top 10 areas identified and indicates those areas that are funded in the DOE study discussed earlier. As the table shows, two of the top five research areas identified are related to large LNG fires—large fire phenomena and large-scale fire testing. Experts believe this research is needed to establish the relationship between large pool fires and the surface emissive power of the fire. Experts recommended new LNG tests for fires between 15 meters and 1,000 meters. The median suggested test size was 100 meters. Some experts also raised the issue of whether large LNG fires will stop behaving like one single flame but instead break up into several smaller, shorter flames. Sandia noted in its study that this behavior could reduce heat hazard distances by a factor of two to three. Experts also ranked research into cascading failure of LNG tanks second in the list of priorities. Concerning cascading failure, one expert noted that, although the consequences could be serious, there are virtually no data looking at the hull damage caused by exposure to extreme cold or heat. As table 2 shows, DOE’s recently funded study involving large-scale LNG fire experiments addresses some, but not all, of the research priorities identified by the expert panel. For DOE, Sandia National Laboratories plans to conduct large-scale LNG pool fire tests beginning with a pool size of 35 meters—the same size as the largest test conducted to date. Sandia will validate the existing 35-meter data and then conduct similar tests for pool sizes up to 100 meters. The goal of this fire testing is to document the impact of smoke on large LNG pool fires. Sandia suggests that these tests will create a higher degree of knowledge of large-scale pool fire behavior and significantly lower the current uncertainty in predicting heat hazard distances. According to researchers at Sandia National Laboratories, some of the research our panel of experts suggested may not be appropriate. Sandia indicated that comprehensive modeling, which allows various complex processes to interact, would be very difficult to do because of the uncertainty surrounding each individual process of the model. One expert on our panel agreed, noting that while comprehensive modeling of all LNG phenomena is important, combining those phenomena into one model should wait for experiments that lead to better understanding of each individual phenomenon. It is likely that the United States will increasingly depend on the importation of LNG to meet the nation’s demand for natural gas. Understanding and resolving the uncertainties surrounding LNG spills is critical, especially in deciding on where to locate LNG facilities. Because there have been no large-scale LNG spills or spill experiments, past studies have developed modeling assumptions based on small-scale spill data. While there is general agreement on the types of effects from an LNG spill, the results of these models have created what appears to be conflicting assessments of the specific consequences of an LNG spill, creating uncertainty for regulators and the public. Additional research to resolve some key areas of uncertainty could benefit federal agencies responsible for making informed decisions when approving LNG terminals and protecting existing terminals and tankers, as well as providing reliable information to citizens concerned about public safety. Although DOE has recently funded a study that will address large-scale LNG fires, this study will address only 3 of the top 10 issues—and not the second-highest ranked issue—that our panel of experts identified as potentially affecting public safety. To provide the most comprehensive and accurate information for assessing the public safety risks posed by tankers transiting to proposed LNG facilities, we recommend that the Secretary of Energy ensure that DOE incorporates the key issues identified by the expert panel into its current LNG study. We particularly recommend that DOE examine the potential for cascading failure of LNG tanks in order to understand the damage to the hull that could be caused by exposure to extreme cold or heat. We requested comments on a draft of this report from the Secretary of Energy (DOE). DOE agreed with our findings and recommendation. In addition, DOE included technical and clarifying comments, which we included in our report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of Energy, and other interested parties. 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 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 IV. To address the first objective, we identified eight unclassified, completed studies of liquefied natural gas (LNG) hazards and reviewed the six studies that included new, original research (either experimental or modeling) and clearly described the methodology used. While we have not verified the scientific modeling or results of these studies, the methods used seem appropriate for the work conducted based on conversations with experts in the field and our assessment. We also discussed these studies with their authors and visited all four onshore LNG import facilities and one export facility. We attended a presentation on LNG safety and received specific training on LNG properties and safety. We also conducted interviews with officials from Sandia National Laboratories, Federal Energy Regulatory Commission, Department of Transportation, Department of Energy, and the U. S. Coast Guard. During our interviews, we asked officials to provide information on past LNG studies and plans for future LNG spill consequences work. To obtain information on experts’ opinions of the public safety consequences of an LNG spill from a tanker, we conducted a three-phase, Web-based survey of 19 experts on LNG spill consequences. We identified these experts from a list of 51 individuals who had expertise in one or more key aspects of LNG spill consequence analysis. In compiling this initial list, we sought to achieve balance in terms of area of expertise (i.e., LNG experiments, modeling LNG dispersion, LNG vaporization, fire modeling, and explosion modeling). In addition, we included at least one author of each of the six major LNG studies we reviewed, that is, studies by Sandia National Laboratories; ABS Consulting; Quest Consultants Inc.; Pitblado, et al.; James Fay (MIT); and William Lehr (National Oceanic and Atmospheric Administration). We gathered resumes, publication lists, and major LNG-related publications from the experts identified on the initial list. We selected 19 individuals for the panel. One or more of the following selection criteria were used: (1) has broad experience in all facets of LNG spill consequence modeling (LNG spill from hole, LNG dispersion, vaporization and pool formation, vapor cloud modeling, fire modeling, and explosion modeling); (2) has conducted physical LNG experiments; or (3) has specific experience with areas of particular importance, such as LNG explosion research. In addition, we included: (1) at least one author from each of the major LNG studies and (2) representatives from private industry, consulting, academia, and government. All 19 experts selected for the panel agreed to participate. The names and affiliations of panel members are included in appendix II. To obtain consensus concerning public safety issues, we used an iterative Web-based process. We used this method, in part, to eliminate the potential bias associated with group discussions. These biasing effects include the potential dominance of individuals and group pressure for conformity. Moreover, by creating a virtual panel, we were able to include more experts than possible with a live panel. For each phase in the process, we posted a questionnaire on GAO’s survey Web site. Panel members were notified of the availability of the questionnaire with an e-mail message. The e-mail message contained a unique user name and password that allowed each respondent to log on and fill out a questionnaire but did not allow respondents access to the questionnaires of others. In the questionnaires, we asked the experts to agree or disagree with a set of statements about LNG hazards derived from GAO’s synthesis of major LNG spill consequence studies. Prior to the first iteration, we had an LNG spill consequence expert who was not a part of the panel review each statement and provide comments about technical accuracy and tone. Experts were asked to indicate agreement on a 3-point scale (completely agree, generally agree, do not agree) and to provide comments about how the statements could be changed to better reflect their understanding of the consequences of LNG spills. If most experts agreed with a statement during the first iteration, we did not include it in the second iteration. If there was not agreement, we used the experts’ comments to revise the statements for the second iteration. The second iteration was posted on the Web site, using the same protocol as used for the first. Again, panel members were asked to agree or disagree and provide narrative comments. We revised the statements where there was disagreement and posted them on the Web site again for the third iteration. At the end of the third iteration, at least 75 percent of the experts agreed or generally agreed with most of the ideas presented. Because some of the studies conducted are classified, this public version of our findings supplements a more comprehensive classified report produced under separate cover. We conducted our work from January 2006 through January 2007 in accordance with generally accepted government auditing standards. Quest Consultants, Inc. National Oceanic and Atmospheric Administration Technology and Management Systems, Inc. Texas A&M University Baker Engineering and Risk Consultants, Inc. For each question below, we show only those responses that were selected by at least one expert. The number of responses adds up to 19— the total number of experts on the panel. Percentages may not add to 100% due to rounding. Large LNG spills from a vessel could be caused by an accident, such as collision or grounding, or by an intentional attack. While large accidental LNG spills are highly unlikely given current LNG carrier designs and operational safety policies and practices, these spills do pose a hazard to the public if they occur in or near a populated area. What is your level of agreement with this paragraph? (Finalized in the second iteration.) LNG is a cryogenic liquid composed primarily of methane with low concentrations of heavier hydrocarbons, such as ethane, propane, and butane. LNG is colorless, odorless, and nontoxic. When LNG is spilled, it boils and forms LNG vapor (natural gas). The LNG vapor is initially denser than ambient air and visible; LNG vapor will stay close to the surface as it mixes with air and disperses. LNG and LNG vapor pose four possible hazards: freeze burns, asphyxiation, fire hazard, and explosions. What is your level of agreement with this paragraph? (Finalized in the second iteration.) LNG poses a threat of freeze burns to people who come into contact with the liquid or with very cold LNG vapor. Since LNG boils immediately and vaporizes after it leaves an LNG tank and LNG vapor warms as it mixes with air, only people in close proximity to the release, such as personnel on the tanker or nearby escort vessels, might come into contact with LNG or LNG vapor while it is still cold enough to result in freeze burns. Freeze burns do not present a direct hazard to the public. What is your level of agreement with this paragraph? (Finalized in the second iteration.) After an LNG spill, LNG vapor forms a dense, visible vapor cloud that is initially heavier than air and remains close to the surface. The cloud warms as it mixes with air and as portions of the cloud reach ambient air temperatures, they begin to rise and disperse. Asphyxiation occurs when LNG vapor displaces oxygen in the air. Asphyxiation is a threat primarily to personnel on the LNG tanker or to people aboard vessels escorting the tanker at close range. An LNG vapor cloud could move away from the tanker as it mixes with air and begins to disperse. However, it is unlikely that the vapor cloud could reach a populated area while still sufficiently concentrated to pose an asphyxiation threat to the public. What is your level of agreement with this paragraph? (Finalized in the second iteration.) The effect of wind on an LNG vapor cloud varies with wind speed. The most hazardous wind conditions, however, are low winds, which can push a vapor cloud downwind without accelerating the LNG vapor dispersion into the atmosphere. Low wind conditions have the highest potential of allowing an LNG vapor cloud to move a significant distance downwind. What is your level of agreement with this paragraph? (Finalized in the third iteration.) Because LNG vapor in an approximately 5 to 15 percent mixture with air is flammable, LNG vapor within this flammability range is likely to ignite if it encounters a sufficiently strong ignition source such as a cigarette lighter or strong static charge. What is your level of agreement with this paragraph? (Finalized in the third iteration.) The main hazard to the public from a pool fire is the thermal radiation, or heat, that is generated by the fire rather than the flames themselves. Often this heat is felt at considerable distance from the fire. Scientific papers have used two different thresholds as end points to describe the impact of thermal radiation on the public: 5 kilowatts per square meter and 1.6 kilowatts per square meter. Which level do you think is the appropriate end point to use to define thermal hazard zones in order to protect the public? (Please indicate your response, then provide an explanation in the textbox below your answer.) 5 kilowatts per square meter 1.6 kilowatts per square meter I do not have the expertise necessary to respond to this question. 57.89% Generally agree but suggest the following clarification. I do not have the expertise necessary to respond to this section. The composition of the LNG can also affect the distance at which thermal radiation from the fire is felt by the public. In small fires, methane, which comprises between 84 percent and 97 percent of LNG, burns cleanly, with little smoke. Cleaner-burning LNG fires, particularly those burning LNG with higher methane content, result in higher levels of thermal radiation than oil or gasoline fires of the same size because the smoke generated by oil and gasoline fires acts as a shield, reducing the amount of thermal radiation emitted by the fire. While LNG composition can have a large impact on the thermal radiation from small LNG fires, as LNG fires get larger, these effects are hypothesized to be less pronounced. What is your level of agreement with this paragraph? (Finalized in the third iteration.) I do not have the expertise necessary to respond to this section. The size of the fire has a major impact on the thermal radiation from an LNG pool fire. Thermal radiation increases with pool size up to a point but is expected to decrease for very large pools, like those caused by a terrorist attack. What is your level of agreement with this paragraph? (Finalized in the second iteration.) I do not have the expertise necessary to respond to this section. If an LNG vapor cloud formed in the wake of an LNG spill and drifted away from the tanker as it warmed and dispersed, the vapor cloud could enter a populated area while areas of the cloud had LNG vapor/air mixtures within the flammability range. Since populated areas have numerous ignition sources, those portions of the cloud would likely ignite. The fire would then burn back through the cloud toward the tanker and continue to burn as a pool fire near the ship, assuming that liquid LNG still remains in the spill area. Ignition of a vapor cloud over a populated area could burn people and property in the immediate vicinity of the fire. While the initial fire would be of short duration as the flames burned back toward the LNG carrier, secondary fires could continue to present a hazard to the public. What is your level of agreement with the above paragraph? (Finalized in the second iteration.) After ignition of a vapor cloud that drifted away from an LNG tanker spill, how fast could the flame front travel back toward the spill site if it was unconfined or confined? (Finalized in the second iteration.) I do not have the expertise necessary to respond to this section. Experts did not agree on the speed of a flame front traveling through an LNG vapor cloud in either a confined or unconfined state. Responses varied from less than 5 meters per second up to 50 meters per second in unconfined settings and from 0 meters per second to 2,000 meters per second in confined settings. A rapid phase transition (RPT) can occur when LNG spilled onto water changes from liquid to gas virtually instantaneously due to the rapid absorption of ambient environmental heat. While the rapid expansion from a liquid to vapor state can cause locally large overpressures, an RPT does not involve combustion. RPTs have been observed during LNG test spills onto water. In some cases, the overpressures generated were strong enough to damage test equipment in the immediate vicinity. Overpressures generated from RPTs would be very unlikely to have a direct affect on the public. What is your level of agreement with this paragraph? (Finalized in the second iteration.) Deflagrations and detonations are rapid combustion processes that move through an unburned fuel-air mixture. Deflagrations move at subsonic velocities and can result in overpressures up to eight times the original pressure, particularly in congested/confined areas. Detonations move at supersonic velocities and can result in overpressures up to 20 times the original pressure. What is your level of agreement with this paragraph? (Finalized in the third iteration.) Please choose the response that best describes your opinion about each type of explosion of LNG vapors in each setting described. (Finalized in the third iteration.) Detonation in a confined setting (BLEVE) If experts answered that “under controlled experimental conditions, it is possible to induce this type of explosion in this type of setting,” they were asked to answer the following question: What is the likelihood of a each type of explosion of LNG vapors in each setting described occurring following an LNG spill caused by a terrorist attack on a tanker? (Finalized in the third iteration.) Deflagration with overpressure in a (BLEVE) A BLEVE is the worst potential hazard of an LNG spill. It would result in the rupture of one or more LNG tanks, perhaps simultaneously, on the ship, with potential rocketing debris and damaging pressure waves. What is your level of agreement with the above paragraph? (Finalized in the first iteration.) Do not agree (Please explain in the textbox below.) The Sandia report concluded that the most significant impacts to public safety exist within 500 meters of a spill, with much lower impacts at distances beyond 1,600 meters even for very large spills. Please choose the response that best describes your opinion about these hazard distances. (Finalized in the third iteration.) They are too conservative (i.e., should be smaller) They are not conservative enough (i.e., should be larger) The Sandia report concluded that large, unignited LNG vapor clouds could spread over distances greater than 1,600 meters from a spill. For a nominal intentional spill, the hazard range could extend to 2,500 meters. The actual hazard distances will depend on breach and spill size, site-specific conditions, and environmental conditions. Please choose the response that best describes your opinion about these hazard distances. (Finalized in the third iteration.) They are too conservative (i.e., should be smaller) They are not conservative enough (i.e., should be larger) The Sandia report concluded that cascading damage (multiple cargo tank failure) due to brittle fracture from exposure to cryogenic liquid or fire- induced damage to foam insulation is possible under certain conditions but is not likely to involve more than two or three cargo tanks for any single incident. What is your level of agreement with this paragraph? (Finalized in the third iteration.) I do not have the expertise necessary to respond to this section. The Sandia report concluded that cascading events are not expected to greatly increase (not more than 20-30 percent) the overall fire size or hazard ranges (500 meters for severe impacts, much lower impacts beyond 1,600 meters) but will increase the expected fire duration. What is your level of agreement with this paragraph? (Finalized in the third iteration.) The Sandia report suggested that consequence studies should be used to support comprehensive, risk-based management and planning approaches for identifying, preventing, and mitigating hazards to public safety and property from potential LNG spills. What is your level of agreement with this paragraph? (Finalized in the third iteration.) In your opinion, what is the risk to public safety posed by an attack on tankers carrying each of the following energy commodities? (Finalized in the first iteration.) In the first and second survey iterations, you noted areas related to LNG spill consequences that need further research. We are interested in your thoughts on the relative level of need for research in these areas, and also the five areas you think should be of highest priority in future research. Please indicate the degree to which further research is needed in each of the areas listed below. (Finalized in the third iteration.) Responses to each part of this question are in the table below, which is sorted by mean score so that the highest-ranked research priorities appear first. Great need (2) need (3) need (4) no need (5) (6) answer (7) Great need (2) Do not have the expertise need (3) need (4) no need (5) (6) answer (7) Great need (2) Do not have the expertise need (3) need (4) no need (5) (6) answer (7) Experts suggested pool sizes of 15 meters up to 1,000 meters, though the median response was 100 meters. Experts suggested pool sizes of 15 meters up to 1,000 meters, though the median response was 100 meters. Experts suggested frequency modeling, determination of acceptable risk to society, analysis of foam on LNG tankers, risk analysis for larger LNG tankers, CFD modeling for pool spreading and evaporation, and improvement to existing techniques used for fighting LNG fires. Not applicable. In addition to the individual named above, Mark Gaffigan, Amy Higgins, Lynn Musser, Janice Poling, Rebecca Shea, Carol Herrnstadt Shulman, and James W. Turkett made key contributions to this report.
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The United States imports natural gas by pipeline from Canada and by tanker as liquefied natural gas (LNG) from overseas. LNG--a supercooled form of natural gas--currently accounts for about 3 percent of total U.S. natural gas supply, with an expected increase to about 17 percent by 2030, according to the Department of Energy (DOE). With this projected increase, many more LNG import terminals have been proposed. However, concerns have been raised about whether LNG tankers could become terrorist targets, causing the LNG cargo to spill and catch on fire, and potentially explode. DOE has recently funded a study to consider these effects; completion is expected in 2008. GAO was asked to (1) describe the results of recent studies on the consequences of an LNG spill and (2) identify the areas of agreement and disagreement among experts concerning the consequences of a terrorist attack on an LNG tanker. To address these objectives, GAO, among other things, convened an expert panel to discuss the consequences of an attack on an LNG tanker. The six unclassified completed studies GAO reviewed examined the effect of a fire resulting from an LNG spill but produced varying results; some studies also examined other potential hazards of a large LNG spill. The studies' conclusions about the distance at which 30 seconds of exposure to the heat (heat hazard) could burn people ranged from less than 1/3 of a mile to about 1-1/4 miles. Sandia National Laboratories (Sandia) conducted one of the studies and concluded, based on its analysis of multiple attack scenarios, that a good estimate of the heat hazard distance would be about 1 mile. Federal agencies use this conclusion to assess proposals for new LNG import terminals. The variations among the studies occurred because researchers had to make modeling assumptions since there are no data for large LNG spills, either from accidental spills or spill experiments. These assumptions involved the size of the hole in the tanker; the volume of the LNG spilled; and environmental conditions, such as wind and waves. The three studies that considered LNG explosions concluded explosions were unlikely unless the LNG vapors were in a confined space. Only the Sandia study examined the potential for sequential failure of LNG cargo tanks (cascading failure) and concluded that up to three of the ship's five tanks could be involved in such an event and that this number of tanks would increase the duration of the LNG fire. GAO's expert panel generally agreed on the public safety impact of an LNG spill, but believed further study was needed to clarify the extent of these effects, and suggested priorities for this additional research. Experts agreed that the most likely public safety impact of an LNG spill is the heat hazard of a fire and that explosions are not likely to occur in the wake of an LNG spill. However, experts disagreed on the specific heat hazard and cascading failure conclusions reached by the Sandia study. DOE's recently funded study involving large-scale LNG fire experiments addresses some, but not all, of the research priorities identified by the expert panel. The leading unaddressed priority the panel cited was the potential for cascading failure of LNG tanks.
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In the late 1970s, Indian tribes began authorizing or conducting various types of gaming activity with only tribal oversight. In 1987, the Supreme Court confirmed that Indian tribes had authority to operate gaming establishments on their trust lands without having to comply with state laws and regulations. To resolve outstanding issues between tribes and states and to provide oversight, Congress passed the Indian Gaming Regulatory Act of 1988 (IGRA). IGRA established the following three classes of gaming to be regulated by a combination of the tribal governments, state governments, Bureau of Indian Affairs (BIA)—an agency of the Department of the Interior, and National Indian Gaming Commission (NIGC). Class I gaming consists of social gaming for nominal prizes or ceremonial gaming. It is regulated solely by the tribe, and no financial reporting to other authorities is required. Class II gaming includes bingo, pull-tabs, and punch-boards. Tribes can conduct only class II games that are legal under state law, and these games are regulated by the tribes and NIGC. Class III gaming consists of all other forms of gaming, including casino games, slot machines, and pari-mutuel betting. Class III games are regulated as indicated below. Tribes are required to obtain state, NIGC, and Department of Interior approval to establish and operate class III gaming facilities. IGRA requires that tribes and states negotiate a tribal-state compact to balance the interests of both the state and the tribe. The Secretary of the Interior is authorized to approve any tribal-state compact and has delegated this authority to the Assistant Secretary—Indian Affairs, who is responsible for BIA. All class II and III gaming operations on Indian lands are required to submit copies of their annual financial statement audits to NIGC. The tribal-state compact is an agreement that may include provisions concerning standards for the operation and maintenance of the gaming facility, the application of laws and regulations of the tribe or the state that are related to the licensing and regulation of the gaming activity, and the assessment by the state of amounts necessary to defray the costs of regulating the gaming activity. IGRA specifies that the tribal ordinance concerning the conduct of class II or III gaming on Indian lands within the tribe’s jurisdiction must provide that the net revenues from any tribal gaming are not to be used for purposes other than to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund operations of local government agencies. Tribes may distribute a portion of their net revenues directly to tribal members, provided that the tribes have a revenue allocation plan approved by BIA. This plan is to describe how tribes intend to allocate net revenues among various governmental, educational, and charitable projects, including direct payments to tribal members. We determined the number of tribes with gaming facilities by reviewing documents provided by NIGC, which identified all tribes with gaming operations as of December 31, 1996. To perform our analyses on revenues, costs and expenses, and net income, for example, we obtained 1995 financial statements that were submitted to NIGC as of November 22, 1996. The sample of facilities included in our report consists of the 178 gaming facilities represented by these financial statements. The sample is not representative of the universe of all Indian gaming facilities. Some facilities were not included in our analyses because they were new and not yet required to file financial statements, the financial statements submitted were incomplete, or the financial statements were not filed as of the date we completed our data collection (see app. I). We used Audit and Accounting Guide: Audits of Casinos, published by the American Institute of Certified Public Accountants, and spoke with industry experts for guidance in deciding what data to extract from the financial statements and what analyses to perform on these data. We also used the financial statements to determine the amount of transfers to the tribes. The transfers as described in this report represent the amounts in the financial statements allocated to the “tribes.” The amounts could have been received by the tribal government or tribal members, but we were not able to determine this because the financial statements did not indicate how the transfers were used or who received them. To compare Indian gaming with other legalized gaming activities, we used data reported in International Gaming and Wagering Business and financial statement data submitted to the Nevada and Atlantic City gaming commissions. To describe the legal issues regarding the taxation of Indian gaming revenues, we reviewed relevant sections of the Internal Revenue Code and the IRS and Department of the Treasury rulings and regulations pertaining to the taxation of Indian tribes. We also interviewed officials from Treasury, IRS, and BIA. (See app. I for more details on our scope and methodology.) We conducted our review from October 1996 through March 1997 in accordance with generally accepted government auditing standards. We obtained comments on a draft of this report from the Internal Revenue Service, the Department of the Interior, and the Chair of NIGC. These comments are discussed at the end of this letter. As shown in figure 1, Indian gaming revenues have grown significantly since 1988 when IGRA was enacted. IGRA provided the regulatory framework for tribes to establish and operate gaming facilities. According to information provided by NIGC, 184 of the 555 Indian tribes officially recognized by the United States were operating a total of 281 gaming facilities as of December 31, 1996. Of the 184 tribes, 182 were in the continental United States, representing 55 percent of all continental U.S. tribes (329). The remaining two tribes were in Alaska. According to NIGC, the 226 tribes in Alaska are generally too remote or too small to operate gaming facilities. An additional 32 tribes had been authorized to operate gaming facilities but had not opened any as of December 31, 1996, according to NIGC information. (See fig. 2 for the distribution of Indian gaming facilities in operation.) From our analyses of the 178 gaming facilities’ financial statements, we found that reported gaming revenues were about $4.5 billion and revenues from other activities, such as food, beverages, and hotel rooms, were over $300 million (see table 1). Median gaming revenues for class II facilities were about $2.5 million and for class III, about $12.7 million. Total net income was about $1.9 billion, with a median of $0.6 million for class II and $4.9 million for class III facilities. About 90 percent of the facilities generated net income, and about 10 percent generated net losses. Most of the facilities were class III, and they accounted for a large majority of all gaming revenues, total revenues, and net income. About 40 percent of all gaming revenues were generated by eight of the class III gaming facilities. Figure 3 shows the distribution of gaming revenues for the 66 class II Indian facilities represented in our analysis. More than half of all class II gaming revenues were generated by eight facilities with gaming revenues of at least $20 million. Figure 4 shows the distribution of gaming revenues for the 112 class III Indian facilities represented in our analysis. Almost half of the gaming revenues were generated by eight facilities with gaming revenues of at least $100 million each. In total, net income of Indian gaming facilities (class II and III) was about 38 percent of total reported revenues. Net income as a percent of total revenues was about the same for class II and class III facilities (see fig. 5). In addition, the net income of about half of the Indian gaming facilities was at least 30 percent of their total revenues (see fig. 6). Of the 126 tribes included in our analysis, 106 reported receiving about $1.6 billion in transfers from their gaming facilities, as shown in figure 7. These 106 tribes operated 149 gaming facilities. Ten of the tribes reported receiving transfers of at least $50 million each and accounted for more than half of the total transferred. The financial statements of 20 of the 126 tribes did not show transfers from their gaming facilities. Table 2 shows that Indian gaming revenues (class II and III) were at least 10 percent of the revenues estimated to have been generated by legal gaming in 1995 and compares Indian gaming to other legalized gaming. Because our sample of financial statements did not cover all existing Indian facilities, the 10 percent market share could be higher. Table 3 gives a breakdown of the casino segment of the gaming industry, including class III Indian gaming. In total, gaming revenues generated by class III Indian facilities and Atlantic City casinos in 1995 were similar, as shown in table 4. In addition, the average gaming revenues generated by class III Indian facilities and Nevada casinos were similar. The comparisons are for facilities and casinos with at least $1 million in gaming revenues because that was how data were reported for Nevada. A small proportion of both class III Indian facilities and Nevada casinos generated significant amounts in gaming revenues and accounted for a large share of their respective aggregate gaming revenues (see fig. 8). Specifically, 13 percent of Indian class III facilities generated 59 percent of the Indian gaming revenues. Atlantic City casinos are not shown because their gaming revenues were more equally distributed. For example, 50 percent of the casinos generated about 59 percent of the gaming revenues. Operating income as a percentage of total revenues for large class III Indian facilities was almost twice as much as that of large Nevada and Atlantic City casinos. Table 5 shows the results of our analysis of operating income for class III Indian facilities and for Nevada and Atlantic City casinos with gaming revenues of $72 million and more. Operating income is a common measure used by industry experts to analyze and compare the profitability of businesses. It discounts the effects of capital structure and other nonoperating incomes and expenses that are not directly related to the performance of the business operations. (See the glossary for further details.) According to industry experts, the difference in operating income margin (operating income as a percentage of total revenues) between these 14 class III facilities and these Nevada and Atlantic City casinos is explained, in part, by the different operational environments of the facilities. Specifically, the operating income shown in table 5 for Nevada and Atlantic City casinos was reduced by expenses that were not generally incurred at these Indian facilities, such as state gaming taxes and other state requirements. For example, Atlantic City casinos are subject to an 8-percent tax on their gaming revenues. Further, these Nevada and Atlantic City casinos have more competition in close proximity than the 14 class III Indian facilities. Another possible explanation for the differences in operating income was the nature of the tribes’ relationships with their gaming facilities: Some tribes provided goods and services to the gaming facilities free of charge or at a low cost, which would have reduced their operating expenses. Although no statutory provision exempts Indian tribes from income taxation, IRS has concluded that federally recognized Indian tribes and their federally chartered corporations are not subject to federal income tax. With respect to tribes, IRS based its conclusion on the determination that the tribes are political agencies that Congress did not intend to include within the meaning of the income tax provisions of the Internal Revenue Code. Indian tribes are not, however, tax-exempt organizations within the meaning of the provisions of the Code that exempt certain categories of organizations from income tax. With respect to the tribes’ federally chartered corporations, IRS takes the view that no taxable entity separate from the tribes exists. IRS has also found that individual tribe members are U.S. citizens and are subject to federal income tax unless a specific exemption can be found in a treaty or statute. IRS has found, however, that Indian tribal governments have no inherent exemption from federal excise taxes and, absent a specific statutory exemption, must purchase taxable articles or services on a tax-paid basis and must pay tax on their sale or use of taxable articles or services. Section 7871 of the Code, enacted in 1982, provides an exemption from certain excise taxes. In addition, Indian tribes that are employers must pay federal employment taxes on wages paid to employees. A provision included as part of the House-passed Seven-Year Balanced Budget Reconciliation Act of 1995 would have made the tribes subject, under section 511(a) of the Code, to the unrelated business income tax on revenues from class II and class III gaming. The unrelated business income tax currently applies to the income from the business activities of tax-exempt organizations that are not substantially related to the organizations’ exempt function. The proposed tax would have been the first explicit federal income tax applied to an Indian tribe. A memorandum prepared by the Congressional Research Service, dated October 10, 1995, concluded that the proposal did not seem to be invalid on any constitutional ground. Before enactment of the Indian Reorganization Act of 1934 (IRA), congressional policy had been directed toward the assimilation of Indian tribes and the allotment of Indian lands to individual tribe members. IRA ended the practice of allotment as it applied to tribally owned lands. The act was designed to further tribal self-government by providing for tribal organization. IRA section 16 provided that any tribe may adopt a constitution and bylaws, and it established a procedure for ratification by tribal members and approval by the Secretary of the Interior. Section 16 also provided that the constitution adopted by the tribe vested certain rights and powers in the tribe, including the right to prevent the sale and disposition of tribal lands and the right to negotiate with federal, state, and local governments. Section 17 provided for the formation of a business corporation and established procedures for petition and ratification. Thus, IRA allowed for a dual mechanism by which the governmental affairs of an Indian tribe are conducted under a constitution and bylaws adopted under IRA section 16 and the commercial matters are handled by a business corporation organized under section 17. IRA section 16 provided that “In addition to all powers vested in any Indian tribe by existing law, the constitution shall also vest in such tribe or its tribal council .” An early opinion of the Solicitor for the Department of the Interior considered the issue of what powers are incorporated in the constitution and bylaws of an Indian tribe by this reference to “powers vested in any Indian tribe or tribal council.” The opinion concluded that the vested powers are those powers of local self-government that have never been terminated by law or waived by treaty, including the power to: (1) adopt a form of government, create offices, and prescribe the duties thereof; (2) regulate the domestic relations of tribal members; (3) levy dues, fees, or taxes upon tribal members; and (4) regulate the use and disposition of all property within the jurisdiction of the tribe. The opinion noted that the list was based on general legislation and judicial decisions of general application and was subject to modification with respect to particular tribes, in light of particular powers granted or particular restrictions imposed by special legislation. “a striking indication on the part of Congress and the executive department of the Government charged with administering various Indian laws that Indian tribes as such have been recognized as political agencies and have never lost their inherent powers of limited sovereignty . . . an Indian tribe, as such, is not a taxable entity within the purview of the income tax provisions of the Internal Revenue Code.” This principle forms the basis for the IRS policy on the income tax status of Indian tribes, as set forth in the series of revenue rulings. IRS has determined, however, that although Indian tribes are governments, they are not political subdivisions of the United States, individual states, or territories for purposes of the Code provisions that apply special tax treatment to these governmental units. These include the state exemptions from excise taxes, the income tax exemption for interest on municipal bonds, and the deduction of charitable contributions to governmental units for estate tax purposes. In 1982, Congress enacted the Indian Tribal Tax Status Act (Tribal Tax Act), treating tribal governments as states for a number of specified tax provisions, including provisions relating to tax-exempt bonds, charitable contribution deductions, and certain excise tax provisions. The treatment is generally available in transactions in which tribes exercise essential governmental functions. The following sections outline the federal income tax treatment that applies to the various structures that generally can be used by tribes to carry out business activities. IGRA provides that unless a tribe elects to license individual owners, the tribe must have the sole proprietary interest and responsibility for the conduct of the gaming activity. Thus, gaming operations must generally be operated by an entity owned by the tribe, or as an arm of the tribe itself. Payments to tribe members and the application of other federal taxes are also discussed. Federally Recognized Indian Tribes Are Exempt From Federal Income Taxation. According to IRS, federally recognized Indian tribes are not subject to federal income taxation. Rev. Rul. 67-284 states that “income tax statutes do not tax Indian tribes. The tribe is not a taxable entity.” Any income earned by the tribe is not subject to income tax, regardless of whether the business activity is inside or outside of Indian-owned lands. The Senate Finance Committee Report on legislation that later became the Tribal Tax Act recognized IRS’ position that sections 1 and 11 of the Internal Revenue Code do not reach Indian tribes as set forth in Rev. Rul. 67-284 and stated that the proposed legislation did not amend this treatment. Federally Chartered Tribal Corporations Are Not Subject to Federal Income Taxation. IRS has determined that federally chartered tribal corporations organized under IRA section 17 are not subject to federal income taxation, regardless of where the income is earned. In Rev. Rul. 81-295, IRS found that a federally chartered Indian tribal corporation has the same tax status as the tribe and is not taxable. The revenue ruling described a particular federally chartered Indian tribe. The tribe was formally organized under a constitution and bylaws pursuant to IRA section 16. In addition, at the time of formal organization, the tribal members had ratified a corporate charter as permitted by IRA section 17. The Secretary of the Interior had approved the tribe’s constitution and bylaws and the corporation’s charter. This principle was affirmed in Rev. Rul. 94-16. Further, in Rev. Rul. 94-65, IRS concluded that a tribal corporation organized under the Oklahoma Indian Welfare Act section 3 is not subject to federal income taxation on the income earned in the conduct of commercial business in or outside of Indian-owned lands. State-chartered Tribal Corporations Are Subject to Federal Income Tax. IRS has determined that a corporation organized by an Indian tribe under state law is subject to federal income tax regardless of the location of the activities that generate the income. In Rev. Rul. 94-16, IRS reasoned that a corporation organized by an Indian tribe under state law is not the same as an Indian tribal corporation organized under IRA section 17 and does not share the same tax status as the tribe for federal income tax purposes. Wholly-owned Tribal Law Corporations Generally Have Not Been Subject to Administrative Attempts to Impose Income Taxes. Although IRS has addressed the tax status of federally recognized Indian tribes and federally chartered corporations, it has not issued a published ruling on the tax status of wholly-owned corporations chartered under tribal law. Many Indian tribal governments have organized wholly-owned tribal corporations to conduct business operations rather than obtain a state or federal charter. Although IRS has not issued published rulings, IRS officials are not aware of any administrative attempt to date to impose federal income taxes on wholly-owned tribal corporations. Payment of Other Federal Taxes. IRS has determined that Indian tribal governments have no inherent exemption from excise taxes, but section 7871 of the Code provides them with a limited exemption. In Rev. Rul. 94-82, 1994-2 C.B. 412, IRS cited Confederated Tribes of the Warm Springs Reservation v. Kurtz, in which the court found that an Indian tribe did not fit within the excise tax exemption for “any State, any political subdivision of a State, or the District of Columbia.” The court reasoned that since the tribe did not derive authority from the state, the state government exemption is not applicable to the tribe. Section 7871 specifically provides that a tribal government is to be treated as a state for purposes of certain excise taxes if the transaction involves the exercise of an essential governmental function. Consequently, Indian tribes performing essential governmental functions share the same excise tax exemptions as states for many excise taxes. However, both Indian tribes and states are subject to wagering excise taxes. The states are, however, exempt from excise taxes on lotteries. Payments to Tribal Members Are Taxable. No provision of the Internal Revenue Code exempts individual Indians from the payment of federal income tax; thus, exemptions must be based on a treaty or an act of Congress. In some cases, a tribal member may receive general welfare payments from the tribe. Although amounts paid for general welfare may not be taxable, payments made pro rata to all tribal members are evidence that the payments are not based on need and, thus, probably will not qualify for the general welfare exclusion. The Indian Gaming Regulatory Act of 1988 provided that the net revenues from any tribal gaming are not to be used for purposes other than to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund operations of local government agencies. IGRA also provided that net revenues from gaming may be used to make per capita payments to members of the Indian tribe, but only if the tribe has prepared a revenue allocation plan to allocate revenues to uses authorized by IGRA. The plan must be approved by the Secretary of the Interior as adequate, particularly with respect to the funding of tribal government operations or programs and promoting tribal economic development. IGRA also required that the interests of minors and other legally incompetent persons entitled to receive any of the payments be protected and preserved. Because the payments are per capita distributions of gaming proceeds, they are generally subject to taxation when distributed. Additionally, IGRA itself provides that the per capita payments are subject to federal taxation, and the act requires that tribes notify their members of the tax liability when payments are made. Section 3402(r) of the Internal Revenue Code provides that every person making a payment to a member of an Indian tribe from the net revenues from class II or class III gaming activity must withhold income taxes from the payment. The withholding is capped at 31 percent. Tribal governments must report the total amount of taxable per capita payments made to each tribal member on Form 1099-Misc. Tribal governments are to report any federal income tax withheld on per capita payments on Form 945, Annual Return of Withheld Federal Income Tax, and make any necessary federal tax deposits. We provided a draft of this report to the Internal Revenue Service, Department of the Interior, and National Indian Gaming Commission. IRS’ Office of Chief Counsel generally agreed with our presentation of the federal tax treatment of Indian tribes and their members and provided some technical comments. We have incorporated those comments where appropriate. Interior’s Director of Audit and Evaluation provided a technical comment regarding the authority to approve class III gaming and tribal-state compacts, which we incorporated. NIGC provided a number of technical comments that we incorporated as appropriate. Two of the comments warrant further discussion. First, the NIGC Acting Chair indicated that our number of tribes and facilities did not agree with NIGC’s records. In an April 18, 1997, meeting with NIGC officials, we discussed the number of tribes and facilities and made changes to the report where appropriate. However, our final figures and list of facilities are not the same as NIGC’s because of differences in the methodology used to identify and count facilities. NIGC officials acknowledged the differences in methodology and agreed with our final figures and list of facilities. Second, the NIGC Acting Chair also indicated that we should not include state gaming taxes and other payments to the state as examples of expenses incurred by Atlantic City and Nevada casinos but not by Indian gaming facilities. She stated that some tribal-state compacts may include payments from either the tribe or the gaming facility to states. We told NIGC officials that information provided by industry specialists and in the financial statements of the gaming facilities included in our analysis of operating income showed no payments of taxes or other fees to the state. We also explained to NIGC officials that this information is not meant to indicate that tribes or their gaming facilities pay no taxes or fees to states but to explain some of the differences in the operating income between Indian gaming facilities and Atlantic City and Nevada casinos. NIGC officials accepted this explanation. Interior’s Assistant Secretary—Indian Affairs provided additional written comments. The Department agreed with our presentation of the federal tax treatment of Indian tribes and their members. It suggested that our report should also compare revenues of Indian gaming facilities with revenues of the various states lotteries. The letter stated that it is Interior’s position that tribes are governments, like states, and that it is therefore more appropriate to compare the gaming revenues of governmental entities rather than to compare gaming revenues of Indian tribes with those of privately owned casinos. We compared revenues from class III gaming (primarily table games and slot machines) with revenues from like gaming activities in Atlantic City and Nevada casinos. We did not compare Indian gaming revenues with state lottery revenues because Indian gaming does not include lotteries; therefore, such a comparison would be inappropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Ranking Minority Member, House Ways and Means Committee; the Senate Finance Committee Chairman and Ranking Minority Member; the Commissioner of Internal Revenue; the Secretary of the Interior; the Chair of the National Indian Gaming Commission; and to other interested parties. We will also make copies available to others upon request. Major contributors to this report are listed in appendix III. If you have any questions or we can be of further assistance, please call me at (202) 512-9110. Our objectives in this report were to provide (1) an updated profile of the Indian gaming industry, (2) information on the amount of transfers to the tribes from their gaming facilities, (3) a comparison of Indian gaming revenues with the revenues generated by other legalized gaming activities, and (4) a summary of the federal tax treatment of Indian tribes and tribe members. To determine the number of tribes with gaming facilities, we reviewed documents provided by NIGC identifying all tribes with gaming operations as of December 31, 1996. This information included only class II and class III gaming facilities. Information on the number of tribes with class I facilities was not readily available because class I gaming consists of social gaming for nominal prizes or ceremonial gaming, which is regulated solely by the tribes. To develop a comprehensive list of tribes and gaming facilities, NIGC contacted all tribes except for those in Alaska, where it contacted only the tribes that were known to be attempting to open gaming facilities. According to NIGC, most of the 226 tribes in Alaska are not operating gaming facilities, primarily because of the remoteness and small size of the tribes’ membership. (A list of tribes and their known gaming facilities as of December 31, 1996, appears in app. II.) IGRA categorizes gaming activities as class II or class III. For purposes of our analysis, however, we categorized facilities based on whether they had approved tribal ordinances and tribal-state compacts. We categorized gaming facilities without compacts as class II facilities, even though they may operate class III games. We treated gaming facilities with class III games and compacts in place, per BIA listing of compacts as of December 14, 1995, as class III facilities. NICG told us that in several states, tribes and states may no longer have valid compacts in place. To perform our analyses on revenues, costs and expenses, and net income, for example, we used data contained in 1995 financial statements that were submitted to NIGC as of November 22, 1996. This was the date on which we ended our data gathering to begin our analyses. For this time frame, NIGC had financial statements from 126 tribes representing 178 facilities. The financial statements of 174 of these facilities were independently audited, and the majority received unqualified opinions.We also verified our listings of financial statements received with NIGC officials to ensure that we had received all of them. (See app. II, footnote a.) The sample of facilities included in our report consists of the 178 gaming facilities represented by these financial statements. The sample is not representative of the universe of all Indian gaming facilities. Table I.1 represents the 1995 financial statement submission status of all gaming facilities existing as of December 31, 1996, according to information provided by NIGC. We verified this information with NIGC officials to clarify questions and inconsistencies. We do not know the characteristics of those gaming facilities for which we did not analyze the financial statements. We did not determine why some tribes did not submit financial statements beyond what is indicated in table I.1 because such an analysis, although important for compliance purposes, was outside the scope of this report. Filed and included in our analysis Filed but not included in our analysis because financial statements were incomplete or submitted after the completion of our data gathering Did not file or received filing extensions Not required to file because they were not operating for one year as of 1995 or were opened in 1996 Included in our analysis but closed by December 31, 1996 (7) For those facilities included in our analyses, we extracted information that allowed us to determine gaming revenues, total revenues, costs and expenses, operating income, and net income. We used Audit and Accounting Guide: Audits of Casinos, published by the American Institute of Certified Public Accountants, and spoke with industry experts for guidance in deciding which data to extract from the financial statements and what analyses to perform on these data. (See the glossary for the accounting terms we used throughout this report.) Our analyses do not include data from the balance sheet or statement of cash flows, such as assets, liabilities, equity, or debt payments, because this information was not reported consistently by the different facilities. To determine the amount of transfers to the tribes, we analyzed information contained in the financial statements. The transfers as described in this report represent the amounts in the financial statements allocated to the tribes. IGRA provides that net revenues from tribal gaming must be devoted to certain uses, including funding tribal government operations. Net revenues is defined as gross gaming revenues minus prizes and gaming-related operating expenses, not including management fees. In figure I.1, we depict, in general, how the transfers flow from the gaming facility to the tribe as indicated in the financial statements. As noted in the Background section of this report, IGRA limits how these transfers can be used. The transfers as described in this report represent the amounts in the financial statements allocated to the “tribes.” The amounts could have been received by tribal government or tribal members, but we were not able to determine this because the financial statements did not indicate how the transfers were used or who received them. In addition, to determine the economic impact of gaming on the tribes, several factors would need to be considered, such as poverty levels and other revenues generated by the tribes; we did not address these factors because they were beyond the scope of this report. We obtained information on the amount of items, such as taxes and fees, rent and other charges, and cost reimbursements, from the financial statements to the extent such amounts were reported. To compare Indian gaming revenues with the gaming revenues of other legalized gaming, we used data reported in International Gaming and Wagering Business and financial statement data submitted to the Nevada and Atlantic City gaming commissions. We obtained the financial data on Nevada casinos from Nevada Gaming Abstract, a report prepared by the Nevada State Gaming Control Board for fiscal year data as of June 30, 1995. The information presented in the Abstract comes from unaudited standard financial statements that licensees whose gaming revenues are $1 million or more are required to file. We obtained the Atlantic City financial data from unaudited standard financial statements that all New Jersey casinos are required to file and from financial analyses prepared by the New Jersey Casino Control Commission as of June 30, 1995. We did not independently verify the data included in these reports. We used data published in International Gaming and Wagering Business to determine the gaming revenue shares of legalized gaming as a whole and also the casino segment in particular. The legalized gaming categories we included are those used in this publication. We substituted the amounts of Indian gaming revenues for the amounts used in this publication only for consistency with our analyses in the rest of our report. The amounts published for Indian gaming, however, were similar to the amounts we determined from the financial statements. We used the financial data of Nevada and Atlantic City casinos only to compare class III facilities. Class III facilities relied primarily on casino games and slot machines, and this was also the case for Nevada and Atlantic City casinos. We included only facilities with gaming revenues of $1 million and more because the Nevada financial data were aggregated and included only facilities with these gaming revenues. To make valid comparisons of revenues among the Indian facilities and casinos, we subtracted the amount of promotional allowances (free food, hotel rooms, and so on given to customers as incentives) from “other revenues” for those facilities and casinos that reported such amounts as “revenues.” We used operating income to compare the results of these operations because operating income is a common measure used by industry experts to analyze and compare the profitability of businesses. It discounts the effects of capital structure and other nonoperating incomes and expenses that are not directly related to the performance of business operations. To describe the legal issues regarding the taxation of Indian gaming revenues, we reviewed relevant sections of the Internal Revenue Code and the IRS and Department of the Treasury rulings and regulations pertaining to the taxation of Indian tribes. We also interviewed officials from Treasury, IRS, and BIA. Coyote Valley Band of Pomo Indians (continued) Seminole Gaming Palace - Immokalee* Coeur d’Alene Tribal Bingo/Casino* Kootenai River Inn and Casino* (continued) Bois Forte Band of Chippewas Fond du Lac Reservation Business Committee Grand Portage Band of Chippewa Indians Leech Lake Band of Chippewa Indians (continued) Avi Casino Enterprise, Inc. Inn of the Mountain Gods** Cities of Gold Sports Bar (continued) Eastern Shawnee Tribe of Oklahoma Bingo Operations* (continued) Foxfire Bingo Casino, Inc. Cheyenne River Sioux Tribe Bingo Children’s Village Bingo (continued) BJ’s Enterprises, Inc. Bad River Band of Lake Superior Chippewa Indians (continued) A single asterisk denotes the facilities included in our analyses (178), the names of which were taken from the financial statements submitted to NIGC. Other facility names were obtained from other NIGC data. A double asterisk denotes the facilities included in our analyses that were not operating on December 31, 1996. Payroll, management fees, depreciation, amortization, the interest portion of debt payments, and others. Under generally accepted accounting principles, the principal portion of the debt payments is not an expense and thus is not included in costs and expenses. Dollars wagered minus payouts. Total revenues minus all costs and expenses. IGRA defines “net revenues” as gross gaming revenues minus prizes and gaming-related operating expenses, not including management fees. Revenues minus costs and expenses that were related to the primary business activities, such as salaries, advertisements, rents, and other expenses. It did not include revenues or expenses that were not related to the primary business activities, such as interest income; gains on sales of assets; and depreciation, amortization, and interest expenses. Sales such as food, beverages, and hotel rooms. Sum of gaming revenues and other revenues. 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.
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Pursuant to a congressional request, GAO provided an updated profile of the Indian gaming industry, focusing on: (1) the amount of transfers to the tribes from their gaming facilities; (2) a comparison of Indian gaming revenues with the revenues generated by other legalized gaming activities; and (3) the federal tax treatment of Indian tribes and tribe members. GAO noted that: (1) as of December 31, 1996, 184 tribes were operating 281 gaming facilities; (2) for 178 of these facilities, operated by 126 tribes, GAO obtained and examined 1995 financial statements; (3) these 178 facilities reported generating gaming revenues (dollars wagered minus payouts) of about $4.5 billion, with 8 of them accounting for about 40 percent of these revenues; (4) the gaming facilities also reported generating over $300 million in revenues from sales such as food, beverages, and hotel rooms; (5) net income (total revenues minus expenses) reported for the 178 facilities was about $1.9 billion, representing 38 percent of the $4.9 billion total revenues; (6) according to the financial statements, about $1.6 billion was transferred to 106 tribes in 1995; (7) for 20 tribes, the financial statements did not show any transfers; (8) none of the financial statements indicated how the transfers were used by the tribes; (9) gaming revenues generated by all class II and class III Indian facilities for which GAO had financial statements equaled at least 10 percent of the estimated gaming revenues generated by legalized gaming reported by the gaming industry in 1995; (10) in the aggregate, 109 class III Indian facilities generated about the same total amount in gaming revenues as the 12 Atlantic City casinos and more than half the gaming revenues of the 213 Nevada casinos; (11) average gaming revenues for these Indian facilities were significantly less than those of Atlantic City casinos but about equal to the average for the Nevada casinos; (12) in terms of the distribution of gaming revenues among the facilities, class III Indian facilities were similar to Nevada casinos, a small proportion of the facilities accounted for a large share of the aggregate gaming revenues; (13) by contrast, the gaming revenues of the 12 Atlantic City casinos were more equally distributed; (14) the Internal Revenue Service has determined that Indian tribes are not subject to federal income tax because they are political agencies not included within the meaning of the income tax provisions of the Internal Revenue Code; (15) Indian tribes are not, however, tax-exempt organizations within the meaning of provisions of the Code that exempt certain categories of organizations from income tax; (16) individual tribe members are subject to federal income tax; and (17) payments of net revenues from gaming operations to members of Indian tribes are generally taxable, and the tribe is responsible for withholding income taxes from the payments.
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TRICARE has three options for its eligible beneficiaries: TRICARE Prime, a program in which beneficiaries enroll and receive care in a managed network similar to a health maintenance organization; TRICARE Extra, a program in which beneficiaries receive care from a network of preferred providers; and TRICARE Standard, a fee-for-service program that requires no network use. The programs vary according to the amount beneficiaries must contribute toward the cost of their care and according to the choices beneficiaries have in selecting providers. In TRICARE Prime, the program in which active duty personnel generally must participate, the beneficiaries must select a primary care manager (PCM) who either provides care or authorizes referrals to specialists. Most beneficiaries who enroll in TRICARE Prime select their PCMs from MTFs, while other enrollees select their PCMs from the civilian provider network. Regardless of their status—military or civilian—PCMs may refer Prime beneficiaries to providers in either MTFs or TRICARE’s civilian provider network. Both TRICARE Extra and TRICARE Standard require copayments, but beneficiaries do not enroll with or have their care managed by PCMs. Beneficiaries choosing TRICARE Extra use the same civilian provider network available to those in TRICARE Prime, and beneficiaries choosing TRICARE Standard are not required to use providers in any network. TRICARE Extra and Standard beneficiaries may receive care at an MTF when space is available. The Office of the Assistant Secretary of Defense for Health Affairs (Health Affairs) establishes TRICARE policy and has overall responsibility for the program. TMA, under Health Affairs, is responsible for awarding and monitoring the TRICARE contracts. DOD has delegated oversight of the civilian provider network to regional TRICARE lead agents. The lead agent for each region coordinates the services provided by MTFs and civilian network providers. The lead agents respond to direction from Health Affairs, but report directly to their respective Surgeons General. In overseeing the network, lead agents have staff assigned to MTFs to provide the local interaction with contractor representatives and respond to beneficiary complaints as needed and report back to the lead agent. Currently, DOD employs four civilian health care companies or contractors that are responsible for developing and maintaining the civilian provider network that complements the care delivered by MTFs. The contractors recruit civilian providers into a network of PCMs and specialists who provide care to beneficiaries enrolled in TRICARE Prime. Contractors are required to establish and maintain the network of civilian providers in the following locations: all catchment areas, base realignment and closure sites, other contract-specified areas, and noncatchment areas where a contractor deems it cost effective. These locations are called prime service areas. In the remaining areas, a network is not required. (See fig. 1.) This network of civilian providers also serves as the network of preferred providers for beneficiaries who use TRICARE Extra. In 2002, contractors reported that the civilian provider network included about 37,000 PCMs and 134,000 specialists. The contractors are also responsible for ensuring adequate access to health care, referring and authorizing beneficiaries for health care, educating providers and beneficiaries about TRICARE benefits, ensuring that providers are credentialed, and processing claims. In their network agreements with civilian providers, contractors establish reimbursement rates and certain requirements for submitting claims. Reimbursement rates cannot be greater than Medicare rates unless DOD authorizes a higher rate. DOD’s four contractors manage the delivery of care to beneficiaries in 11 TRICARE regions. DOD is currently analyzing proposals to award new civilian health care contracts, and when they are awarded in 2003, DOD will reorganize the 11 regions into 3—North, South, and West—with a single contract for each region. Contractors will be responsible for developing a new civilian provider network that will become operational in April 2004. Under these new contracts DOD will continue to emphasize maximizing the role of MTFs in providing care. See appendix II for maps depicting the current and future regions. DOD has standards intended to ensure that its civilian provider network enhances and supports the capabilities of the MTFs in providing care to millions of TRICARE Prime beneficiaries. DOD requires that contractors have a sufficient number and mix of providers, both primary care and specialists, to satisfy the needs of beneficiaries enrolled in the Prime option. Specifically, it is the responsibility of the contractors to ensure that each prime service area in the network has at least one full-time equivalent PCM for every 2,000 TRICARE Prime enrollees and one full-time equivalent provider (both PCMs and specialists) for every 1,200 TRICARE Prime enrollees. In addition, DOD has access-to-care standards that are designed to ensure that Prime beneficiaries receive timely care from providers. Under these standards appointment wait times shall not exceed 24 hours for urgent care, 1 week for routine care, or 4 weeks for well-patient and specialty care; office wait times shall not exceed 30 minutes for nonemergency care; and travel times shall not exceed 30 minutes for routine care and 1 hour for specialty care. Lead agents are responsible for ensuring that the civilian provider network meets these standards so that all TRICARE Prime beneficiaries in their region have adequate access to health care. To do so, lead agents told us they use network adequacy reports that contractors provide each quarter as the primary tool to oversee the network. According to DOD’s operations manual, these reports are to contain information on the status of the network, such as the number and type of specialists; data on adherence to the access standards; a list of civilian and military primary care managers; and the number of their enrollees. The reports may also contain information on steps contractors have taken to address any network inadequacies. However, because the reporting requirements do not specify a standard process for collecting information on network adequacy, contractors vary in how they obtain this information. For example, lead agents told us that one contractor conducts visits of providers’ offices to review appointment wait times, while another contractor uses an automated appointment tracking system to collect this information. Lead agents told us they also rely on beneficiary complaints to oversee the adequacy of the civilian provider network. Beneficiaries may complain directly to DOD, the contractor, lead agent, or MTF. DOD officials said that when they receive a beneficiary complaint, they direct the complaint to either the contractor, lead agent, or MTF, depending on the subject of the complaint. In addition to these tools, lead agents periodically monitor contractor compliance by reviewing performance related to specific contract requirements, including requirements related to network adequacy. Lead agents also told us they periodically schedule reviews of special issues related to network adequacy, such as conducting telephone surveys of providers to determine whether they are accepting TRICARE Prime patients. In addition, lead agents stated they meet regularly with MTF and contractor representatives to discuss network adequacy. If lead agents determine that the network is inadequate, the lead agents or TMA may issue enforcement actions to encourage contractors to address deficiencies in their region. However, lead agents told us that few enforcement actions have been issued. During our review, three enforcement actions related to network adequacy were open for the five regions we visited. Lead agents said they prefer to address deficiencies informally rather than take formal actions, particularly in areas where they do not believe the contractor can correct the deficiency because of local market conditions. For example, rather than taking a formal enforcement action, one lead agent worked with the contractor to arrange for a specialist from one area to travel to another area periodically. DOD’s ability to effectively oversee the TRICARE civilian provider network is hindered by (1) flaws in its required provider-to-beneficiary ratios, (2) incomplete reporting on beneficiaries’ access to providers, and (3) the absence of a systematic assessment of complaints. Although DOD has required the network to meet established ratios of providers to beneficiaries, the ratios may underestimate the number of providers needed in an area. Similarly, although DOD has certain requirements governing Prime beneficiary access to available providers, the information reported to DOD on this access is often incomplete—making it difficult to assess compliance with the requirements. Finally, when beneficiaries complain about availability or access in the network, these complaints can be directed to different DOD entities, with no guarantee that the complaints will be compiled and analyzed in the aggregate to identify possible trends or patterns and correct network problems. However, DOD has existing surveys and automated reporting systems that, while not designed specifically for monitoring the civilian provider network, could provide valuable information and potentially improve DOD’s ability to oversee the civilian provider network. The provider-to-beneficiary ratios contractors report to DOD for a prime service area do not always accurately reflect the potential health care workload for that area or the provider capability to deliver the care. In some cases, the provider-to-beneficiary ratios underestimate the number of providers, particularly specialists, needed in an area. This underestimation occurs because in calculating the ratios, some contractors do not include the total number of Prime enrollees within the area. Instead, in some areas contractors base their ratio calculations on the total number of beneficiaries enrolled with civilian PCMs and do not count beneficiaries enrolled with PCMs in MTFs. The ratio is most likely to result in an underestimation of the need for providers in areas in which the MTF is a clinic or small hospital with a limited availability of specialists. For example, the Air Force clinic at Grand Forks, N. Dak. has few specialists on staff and must rely on the civilian provider network for a large proportion of specialist care. In fiscal year 2002, 90 percent of its specialist appointments were referred to the network. In contrast, a large MTF, such as Wright Patterson Medical Center in Dayton, Ohio, has many specialist providers on staff and referred only 2 percent of its specialty appointments to the civilian provider network during fiscal year 2002. Incorporating MTF provider capability and the total number of Prime enrollees into the network assessment would give DOD a more complete and accurate assessment of the adequacy of the network for a geographical area. Moreover, in reporting whether the network meets the established ratios, contractors do not make the same assumptions about the level of participation on the part of civilian network providers. Contractors generally assume that between 10 to 20 percent of their providers’ practices are dedicated to TRICARE Prime beneficiaries. Therefore, if a contractor assumes 20 percent of all providers’ practices are dedicated to TRICARE Prime rather than 10 percent, the contractor will need half as many providers in the network in order to meet the prescribed ratio standard. These assumptions may or may not be accurate, and the assumptions have a significant effect on the number of providers required in the network. In the network adequacy reports we reviewed, the contractors did not always report all the information required by DOD to assess compliance with the access standards. Specifically, for the network adequacy reports we reviewed from 5 of the 11 TRICARE regions, we found that contractors reported less than half of the required information on access standards for appointment wait, office wait, and travel times. Some contractors reported more information than others, but none reported all the required access information. Contractors said they had difficulties in capturing and reporting information to demonstrate compliance with the access standards. They stated that it was not practical or feasible to document every appointment and office wait time because some beneficiaries make their own appointments directly and provider offices are spread throughout the geographic area. Most of the DOD lead agents we interviewed told us that because information on access standards is not fully reported, they monitor compliance with the access standards by reviewing beneficiary complaints. Lead agents and contractors said such complaints may include a beneficiary’s inability to get an appointment, having to drive long distances for care, or a provider not accepting new TRICARE Prime patients. Because beneficiary complaints are received through numerous venues, often handled informally on a case-by-case basis, and not centrally evaluated, it is difficult for DOD to assess the extent of any systemic access problems. Separately, TMA has a database of complaints that includes some complaints about access to care. TMA has received these complaints either directly, through DOD’s beneficiary survey, or from letters sent by beneficiaries to their congressional representatives. However, the usefulness of the database is limited because it does not capture complaints sent to MTFs, lead agents, or contractors. While contractor and lead agent officials told us they have received few complaints about network access problems, this small number of complaints could indicate either an overall satisfaction with care or a general lack of knowledge about how or to whom to complain. Additionally, a small number of complaints, particularly when spread among many sources, limits DOD’s ability to identify any specific trends of systemic problems related to network adequacy within TRICARE. The next generation of contracts, called TNEX, may result in a more structured approach to collecting complaint information when implemented in 2004. Under TNEX, the civilian provider network must be accredited in each region by a nationally recognized accrediting organization, such as the National Committee for Quality Assurance (NCQA) or the Joint Commission on Accreditation of Healthcare Organizations (JCAHO). These organizations typically require procedures for addressing beneficiary complaints. For example, NCQA guidance requires procedures for registering, responding to, and investigating complaints. It also requires documentation of actions taken to address complaints. JCAHO guidance has similar requirements. Such procedures could provide DOD with a basic structure that in turn could lead to a more systematic means of collecting and evaluating complaint data at the prime service area and regional levels. DOD has some tools that, while not designed specifically for monitoring the civilian provider network, could be useful for oversight. For example, the Health Care Survey of DOD Beneficiaries (HCSDB) could be used as a source of information for overseeing civilian provider network adequacy at the national level. This quarterly survey contains specific questions on all beneficiaries’ experiences related to access to care. For example, our analysis of the 2000 HCSDB data for all Prime beneficiaries receiving care from civilian providers indicates that over one-third of these beneficiaries waited more than DOD’s standard of 1 day for access to a provider for an illness or an injury. However, the survey’s sample design does not generally allow for assessing the adequacy of the civilian provider network in most prime service areas and the survey’s response rate of 35 percent further limits its usefulness. In addition to DOD’s beneficiary survey, contractors conduct surveys of providers that could assist in DOD’s oversight of the civilian provider network. These surveys are intended to assess providers’ satisfaction with contractors’ performance and other TRICARE requirements. However, these surveys have very low response rates, ranging from 4 to 19 percent, and in some cases they reflect unrepresentative samples of providers. For example, one contractor surveyed only those providers who participated in a contractor-sponsored seminar. Also, we found considerable variation among the survey instruments, with some assessing provider satisfaction more thoroughly than others. Despite these weaknesses, if improved, the surveys could reveal concerns providers may have about participating in the TRICARE network. This in turn could help DOD address these concerns and mitigate problems that might affect the adequacy of the network. In addition to these existing surveys, DOD is piloting two initiatives for collecting information on meeting access standards that could help in the oversight of network adequacy. The first, the Enterprise Wide Referral and Authorization System (EWRAS), which is currently being tested in the Washington D.C. area, captures information on specialty care appointments in MTFs and information on some specialty care appointments in the civilian provider network. DOD officials said they expect EWRAS to be fully implemented in Spring 2004. The second initiative, the Access to Care (ATC) Project, gathers information on appointments and specialty referrals at or originating from MTFs. Specifically, it captures data on whether beneficiaries had a referral, declined an appointment that was available, cancelled an appointment, or left without being seen. It also records the average number of days between when the appointment was made and when the beneficiary was seen, as well as clinic cancellations and future appointments. This information can help indicate the extent to which MTFs are meeting the appointment wait-time access standards. Although the ATC Project is currently being piloted at four MTFs, a similar system, if modified to accommodate the requirements of the contractors for the civilian provider network, could provide valuable information on appointment wait time standards—information that is necessary for overseeing the adequacy of the network. DOD and its contractors have reported three factors that may contribute to potential civilian provider network inadequacy: lack of providers in certain geographic locations, low reimbursement rates, and administrative requirements. First, DOD and contractors have reported regional shortages for certain types of specialists in rural areas. For example, they reported shortages for endocrinologists in the Upper Peninsula of Michigan, dermatologists in New Mexico, and neurologists and allergists in Mountain Home, Idaho. Additionally, in these instances, TRICARE officials and contractors have reported difficulties in recruiting providers into the TRICARE Prime network because in some areas providers, notably specialists, will not join managed care programs. For example, contractor network data indicate that there have been long-standing specialist shortages in TRICARE in areas such as Alaska or eastern New Mexico, where the lead agent stated that the providers in those locations have repeatedly refused to join any managed care network. There are certain geographic locations in which DOD has confirmed shortages of providers and has raised TRICARE’s reimbursement rates as a means of remedying such shortages. Although by statute DOD generally cannot pay TRICARE network providers more than they would be paid under the Medicare fee schedule, DOD may make payments of up to 115 percent of the Medicare fee to ensure the availability of an adequate number of qualified healthcare providers. In 2000, DOD increased reimbursement rates in rural Alaska in an attempt to entice more providers to join the network. Similarly, in 2002, DOD increased reimbursement rates for the rest of Alaska, and in 2003, DOD increased the rates for selected specialists in Idaho to address documented network shortcomings. These three instances are the only times DOD has used its authority to pay above the Medicare rate in order to address local area provider shortages, and the increases have had mixed success. In 2001, for instance, we found that the 2000 rate increase in rural Alaska had not increased provider participation. On the other hand, DOD officials told us that with the 2002 increase in Alaska and the 2003 increase in Idaho, contractors were experiencing some success in recruiting providers in those areas. According to DOD officials, for example, six neurosurgeons in Boise, Idaho agreed to join the network, eliminating the neurosurgeon shortfall in that prime service area. In Alaska, DOD officials reported that since the reimbursement rate increased, providers for radiology, thoracic surgery, pediatrics, and other specialties have stated they will participate in TRICARE. The general levels of TRICARE’s reimbursement rates are another factor that DOD and contractor officials told us may contribute to civilian provider network inadequacy. Specifically, according to contractor officials, civilian network providers have expressed concerns about the decline in Medicare fees in 2002 and the potential for further reductions, which they have said will affect their participation in the network. In addition, there have been reported instances in which groups of providers have banded together and refused to accept TRICARE Prime patients due to their concerns with low reimbursement rates. One contractor identified low reimbursement rates as the most frequent cause of provider dissatisfaction. In addition to provider complaints, beneficiary advocacy groups, such as the Military Officers Association of America (MOAA), have cited instances of providers refusing care to beneficiaries because of low reimbursement rates. However, while TRICARE’s reimbursement rates may have created dissatisfaction among providers, it is not clear how much this has affected civilian provider network adequacy except in limited geographic locations, because the information contractors provide to DOD is not sufficient to measure network adequacy. Additionally, there are indications that reimbursement rates have little influence on providers’ decisions to leave the TRICARE network. Data from one contractor indicated that out of the 2,156 providers who left the network between June 2001 and May 2002, 900 providers cited reasons for leaving and only 10 percent of these cited reimbursement rates as a reason for leaving the network. Contractors report that providers have also expressed dissatisfaction with some TRICARE administrative requirements, such as credentialing and preauthorizations and referrals—but the effect of these requirements on civilian provider network adequacy is also unclear. For example, many providers have complained about TRICARE’s credentialing requirements. In TRICARE, a provider must get recredentialed every 2 years, compared to every 3 years for the private sector. Providers have said that this places cumbersome administrative requirements on them. Another widely reported concern about TRICARE administrative requirements relates to preauthorization and referral requirements. Civilian PCM providers are required to get preauthorizations from MTFs before referring patients for care. While preauthorization is a standard managed care practice, providers complain that obtaining preauthorization adversely affects the quality of care provided to beneficiaries because it takes too much time. In addition, civilian PCMs have expressed concern that they cannot refer beneficiaries to the specialist of their choice because of MTFs’ “right of first refusal” that gives an MTF discretion to care for the beneficiary or refer the care to a civilian provider. Nevertheless, there are not direct data confirming that administrative burdens translate into widespread civilian provider network inadequacies. Further, when reviewing one contractor’s survey of providers who left the network, we found that only 1 percent of providers responding cited administrative burdens as a factor. DOD’s new contracts for providing civilian health care, called TNEX, may address some network concerns raised by providers and beneficiaries, but may create other areas of concern. Because the new contracts had not yet been finalized as of June 2003, the specific mechanisms DOD and the contractors will use to ensure network adequacy are not known. Under TNEX, DOD plans to retain the requirement that the civilian provider network complement the clinical services provided by MTFs; the access standards for appointment and office wait times, as well as travel-time standards; and the periodic reporting on the adequacy of the network. However, the requirement to use provider-to-beneficiary ratios to measure network adequacy will be eliminated, although such ratios may be used during the network accreditation process. Further, TNEX contains a provision intended to encourage contractors to develop an adequate civilian provider network. This provision states that at least 96 percent of contractor referrals shall be to a MTF or network provider with an appointment available within the access standards. Failure to achieve the 96 percent standard will affect contractors financially. TNEX may reduce the administrative burden related to provider credentialing and patient referrals. Currently, civilian network providers must follow TRICARE-specific requirements for credentialing. In contrast, TNEX will allow network providers to be credentialed through a nationally recognized accrediting organization. DOD officials stated this approach is more in line with industry practices. Patient referral procedures will also change under TNEX. Referral requirements will be reduced, but the MTFs will still retain the right of first refusal. On the other hand, TNEX may be creating a new administrative concern for contractors and providers by requiring that all network claims submitted by civilian providers be filed electronically. In fiscal year 2002, only 25 percent of processed claims were submitted electronically. Contractors stated that such a requirement could discourage providers from joining or staying in the network because providers may not be willing to modify their systems to submit electronic claims for a small volume of TRICARE beneficiaries. DOD states that electronic filing will reduce claims-processing costs. DOD spends over $5 billion a year for health care delivered by the network of civilian providers to complement care provided in the MTFs; however, DOD has exercised limited oversight of the adequacy of the civilian provider network. The information DOD relies on to assess the network does not always accurately reflect the actual numbers of beneficiaries or availability of providers. Further, the contractors do not report comprehensive data on the network’s compliance with DOD’s access standards, which are key benchmarks in assessing network adequacy. This information will be important as DOD oversees the transition to the new health care delivery contracts. Incorporating data on the numbers and types of providers in the MTFs and the total number of beneficiaries enrolled in TRICARE Prime would give DOD a more accurate and comprehensive report of the potential workload the civilian provider network faces in a prime service area and the adequacy of the number of PCMs and specialists to deliver that care. Similarly, more thorough reporting on beneficiaries’ access to care within the standard time frames and development of a more systematic means of collecting and evaluating complaint data would help DOD’s oversight of the ability of the civilian provider network to deliver timely care to beneficiaries. Further, with improvements in response rates and provider representation, the civilian provider satisfaction surveys could also be useful in identifying actions DOD and the contractors could take to address provider concerns and ensure network stability. To improve DOD’s oversight of the civilian provider network, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs to ensure that MTF capabilities and all enrolled Prime beneficiaries in prime service areas are accounted for when assessing and documenting the adequacy of the civilian provider network; ensure that the information reported on the required access standards is explore ways to ensure that beneficiary complaints are systematically evaluated and used to oversee the civilian provider network; and explore options for improving the civilian provider surveys so that the results of the surveys could be useful to DOD and the contractors in identifying civilian provider concerns and developing actions that might mitigate concerns and help ensure the adequacy of the civilian provider network. DOD provided written comments on a draft of this report. (See app. III.) DOD concurred with the report’s recommendations. In its written comments, DOD stressed that strong oversight of the civilian provider network is necessary and should be continuously monitored for improvements. DOD said that the implementation of TNEX will address many of the points raised in our report. DOD said TNEX will enhance the reporting of information about network adequacy as well as provide powerful financial incentives for contractors to optimize the direct care system, maximize the extent of civilian provider networks, and achieve the highest level of beneficiary satisfaction. However, since the TNEX contracts have not been finalized as of July 2003, it is too early to assess whether the contracts will result in improved oversight. In its written comments DOD also said that the report title might mislead some into concluding that we found the TRICARE network to be inadequate. As we noted in the draft report, we did not assess the adequacy of the civilian provider network but focused our work on DOD’s oversight of the network. We believe the title of the report reflects that focus. DOD also provided technical comments, which we incorporated into the report as appropriate. We are sending copies of this report to the Secretary of Defense, appropriate congressional committees, and other interested parties. Copies will also be made available to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-7101. Other contacts and staff acknowledgments are listed in appendix IV. To describe and evaluate DOD’s oversight of the adequacy of the civilian provider network, we reviewed and analyzed the information in the quarterly network adequacy reports submitted by each contractor. We identified the requirements for the content of these adequacy reports based upon the general requirements in the TRICARE Operations Manual and the additional requirements in contractors’ Best and Final Offers. We reviewed the contents of five of the contractors’ quarterly network adequacy reports, submitted between June 2002 and October 2002, and compared them to the applicable reporting requirements. Each report was evaluated for compliance regarding the provider-to-beneficiary ratios and the access-to-care standards. Because DOD has delegated the oversight of the network to the regional lead agents, we discussed civilian provider network oversight with officials in 5 of the 11 TRICARE regions—Northeast, Mid-Atlantic, Heartland, Central, and Northwest. To discuss network management, we interviewed officials from the four contractors—HealthNet, Humana, Sierra, and TriWest—that are responsible for developing and maintaining the provider network that augments care provided by DOD’s MTFs. Because concerns regarding network adequacy may also be identified at the local level, we met with lead agent and contractor officials at MTFs in each of the regions we visited. Finally, we interviewed officials at TMA in Falls Church, Va., the office that is responsible for ensuring that DOD health policy is implemented, and officials at TMA-West in Aurora, Colo., the office that carries out contracting functions, including monitoring the civilian contracts and writing the request for proposals for the future contracts. As part of our assessment of DOD’s oversight, we also reviewed surveys of beneficiaries and providers, as well as DOD data collection initiatives as potential tools for overseeing DOD’s civilian provider network, but did not validate the data in the surveys or collection initiatives. Using annual data from the 2000 HCSDB, we analyzed beneficiaries’ responses to access-to- care questions for those who were enrolled in Prime and received most of their health care in the civilian provider network. We examined the results of access-to-care questions based on whether or not these beneficiaries were seen within the TRICARE access-to-care standards. Because we included only Prime beneficiaries who received care in the civilian provider network, our analysis of access to care does not reflect the entire survey sample. To examine the provider surveys as potential oversight tools, we obtained and reviewed each contractor’s 2001 provider survey and assessed the survey’s response rate, sample selection, and the instrument itself. We also discussed DOD initiatives underway and being tested with cognizant officials to assess their potential as oversight tools. To describe factors that may contribute to network inadequacy, we interviewed and obtained documentation from DOD and contractor officials regarding current network inadequacies, including their location, duration, and the type of specialty needed. We also obtained provider termination reports from three of the four contractors, which described providers’ reasons for leaving the network. To further explore DOD’s response to civilian provider concerns regarding rates, we interviewed DOD officials on the use of their authority to raise reimbursement rates. We also interviewed officials from the American Medical Association, The Military Coalition, the MOAA, the National Association for Uniformed Services, and the National Veteran’s Alliance to supplement data on the possible causes of network inadequacy. Finally, we reviewed DOD’s request for proposals for the future contracts and interviewed DOD and contractor officials to describe how the new contracts might affect network adequacy. We conducted our work from June 2002 through July 2003 in accordance with generally accepted government auditing standards. The shaded areas in figure 2 represent the 11 current TRICARE geographic regions. The shaded areas in figure 3 represent the 3 planned TRICARE geographic regions under the TNEX contracts expected to be awarded in 2003. In addition to those named above, contributors to this report were Louise Duhamel, Marc Feuerberg, Krister Friday, Gay Hee Lee, John Oh, and Marie Stetser.
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Testifying before Congress in 2002, military beneficiary groups described problems accessing care from TRICARE's civilian medical providers. Providers also testified on their dissatisfaction with the TRICARE program, specifying low reimbursement rates and administrative burdens. The Bob Stump National Defense Authorization Act of 2003 required GAO to review the oversight of the TRICARE network of civilian providers. Specifically, GAO describes how the Department of Defense (DOD) oversees the adequacy of the civilian provider network, evaluates DOD's oversight of the civilian provider network, and describes the factors that have been reported to contribute to network inadequacy. GAO analyzed TRICARE Prime--the managed care component of TRICARE. To describe and evaluate DOD's oversight, GAO reviewed and analyzed information from reports on network adequacy and interviewed DOD and contractor officials in 5 of 11 TRICARE regions. For the 8.7 million TRICARE beneficiaries, DOD relies on the civilian provider network to supplement health care delivered by its military treatment facilities. To ensure the adequacy of the civilian provider network, DOD has standards for the number and mix of providers, both primary care and specialists, necessary to satisfy TRICARE Prime beneficiaries' needs. In addition, DOD has standards for appointment wait, office wait, and travel times to ensure that TRICARE Prime beneficiaries have timely access to care. DOD has delegated oversight of the civilian provider network to the local level through regional TRICARE lead agents. DOD's ability to effectively oversee the TRICARE civilian provider network is hindered in several ways. First, the measurement used to determine if there is a sufficient number and mix of providers in a geographic area does not always account for the total number of beneficiaries who may seek care or the availability of providers. This may result in an underestimation of the number of providers needed in an area. Second, incomplete contractor reporting on access to care makes it difficult for DOD to assess compliance with these standards. Finally, DOD does not systematically collect and analyze beneficiary complaints, which might assist in identifying inadequacies in the civilian provider network. However, DOD has tools, such as surveys of network providers and automated reporting systems which, while not designed specifically for monitoring the civilian provider network, could, if modified, improve DOD's ability to oversee the network. DOD and its contractors have reported that a lack of providers in certain geographic locations, low reimbursement rates, and administrative requirements contribute to potential civilian provider network inadequacy. DOD and contractors have reported long-standing provider shortages in some geographic areas. In areas where DOD determines that access to care is severely impaired, DOD has the authority to increase reimbursement rates. Since 2002, DOD has used its reimbursement authority to increase rates in Alaska and Idaho in an attempt to entice more providers to join the network. DOD officials told us that the contractors have achieved some success in recruiting additional providers by using this authority. Additionally, civilian providers have expressed concerns that TRICARE's reimbursement rates are generally too low and administrative requirements too cumbersome. However, while reimbursement rates and administrative requirements may have created provider dissatisfaction, it is not clear how much this has affected civilian provider network adequacy except in limited geographic locations, because the information contractors provide to DOD is not sufficient to measure network adequacy.
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VA operates 158 medical centers and employs approximately 10,723 full- and part-time physicians and 37,294 registered nurses. During fiscal year 1994, these facilities treated approximately 906,925 inpatients and provided for 24,074,365 outpatient visits. VA acknowledges that patient care, particularly that which occurs in hospitals, contains some degree of inherent risk. In some instances it is difficult to differentiate between the risk of incurring malpractice claims from not treating diseases and the risk of incurring such claims from proceeding with treatment. Under the provisions of the Federal Tort Claims Act (title 28 U.S.C. 2671-2680), the federal government may be held responsible for monetary damages for personal injury or wrongful death caused by the negligent actions of its employees when they are operating within the scope of their employment. Thus, the government assumes liability for any such actions by VA practitioners if they were performed in the line of duty. VA’s Office of General Counsel has overall responsibility for managing the malpractice claims process. However, the routine investigation, analysis, and decision-making involved in processing each claim is conducted by one of VA’s 23 regional counsels located throughout the United States. Specifically, regional counsel staff examine the initial claim, interview the VA health care provider(s) involved, and obtain an independent medical opinion on the circumstances of the claim—usually from peer reviewers in a VAMC other than the center involved in the claim. On the basis of this information, the regional counsel can either deny or settle the case. If a claim is denied, the claimant may appeal it within VA or file suit in federal district court. Litigation is defended by the U.S. Attorney with the assistance of the regional counsel and the Office of General Counsel. No court action can be initiated until the claimant has presented his/her claim administratively and had it denied. When an investigation has been completed by regional counsel, a complete, concise, and accurate statement of the relevant facts must be prepared by the cognizant attorney. The statement of facts must be supported by appropriate exhibits and references. Because of their confidential and privileged nature, however, quality assurance records and documents may not be included as exhibits to the statement. If a suit is filed, the completed statement of facts is to be reviewed by attorneys in the Office of General Counsel and appropriate VA medical personnel. It is also to be reviewed by attorneys in the Department of Justice. Case files are maintained by regional counsels in a computerized database to which VA’s General Counsel has complete access. A claim may be settled by regional counsel for amounts up to $100,000. Settlements above that amount but not exceeding $200,000 may be settled by VA’s General Counsel. Sums above $200,000 are negotiated by the General Counsel subject to approval by the Department of Justice. In fiscal year 1994, 252 administrative claims were settled by VA’s regional counsels and General Counsel at a cost of $19.6 million; 127 lawsuits were settled by the Department of Justice and the U.S. Attorney at a cost of $30.6 million; and 12 cases resulted in court judgments against the federal government totaling $3.6 million. The number of malpractice claims filed annually against VA has increased from 678 in fiscal year 1990 to 978 in fiscal year 1994. Correspondingly, the monetary payments made on 943 administrative claims settled during this period have increased from approximately $10 million in fiscal year 1990 to $20 million in fiscal year 1994. In addition, the 1,089 lawsuits filed against VA have resulted in annual litigated settlements and awards to claimants ranging from $22 million in fiscal year 1990 to $34 million in fiscal year 1994. Total payments made on behalf of VA for fiscal years 1990 through 1994 amounted to over $205 million with an average paid claim of $120,714. VA classifies its malpractice claim data in two categories: administrative claims and lawsuits. Every claim received in VA is initially classified as administrative. However, if a claim subsequently results in a lawsuit and is filed in federal district court, the claim entry is amended to reflect the new status, that is, “suit filed” rather than “claim filed.” Table 1 shows the number of administrative cases filed and paid from fiscal year 1990 through fiscal year 1994. Lawsuits filed in federal district court may be settled before the court makes a final judgment. Table 2 shows the number and dollar value of lawsuits filed in federal district court, the number of claims settled before a court judgment was made, and the number and dollar value of claims that resulted from a court judgment. The number of malpractice claims filed and paid is not necessarily evidence that negligence has occurred. Claims experience does, however, provide the basis for examination of trends, identification of problem areas, and an attempt to provide a systemwide vigorous response through risk management programs. VA recognizes this and in June 1992 entered into an agreement with AFIP to analyze and assess trends in VA malpractice claims. The purpose of this effort was to improve the quality of medical care in the VA system by providing VA with information to (1) identify problem areas in delivery of care and (2) initiate appropriate corrective actions. The agreement with AFIP pertains to all medical malpractice claims in the VA system that were filed administratively on or after October 1, 1992. As of October 1995, AFIP had issued one report (April 1994) to VA. This report contains an analysis of the 801 medical malpractice claims filed against VA in fiscal year 1993 and is intended to provide VA management with some general characteristics of VA malpractice claims in order to help VA managers identify possible opportunities for improving VA health care delivery. AFIP’s report was provided by VA’s Office of Quality Management to all medical center quality managers for their review. Because this was the first report prepared by AFIP, no data trends could be noted. However, examples of the types of analysis that the report contained were as follows: The average time between the date of the incident and the date the case was closed (both administratively closed and closed by litigation) was 3.62 years. The three most frequent age groups filing medical malpractice claims were beneficiaries between the ages of 61 and 70 (29.5 percent); 41 and 50 (22.8 percent); and 51 and 60 (18.1 percent). In three-fourths of all malpractice cases filed, there was either major injury (53.9 percent) or death (28.2 percent). The most frequently recorded clinical specialty involved in malpractice claims was internal medicine (13.1 percent). Less frequently listed specialties were general surgery (8.7 percent), psychiatry (7.8 percent), orthopedic surgery (6.7 percent), and nursing (5.4 percent). The three most frequent locations where alleged incidents occurred were the operating suite (23.8 percent), the patient’s room (23.5 percent), and the outpatient area (17.2 percent). For the eight components of care reviewed by AFIP, the care was either “definitely acceptable,” or “probably acceptable” in 75 to 80 percent of the cases. According to the peer reviewer at the facility, in approximately 64 percent of the cases, most experienced competent practitioners would have handled the case similarly in all respects. In approximately 20 percent of the cases, most experienced competent practitioners might have handled the case differently in one or more respects, and in 9 percent of the cases, most experienced practitioners would have handled the cases differently in all respects. Staff physicians constituted 61.2 percent of the various providers involved in the alleged incidents, and physicians in training (residents or fellows) constituted 32.7 percent of the total. In approximately one-half of the claims filed, the duration of the injury caused by the alleged negligence was permanent. Quality assurance personnel in the six VAMCs we visited are not consistently using available malpractice claim information in either their quality assurance or risk management programs. For example, of the 53 claims paid in fiscal year 1994 that were associated with practitioners in these facilities, we found only 12 cases where there was evidence that defined follow-up action was taken on the risk management issues specified in the tort claim. Further, recent discussions with quality assurance personnel at these facilities revealed that the analysis of malpractice claims being made for VA by AFIP is not consistently being used by medical center personnel to improve quality of care. Only one of the six risk management and/or quality assurance personnel we interviewed indicated that she is using AFIP information in the center’s risk management program. This Risk Manager has established a system for reviewing and tracking all malpractice claims filed for the medical center. Specifically, information from AFIP’s report is compared with the medical center’s claims database to present a comprehensive picture of malpractice experience of the medical center. This information assists the center’s risk management and quality assurance personnel in analyzing and assessing trends in malpractice data. Of the remaining personnel we interviewed, two told us that they had not seen AFIP’s report, and three stated that they had read the report. However, those three individuals did not indicate that they used the data in their risk management program. A copy of the report was usually given by the VAMC’s chief of staff to the relevant service chiefs for follow-up. The service chiefs use the information in their clinical service meetings with the medical staff. The Risk Manager at one of the VAMCs we visited told us that VA is also replacing its Patient Incident Review guidelines with guidelines for an “Integrated Risk Management Program.” The revised guidelines call for VAMCs to focus on correcting problems using claims analysis information obtained from AFIP’s annual report. However, AFIP’s annual report contains VA systemwide claims data and analysis and does not have information specific to any VAMC. These data are available upon request. AFIP can provide VAMCs with the number of malpractice cases at the facility, the status of a case, the amount of payment, the results of peer review, a determination about whether the patient injury was related to a component of care, and the types of risk management issues that should be addressed. According to an official in AFIP, at least one VAMC, the identity of which he could not recall, and a regional office requested this information in fiscal year 1994. The Chief of Staff for the region involved told us that he requested claim analysis information for every VAMC in his region in order to (1) determine what corrective actions are being taken at each facility to preclude a repetition of the event that resulted in a malpractice claim and (2) review the decisions made by VAMC personnel with respect to reporting a practitioner on whose behalf a malpractice payment was made to the National Practitioner Data Bank. The methods used by VA and the uniformed services to collect and present malpractice claim data are not consistent. Thus, no valid comparison can be made of their claim data. Comparisons can, however, be made of the types of problems that are resulting in malpractice claims against each of these entities. Table 3 shows the areas into which most malpractice claims fall. Appendix II shows the elements within six types of malpractice claim allegations in table 3. During fiscal years 1990 through 1994, 5,172 malpractice claims were filed against the Army, Navy, and Air Force (see app. I for a claims breakout by uniformed service). During the same period, 3,878 malpractice claims were filed against VA. Accurate comparisons of these data cannot be made because there is no standard interagency format for data collection and presentation. As a result, each entity uses its own criteria (for example, data presented on a calendar or fiscal year basis, or multiple claims on a single case incorporated in the count as opposed to recording only a single malpractice case). But, even if the number of malpractice claims filed against VA and the military services could be compared, the numerical data may not be an accurate representation of the extent to which malpractice in fact occurs. For example, research indicates that patients who have relatively low incomes and/or are over the age of 65 are less likely to file malpractice claims than younger patients. Given that the preponderance of patients in VA are over the age of 65, it can be expected that not all malpractice activity will be reported. Further, the “Feres Doctrine” limits government liability for monetary damages for injuries sustained by active duty service members. Specifically, under this doctrine the government is not liable in monetary damages for injuries to active duty service members that occur in the course of activity incident to service. Consequently, active duty members are not compensated under the Federal Tort Claims Act for injuries they may receive in military hospitals as the result of malpractice. The growing number of malpractice claims involving VA practitioners and facilities raises concerns about risk management and quality assurance at VAMCs. Through AFIP, VA has the ability to obtain detailed analysis of and descriptions of trends in malpractice data from both a systemwide and medical center perspective. Although claims analysis is but one segment of a comprehensive risk management program, effective utilization of these data is important. However, AFIP data are not being effectively utilized at either the central office or VAMC level. As a result, opportunities to (1) identify possible systemic risk management problems and/or individual provider inefficiencies and (2) decrease the risk of incurring future malpractice claims are being lost. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to require VAMC directors to obtain and utilize all available AFIP data, including facility-specific data, to (1) identify problem-prone clinical processes and (2) initiate programs to prevent recurrence of adverse events that caused malpractice claims to be generated. On November 3, 1995, we obtained comments on a draft of this report from VA’s Deputy Under Secretary for Health, other Veterans Health Administration officials, and VA’s General Counsel. The Deputy Under Secretary generally concurred with our recommendations that VA and the individual facilities review and utilize available data relating to malpractice claims. He stated that although the report indicates a sizable increase in malpractice claims, the increase has been modest and similar to increases in claims filed and paid by DOD and the private sector. In addition, he noted that by focusing on claims filed and paid only since 1990, our report fails to recognize that VA’s claims experience tends to be cyclical, as evidenced by the trend in the 1980s when increases in claims were followed by decreases later in the decade. We noted in our report that the number of malpractice claims filed and paid is not necessarily evidence of negligence; however, claims experience is valuable in examining trends, identifying problems, and establishing risk management strategies. Although we did not take into specific account VA’s cyclical experience with malpractice claims during the 1980s, we continue to believe that VA’s recent experience with claims filed and paid provides an opportunity for enhancement of VA’s quality assurance programs by analyzing, both at headquarters and locally, the reasons the claims were filed. VA officials agree with this point. In response to the comments of VA’s General Counsel, we made several technical changes to the draft report as we believed appropriate. As agreed with your office, copies of this report will be sent to appropriate congressional committees; the Secretary of Veterans Affairs; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others upon request. If you have questions about this report, please contact me at (202) 512-7120. Major contributors to this report were James A. Carlan, Assistant Director; and Patricia A. Jones, Evaluator-in-Charge. U.S. Army Litigation Division provided only 5-year aggregate information for these categories. Failure to diagnose (that is, concluding that patient has no disease or condition worthy of further follow-up or observation) Wrong diagnosis or misdiagnosis (that is, original diagnosis is incorrect) Improper performance of test Unnecessary diagnostic test Delay in diagnosis Failure to obtain consent/lack of informed consent Failure to perform surgery Improper positioning Retained foreign body Wrong body part Improper performance of surgery Unnecessary surgery Delay in surgery Improper management of surgical patient Failure to obtain consent/lack of informed consent Failure to order appropriate medication Wrong medication ordered Wrong dosage ordered of correct medication Failure to instruct on medication Improper management of medication regimen Failure to obtain consent/lack of informed consent Medication error Failure to medicate Wrong medication administered Wrong dosage administered Wrong patient Wrong route Improper technique Failure to manage pregnancy Improper choice of delivery method Improperly performed vaginal delivery Improperly performed C-section Failure to obtain consent/lack of informed consent Improperly managed labor Failure to identify/treat fetal distress Delay in treatment of fetal distress (that is, identified but treated in untimely manner) Retained foreign body/vaginal/uterine Abandonment Wrongful life/birth (continued) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) malpractice claims, focusing on the: (1) total number of malpractice claims filed against VA between fiscal years (FY) 1990 and 1994; (2) way VA manages its malpractice claims; (3) extent to which malpractice experiences are used in VA quality assurance activities; and (4) volume of non-VA health care malpractice claims. GAO found that: (1) between FY 1990 and 1994, malpractice claims against VA medical centers (VAMC) increased from 678 to 978 annually and claimants received over $205 million in payments; (2) in 1992, VA entered into an agreement with the Armed Forces Institute of Pathology (AFIP) to analyze malpractice claims on a systemwide basis to identify malpractice trends and risk management issues, but VA is not using the information requested from AFIP to address risk management or quality assurance issues; (3) although Department of Defense (DOD) malpractice data can not easily be compared to VA data due to the lack of a standard data collection format, comparisons can be made of the types of problems resulting in malpractice claims against each agency; and (4) DOD malpractice data may help VA identify areas in which malpractice claims are being generated, such as surgery-related incidents.
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Pension tax preferences are structured to provide incentives for employers to start and maintain voluntary, tax-qualified pension plans and to ensure that participants receive an equitable share of the tax-favored benefits. The tax treatment for DC and defined benefit (DB) plans are similar. However, DC plan contributions are subject to specific limits and DB plans allow deductions for contributions to fund future benefits (plus a cushion amount), which may total several times the DC tax-deferred contribution dollar limit. Importantly, such benefits cannot exceed the maximum yearly benefit—which is $195,000 per participant per year— and the allowable contribution in any year also depends on a variety of actuarial factors, including the ages of the participants and the funded status of the plan. (See table 1 for a summary of DC contribution limits.) One important requirement for tax-qualified pension plans of private employers is that contributions or benefits be apportioned in a nondiscriminatory manner between highly compensated employees or other workers. There are standard off-the-shelf plan designs, termed “safe harbors,” which allow employers to easily comply with this requirement. Alternatively, employers can develop a custom-tailored plan design and apply general testing methods (as required by law) to a plan’s apportionment of contributions or benefit accruals each year. These methods for custom-tailored plan designs are complex, but they generally require the employer to provide both coverage and contributions or benefits for employees other than the most highly compensated at rates that do not differ too greatly from the rates at which the employer provides coverage and contributions or benefits for its most highly compensated employees. The purpose of the legal limits that constrain tax-deferred contributions to tax-qualified retirement plans is to prevent tax preferences from being used to subsidize excessively large pension benefits. Tax-deferred pension contributions are also limited by the application of other statutory limits. In addition to the legal limits, some plans set their own limits on contributions. In DC plans with plan-specific contribution limits, tax- deferred contributions are limited to the statutory limit or the plan specific limit, whichever is smaller. Employers set plan-specific limits, in part, to ensure that the plans they sponsor pass statutory and regulatory requirements, such as the requirement that contributions or benefits not be skewed too heavily in favor of highly compensated employees. The Employee Retirement Income Security Act of 1974 imposed dollar and percentage-of-compensation limitations on combined employer and employee tax-deferred contributions. Subsequently, the Revenue Act of 1978 included a provision that became Internal Revenue Code section 401(k), under which employees are not taxed on the portion of income they elect to receive as deferred compensation. The Tax Reform Act of 1986 introduced a dollar limitation (i.e., a maximum dollar contribution) on employees’ tax-deferred contributions to DC plans. In 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permitted greater contributions to such tax-advantaged savings plans beginning in 2002. The scheduled increases were to be fully implemented by 2006 and expire at the close of 2010. At the time, some asserted that increasing these limits would enhance employer incentives to start new plans and improve existing plan coverage, especially for employees of small businesses. EGTRRA also allowed a so-called catch-up provision, where persons aged 50 or older are permitted to make additional tax-deferred contributions, in excess of other applicable statutory limits, to 401(k) and similar DC plans. The provision is intended to encourage older workers who had not previously been able to save sufficiently to make larger catch-up contributions in order to reach more adequate levels of retirement savings. (See table 1.) However, these EGTRRA provisions had also been scheduled to expire on December 31, 2010. In 2006, the Pension Protection Act made permanent the higher benefit limits in DB plans, higher contribution limits for IRAs and DC plans, and catch-up contributions for workers 50 and older that were included in EGTRRA. Additionally, in order to encourage low- and middle-income individuals and families to save for retirement, EGTRRA authorized a nonrefundable tax credit (the Saver’s Credit) of up to $1,000 against federal income tax. Eligibility for the Saver’s Credit is based on workers’ adjusted gross income (AGI) and contributions to 401(k) and other retirement savings plans and IRAs. The Saver’s Credit phases out as AGI increases so that eligible tax filers with higher AGI receive a lower credit rate (see table 2). The credit amount is equal to the amount of contributions to a qualified retirement plan or IRA (up to $2,000 for individuals and $4,000 for households) multiplied by the credit rate. Federal revenue losses for the Saver’s Credit are estimated to amount to $1.4 billion in fiscal year 2011 and $6.5 billion for fiscal years 2012–2016. Over the last three decades, DC plans have replaced DB plans as the dominant type of private-sector employer pension plan and, by almost any measure, have taken on a primary role in how workers save for retirement. By 2007 (the most recent year with available data), DC plans comprised 93.1 percent of all plans and active DC participants in the private sector outnumbered those in DB plans 66.9 million to 19.4 million. Meanwhile, participation in employer-sponsored plans has stayed fairly constant in the past few years. Data from the Department of Labor’s Current Population Survey show that in 2008 about 53 percent of private- sector wage and salary workers, aged 25–64, worked for employers that sponsored a retirement plan and about 44 percent participated in a plan. The Current Population Survey data show that while each of those percentages were about 2 percentage points lower than in 2007, they are indicative of the overall decline in plan coverage and participation since 2000. For instance, the percentage of private-sector wage and salary workers, aged 25–64, who worked for employers that sponsored a retirement plan in 2008 was more than 8 percentage points lower than it had been in 2000 (about 61 percent). Likewise, the percentage of private- sector wage and salary workers, aged 25–64 participating in a plan fell from more than 50 percent in 2000 to 44 percent in 2008. Similar trends are evident when looking at such percentages by full- and part-time employment status. The Current Population Survey data also show that full-time workers are more likely than part-time workers to have access to and participate in a pension plan. Moreover, the data indicate there is substantial disparity in sponsorship of retirement plans between large and small employers. Workers at establishments with fewer than 100 employees are much less likely to have access to an employer-sponsored retirement plan than workers at larger establishments. The U.S. economy went into recession in December 2007 and major stock indexes fell more than 50 percent from their peaks in October of that year until hitting their lows in March 2009. These economic conditions have not been beneficial to retirement savings, particularly given the fact that stocks have been a major type of investment for pension plans. Each year, from 2003 to 2007 (the most recent data available), private employers created thousands of new retirement plans. However, the total number of private employer-sponsored retirement plans has increased only slightly because the gains from these newly formed plans were largely offset by other plan terminations. Even though employers created more than 179,000 new plans from 2003 to 2007, the Department of Labor estimates a slight increase overall in the total number of plans from about 697,000 to only about 705,000 in the same period (see fig.1). It is important to note that some plan formations and terminations are linked as sponsors may terminate plans because of company mergers or acquisitions, and then cover the participants with other newly started or existing plans. Most of the new plans private employers created were small—about 173,000 new plans had fewer than 100 participants (about 96 percent of plans) and only about 6,000 plans had 100 participants or more (see fig. 2). Most new DB plans were even smaller than new DC plans. The median number of participants for new DB plans was just four, compared to eight members for new DC plans. However, some larger DB plans rais the average size of new DB plans (about 43 participants) above that of t average size of new DC plans (about 34 participants). Based on the 2007 SCF, about 5 percent of more than 40 million DC participants contributed at or above the statutory limits for tax deferred contributions. Most of these participants whose contributions were at or above the limits were high-earners (see fig. 4). We estimated that about 72 percent of them had individual earnings at the 90th percentile ($126,000) or above for all DC participants. In comparison, only 7 percent of the DC participants contributing below the limits had individual earnings at the 90th percentile or above. We also found that most DC participants who made contributions at or above the 2007 statutory limits came from households with other assets in addition to their DC accounts. Assets commonly held by the households of such participants included checking accounts, savings accounts, houses, IRAs, and stocks (see fig. 5). For example, 90 percent of these participants came from households that owned a home and 60 percent came from households holding stocks. DC participants contributing at or above the limits were more likely to come from households holding these assets than were DC participants contributing below the limits. For example, 65 percent of those contributing at or above the limits lived in households with an IRA, compared to only 29 percent of those contributing below the limits. In addition, according to our estimates, the value of household assets for DC participants contributing at or above the 2007 statutory limits tended to be higher, on average, than the value of household assets for participants contributing below the limits (see table 3). For example, the average value of stock for the former was about $228,000 in 2007, compared to about $32,000 for the latter. Further, participants contributing at or above the limits lived in households with an aggregate savings account balance of around $59,000, on average, while those contributing below the limits lived in households with an average aggregate savings account balance of about $15,000. High-income workers have been the primary beneficiaries of recent increases in the limits on both individual employee contributions and combined employer and employee contributions, as well as the introduction of the catch-up contribution provision. When we compared 2007 contributions to the lower 2001-level limits, we found that about 14 percent of all DC participants would have been contributing at or above the 2001-level limits. In comparison, about 5 percent of DC participants made contributions that were at or above the limits in 2007. Thus, about 8 percent of all DC participants made contributions that were below the actual 2007 limits but would have been at or above the limits if the 2001 limits had still been in place. Therefore, these participants likely benefited from the increases in the limits because all of their 2007 contributions would have been tax-deferred while only a portion of their contributions would have been tax deferred had the 2001 limits been in place. Thirty-eight percent of these participants had individual earnings at the 90th percentile ($126,000) or above and 20 percent had individual earnings at the 95th percentile or above ($180,000). (See fig. 6.) Regarding the catch-up contribution provision of EGTRRA, although it was intended to help older workers, particularly women, catch up in saving for retirement, a higher percentage of men than women made catch-up contributions. Further, a higher percentage of men also contributed at or above the statutory limit on these contributions. Specifically, among the 10 percent of eligible DC participants making catch-up contributions in 2007, 77 percent were men and 23 percent were women. Further, men made up 74 percent of those contributing at or above the catch-up contribution limit, while women made up only 26 percent (see fig. 7). In addition, many participants making catch-up contributions at or above the statutory limit already had relatively high account balances. The median account balance for those contributing at or above the catch-up contribution limit in 2007 was $340,000. In comparison, the median account balance for all DC participants aged 50 and older was about $51,000. When we looked at total DC savings, we found that the savings of those who made contributions at or above the limits represented a substantial portion of all savings among DC participants, regardless of whether the 2001 or 2007 limits are applied to 2007 contributions. When we compared 2007 contributions to the 2001 limits, we found that an estimated 14 percent of participants in 2007 contributed at or above the 2001 limits and these participants held an estimated 41 percent of all DC savings in 2007. Under the 2007 limits, although a smaller percentage of participants (5 percent) contributed at or above the limits, these participants still held a substantial portion of all DC savings, about 23 percent. In addition, according to our estimates, the median account balance for those contributing at or above either the 2001 or 2007 limits was significantly higher than the median account balance for those contributing below the limits (see table 4). Some industry groups have suggested that the increases in the contribution limits could motivate employers to sponsor new pension plans, according to our past work. While the number of new plans formed has risen since 2003—the year after the new higher limits began— the rate of increase has been small overall, and the total number of plans actually declined from 2003 to 2005 (see fig. 2). Further, from 2003 to 20 the total number of pension plans has remained relatively constant at about 700,000 plans, suggesting that there is no net increase in plans. Other factors may have been at work, but at a minimum, the number of pension plans and the number of workers covered by pension plans has remained relatively steady. It is possible that the higher limits may have had little or no effect. However, it would be hard to disentangle the possible effects of the financial crisis and recent recession on plan formation in recent years. Experts we spoke with cited several options that could further encourage low-income workers to save for retirement, although each of them would create additional cost for the federal government. We found that most of these options could be implemented by modifying the existing Saver’s Credit. Provide a refundable tax credit. Expert commentary indicates that providing a refundable Saver’s Credit would allow low-income workers to receive the full amount of the credit for which they qualify, providing mor of an incentive for them to save for retirement. Expert commentary also indicates that not only might this increase saving by those already taking advantage of the credit, but it might also encourage more individuals to utilize the credit. While eligible tax filers may qualify for the credit based on their AGI, they may gain little or no tax benefit from the credit because their tax liabilities are low. For example, if a household earned $20,000 in 2010 and contributed $2,000 to an IRA or DC plan, the household qualifie for a $1,000 tax credit. However, the household will only receive the fulld e amount of the credit if its federal tax liability is $1,000 or more. Several studies have found that low-income workers with limited tax liability may not be able to take full advantage of the current Saver’s Credit becau nonrefundable. One study concluded that as little as 14 percent of taxpayers eligible for the 50 percent rate could benefit from the credit because of its nonrefundable nature. Further, a 2005 study estimated the take-up rate for the Saver’s Credit to be only 66 percent. Provide a credit that covers all low-income and some middle- income workers. Some experts told us that more low- and middle-i workers should be offered a tax credit for retirement savings. They suggested that the limits on AGI under the current Saver’s Credit could be increased to make more workers eligible and could have a larger effect on ial retirement saving. The Retirement Security Project and recent president ore budget proposals have called for increasing the AGI limits so that m low- and middle-income households would qualify for the credit. Eliminate the phase-out of the credit and apply the full credit ra for all eligible income levels. Some experts have suggested that all recipients of the Saver’s Credit should receive the 50 percent credit rate to better motivate low- and middle-income households to save for retirem They explained that under the current structure of the Saver’s Credit, ent. which phases out the credit rate as AGI increases, the 10 and 20 per credit rates that some Saver’s Credit recipients receive may not be sufficient motivation to save for retirement. For joint filers in 2010, the 50 percent credit applied to those with AGI of $33,500 or less, the 20 percent credit applied to those with AGI between $33,501 and $36,000, and the 10 percent credit applied to those with AGI between $36,001 and $55,000. Further, several experts said that eliminating the different crediting rat could improve the understanding and appeal of tax incentives for low- income workers, making it more likely that they would take adva the credit. Some believe that the current phase-out is difficult to understand and can make the credit difficult to use. A 2005 analysis of the Saver’s Credit found th at one-third of those eligible for the credit failed to take advantage of it. Deposit any tax credit directly into retirement savings accounts. One expert we spoke with said that depositing a tax credit for retirement saving directly into an IRA or DC account would encourage retirement saving for all ages and income levels because direct deposit provides a tangible reinforcement since workers can see their accounts grow. The current Saver’s Credit, in comparison, either reduces the amount of tax owed or is part of the household’s tax refund. Because the money does not go directly into a retirement account, the recipient can use the money for any purpose and the credit might not provide the same benefits as it would if deposited directly into a retirement account. Additionally, the expert we spoke with said a credit directly deposited into an account could replace the employer match and provide additional flexibility to meet future needs because saving has increased. This could be particularly effective for young workers because it encourages them to start saving for retirement early. Provide a government match for employees’ retirement contributions. A government match for retirement contributions could be another option for increasing retirement saving among low-income workers, according to the Retirement Security Project, President’s Economic Recovery Advisory Board, and Economic Policy Institute. Researchers have found that presenting the Saver’s Credit as a match, rather than a credit, improves the take-up rate. A match could replace existing Saver’s Cre dit or it could be implemented as part of a broader reform proposal. Several options for revising the Saver’s Credit could provide a sizable increase in retirement savings for some low-income workers. (See Modeling Scenarios and Assumptions and appendix I for detailed descriptions of the scenarios and assumptions.) We simulated the effects on retirement income from DC accounts using three policy scenarios (see table 5). Each of these options would have a tradeoff in that they would increase federal costs for otential cost of these scenarios the Saver’s Credit. For information on the p to the federal government, see appendix I. Policy scenario 1: refundable Saver’s Credit. On average, Saver’s Credit recipients would receive $322 more in annual retirement income than would have without a Saver’s Credit. Saver’s Credit recipients in the second-lowest earnings quartile would receive the greatest benefit from the credit, with an additional $411 in annual income. We projected that 52 at age 70 would percent of those receiving annuity income from a DC plan have received the credit at some point over their career. Policy scenario 2: refundable Saver’s Credit with an increase in the AGI limits. Saver’s Credit recipients would receive an additional $491 in annual income, on average. Saver’s Credit recipients in the second-lowest earnings quartile would experience the biggest increase in income, $591 a year. We projected that the percentage of DC annuitants who would have received the Saver’s Credit at some point over their career increased to 72 percent. Policy scenario 3: refundable Saver’s Credit with an increase in the AGI limits, and automatic enrollment. Under this scenario, the average increase in annual income for Saver’s Credit recipients would be $917. Saver’s Credit recipients in the highest earnings quartile would receive the biggest increase in income, experiencing an increase in annual income of $1,181. As with scenario 2, we projected that 72 percent of DC annuitants would have received the Saver’s Credit at some point over their career. Since many of the options experts suggested could be implemented through modifying the Saver’s Credit, we modeled three potential modifications to the Saver’s Credit for a cohort of workers born in 1995. These three scenarios do not reflect any one particular proposal but incorporate some of the options experts suggested. We compared retirement income for workers by earnings quartile under the three scenarios, assuming that workers have access to a DC plan only and that they fully annuitize their DC accounts at retirement. Because we were unable to model the current scenario of a nonrefundable Saver’s Credit given the structure of the microsimulation model, we used a scenario of no Saver’s Credit as our baseline. Although these assumptions reflect stylized scenarios, they illustrate the potential effect of such changes on retirement income for workers with low lifetime earnings. Refundable Saver’s Credit. Introduced a refundable Saver’s Credit starting in 2011 for up to $1,000 of DC contributions per person. All tax filers eligible for the Saver’s Credit received a 50 percent credit rate. Credits were automatically deposited into the recipient’s DC account. AGI limits remained as they were in 2010. The AGI limits were $27,750 for individuals with a filing status of single, married filing separately, or widow(er); $41,625 for individuals with a filing status of head of household, and $55,500 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation. Refundable Saver’s Credit with an increase in the AGI limits. In addition to a refundable Saver’s Credit, AGI limits were increased to include all low- and some middle-income workers. The 2011 AGI limits were $50,000 for individuals with a filing status of single, married filing separately, or widow(er); $75,000 for individuals with a filing status of head of household; and $100,000 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation, as under current law. Refundable Saver’s Credit with an increase in the AGI limits and automatic enrollment. In addition to a refundable Saver’s Credit and an increase in the AGI limits, all employers automatically enrolled all workers eligible to participate in the employer’s DC plan, unless the worker chose to opt-out. We used the 1995 birth cohort for our simulation so that the reform scenarios would be effective for this cohort’s entire working life. Our projections assume that 100 percent of tax filers for the Saver’s Credit take the credit and the credit is automatically deposited into a recipient’s DC account. Research suggests that the aggregate utilization rate for the current nonrefundable Saver’s Credit may be closer to two-thirds. In an alternate simulation, we assume an aggregate utilization rate of 67 percent (see app. I, table 8). Our projections also assume an annual nonstochastic real rate of return of 6.4 percent for stocks and 2.9 percent for government bonds. We also ran an alternate simulation in which we assumed the real rate of return for both stocks and government bonds was 2.9 percent (see app. I, table 7). Using different rates of return reflects assumptions used by the Social Security Administration’s Office of the Chief Actuary in some of its analyses of trust fund investment. We held stock returns for employee and employer contributions to DC plans constant. Low-income workers are those whose steady lifetime earnings fall in the lowest lifetime earnings quartile for all workers. Annuity equivalents are our projection of annual income produced by an individual’s DC savings. Annuity equivalents are calculated by converting DC-derived account balances at retirement into inflation-indexed retirement annuity payments using annuity prices that are based on projected mortality rates for the 1995 birth cohort and annuity price loading factors that ensure that the cost of providing these annuities equals the revenue generated by selling them at those prices. Under our three scenarios, the average increases for all Saver’s Credit recipients were not substantial. For example, for all of the scenarios, the average replacement rate provided by income from annuitizing DC savings at retirement does not increase by more than about 3 percentage points. In addition, under our most generous scenario, on average, Saver’s Credit recipients could only expect to see an additional $17,562 in income over their lifetime, which is an increase of slightly more than 4 percent. Nevertheless, for some low-income workers, the increase in income due to any Saver’s Credit could be sizeable given their relatively low level of income from DC savings in retirement. For example, Saver’s Credit recipients in the lowest earnings quartile would experience, on average, an 8.7 percent increase in their annuity under the first scenario and an increase of 14 percent under the third scenario. This amounts to an additional $348–559 of retirement income, on average, each year. For low- income workers, this could be an important increase in income. Further, these numbers reflect averages; some low-income workers will experience an even greater increase in annual income. Examples of Two Individuals Who Benefit from the Saver’s Credit We profiled two hypothetical low-income men who work full-time at ages 21 and 25 and take the Saver’s Credit. At retirement, they both converted their DC savings into lifetime annuities. We compared their annuity equivalent under a scenario with no Saver’s Credit and one with a refundable Saver’s Credit, an increase in the AGI limits, and all employers automatically enrolling those eligible to participate in a DC plan. Individual 1 had very low steady lifetime earnings, received more from Saver’s Credit than individual 2, retired 7 years later, and experienced a large increase in retirement income after the Saver’s Credit modifications were implemented. Individual 2 had slightly higher steady lifetime earnings, received less from the Saver’s Credit than individual 1, and only received a modest benefit increase. Amount of Saver’s Credit Received and Retirement Income for Two Individuals from the 1995 Cohort Demographic characteristics at age 70 Highest level of education achieved over lifetime Steady lifetime earnings at age 70 Annual earnings and Saver’s Credit at age 21 Annual earnings (2010 dollars) Saver’s Credit received (2010 dollars) Annual earnings and Saver’s Credit at age 25 Annual earnings (2010 dollars) Saver’s Credit received (2010 dollars) Retirement income at age 70 Total amount of Saver’s Credit received over working years (2010 dollars) Annuity equivalent (2010 dollars) There are several possible explanations for why the additional annual income provided by the Saver’s Credit would be small for many workers. First, we projected that Saver’s Credit recipients tended to make lower dollar contributions to their DC plans over their working years than higher-income workers. Because contributions were lower, account balances also tended to be lower, even with the Saver’s Credit. The lower the account balance, the more likely the account would be cashed-out when a worker changed jobs, decreasing DC savings. Second, we found that, for some workers, the Saver’s Credit would make the difference between having and not having savings at retirement. Therefore, the annuity for these individuals would be low, pulling down the average dollar increase in income that resulted from the Saver’s Credit. Third, our scenarios did not account for any behavioral effects that may result from modifying the Saver’s Credit and having all employers offer automatic enrollment. For example, a more generous credit might motivate more workers to save more because they would receive a larger credit. We did not include this possibility in our projections. Further, automatically enrolling employees would increase the number of people eligible for the credit because more workers would be participating in DC plans and some would be eligible to claim the Saver’s Credit. Finally, in our projections, we assumed that annuities were inflation-adjusted. Inflation-adjusted annuities are initially smaller than nonadjusted annuities of the same account balance because they are more costly. The long-term effects of the recent financial crisis on retirement income security are uncertain, but research suggests that the effects will vary widely for individuals based on factors such as age, type of pension plan, and employment status. Relevant and up-to-date data on the effect of the financial crisis on retirement saving are limited and analyses to date have drawn varied conclusions. For those who have been able to participate in an employer-sponsored pension plan throughout the financial crisis and recession, their benefit or accounts at retirement may or may not be significantly affected. However those who are out of work for any significant length of time are much more likely to have reduced retirement savings. The current slow recovery further adds to the uncertainty. Many economists project only modest economic growth in the near term and some remain concerned that unemployment will remain high for years to come. While both stock markets and many DC plan account balances have regained some of their value since 2008, there is no consensus among analysts as to the ultimate effect of the financial crisis on retirement savings. The decline in the major stock market indexes in 2008 significantly reduced the value of many DC plan accounts. According to the Board of Governors of the Federal Reserve System, total assets held in DC plans fell from $3.81 trillion at the end of 2007 to $2.7 trillion at the end of 2008. However, as of January 2011 the major stock market indexes have regained more than 80 percent of their value from the October 2007 peak. As for plan balances, the Employee Benefits Research Institute (EBRI) reported that the average 401(k) account balance rose by 31.9 percent in 2009. Some plan managers we interviewed suggested that given these recent gains, there would not be a significant effect on retirement savings from the market decline. Others, however, assert that the prior losses ultimately will have a negative effect on the retirement income of many. Plan managers we spoke with conclude that the relative stability they saw in both employee deferral rates and asset allocations has helped fuel the regrowth in plan balances for many DC plan participants. Fidelity Investments reports that in the first quarter of 2010 the percentage of participants who have decreased their deferrals was 3.5 percent. While this was higher than in the prior three quarters, it was down almost 50 percent from its peak of 6.4 percent in the first quarter of 2009. In addition, plan managers told us that most of their participants have maintained the same asset allocation that they had prior to the financial crisis, including allocations of assets in equities. These findings are consistent with past research that indicates that households rarely rebalance retirement savings portfolios. Nevertheless, the degree to which subsequent gains due to continued contributions and investment returns can offset earlier losses depends in part on the value of the account prior to the crisis and the number of years a worker has to restore the wealth lost. Consequently, some analyses have found that older workers with substantial investment in equities may be more negatively impacted as they were more likely to have had higher account balances prior to the downturn and thus to have suffered greater absolute losses than younger workers. Further, with fewer years left in the workforce they may be unable to recoup these losses through additional saving and investment. Other research, however, suggests that portfolio reallocations may have been more frequent during the last several years than otherwise believed. Data from a February 2009 household survey found that 21 percent of those with retirement savings reported that they had made “active changes to how retirement savings are invested” since a prior survey the previous November. A follow-up survey in May 2009 found that 28.6 percent of those with retirement savings had made a change in the investment of new funds or the allocation of old balances since October 2008. Although estimates differ on the number of participants who have not maintained their prior deferral rates and asset allocations, the effects such changes can have on retirement saving could be harmful, especially for those who reduce or cease contributions. Plan managers report that stopping contributions even temporarily can adversely impact account balances. In addition to the account losses suffered when the market declined, those who reduce or stop deferrals will forgo both the amount of the contribution and any associated employer matching contributions, as well as the investment income that would have been earned on those contributions. Besides concerns about the safety of the market, job loss, a reduction in pay or hours, or other financial shocks are all events that could induce an individual to reduce contributions to a pension plan. As a result of the financial crisis and economic downturn some plan sponsors reduced or suspended employer matching contributions and a large number of employees have been affected by these reductions. In addition to losing the matching contributions, a participant forgoes the investment income on those contributions. Surveys of plan sponsors indicate that between 40–50 percent of plans that had previously suspended employer matching contributions, particularly those at large firms, have more recently reinstated their matches, and a report from the Center for Retirement Research at Boston College concluded that to the extent that the match is quickly restored, little harm may have been done—especially compared with the alternative of laying off workers. However, for those employees still not receiving a matching contribution or receiving a reduced match, the long-term impact is difficult to measure as it is unclear whether the employer suspensions are temporary or permanent. Furthermore, everything else equal, unless the reinstituted match is larger than it had been previously, a reduced or suspended match means lower contributions now and lower account balances at retirement. The primary effects of the economic recession on individuals and families—unemployment or reduced wages—could induce plan participants to use retirement assets for nonretirement related purposes. Retirement plan participants can often access accrued assets by borrowing against plan assets, by taking hardship withdrawals from the plan prior to retirement, or even by cashing out plan assets upon separation from employment. The impact of this leakage on retirement savings can be costly. We have previously reported that retirement assets can be eroded as a result of loans or withdrawals. Data, including some plan data, indicate that while the percentage of participants taking out loans or hardship withdrawals from DC plans remains relatively small, it has increased in the past couple of years since the financial crisis. While the rates of loans and hardship withdrawals may not have increased sharply after the financial crisis, if the economy is slow to recover and unemployment stays high, this type of leakage may increase if participants experiencing reduced wages or facing other personal difficulties need access to any available financial resources. Participants may view loans or withdrawals as a necessity to help meet critical preretirement financial needs when faced with serious personal financial catastrophes, even if it may mean a potential reduction in future retirement income. Furthermore, in addition to eroding retirement savings, withdrawals from a DC plan or other retirement account prior to age 59 ½ generally incur a tax penalty, an additional financial burden to bear. A study published by the Urban Institute found that withdrawals can represent a significant loss to retirement savings. Finally, we have previously reported that DC plan loans may affect retirement savings balances less than withdrawals, as borrowers must pay the loan amount and interest back to the plan account; however, not all plans permit loans. The effects of the financial crisis and recession are different for DB plan participants than for DC plan participants, but also pose challenges to retirement security. DB plan assets were also hit hard by the financial crisis. While data show that many DB plans entered the financial crisis more than sufficiently funded, a number of plans had very low funding ratios. For DB plans, the risk of declining asset values falls initially on employers, as they bear the burden of funding the plan up to legal requirements. However, the combination of a weak economy and an underfunded pension plan can put greater pressure on a firm’s financial resources, possibly leading the sponsor to freeze the plan, limiting the future benefit accruals of employees. Additionally, these financial demands might lead firms that no longer wish to carry the burden of risk associated with a DB plan into freezing or terminating their plans. DB plan participants are somewhat sheltered from the impact of the decline in assets, as promised benefits—based on years of service and earnings—must be paid regardless of any decline in plan assets. Nevertheless, they still bear some risk for reduced pension income in retirement, for example, if they become unemployed or if the plan is terminated while underfunded and benefits exceed the PBGC guarantee limits. Although current and relevant data concerning the full impact of the financial crisis on retirement saving is limited, extended unemployment almost certainly has a negative effect on an individual’s retirement income. The extent of the damage will vary, but whether through cessation of employee or employer contributions or even tapping into pension assets for near term needs, being out of work for any length of time is likely to affect a person’s ability to save and perhaps even the ability to preserve accrued retirement savings. This is of increasing concern as unemployment has increased dramatically in the past few years. As of February 2011, the unemployment rate was 8.9 percent, representing nearly 14 million people out of work, and millions more have dropped out of the workforce—so called discouraged workers—or are working part- time involuntarily. Long-term unemployment has increased significantly as well. As of February 2011, the share of workers unemployed for 27 weeks or more was nearly 42 percent of the total unemployed population. In addition to the loss of income, the unemployed will forgo additional contributions to, and the resultant investment gains from, employer- sponsored pension plans. To the extent that unemployed persons have retirement savings accounts, the longer they are out of work—possibly long enough to have exhausted unemployment insurance benefits—the greater the potential that they may tap into those assets. Though little data are currently available to assess the account behavior of terminated employees, Fidelity Investments has looked at the behavior of terminated employees over the course of a 1-year period and found that 7 in 10 kept their money in their workplace savings plan or rolled it over to another tax-deferred retirement savings vehicle. That means, however, that almost a third of participants cashed-out some or all of their DC plan assets. With a significant number of workers being unemployed during the recession for more than 1 year, it is possible that such cash-outs might continue or even escalate. We have previously reported that cash-outs of any amount at job separation have a greater effect on an individual’s account balance than loans or hardship withdrawals. However, while loans may generally affect retirement saving balances less than withdrawals or cash-outs, if a borrower loses his or her job, the loan amount often becomes due immediately, creating either a burden to repay the loan at a dire financial time or, if the worker cannot pay the amount due, an unplanned drain on retirement savings. The biggest risk DB plan participants face with regard to retirement income is likely from unemployment. When a worker with a DB plan is laid off, accruals cease and the pension benefit they receive will be based on current salary levels and current service (rather than what salary and service would have been at the time of retirement), and future benefits will be lower than they would have been otherwise. To the extent that sponsors of underfunded DB plans go bankrupt and terminate their plans, participants of many plans will receive insured benefits from the PBGC, but some will not get their full benefit. Additionally, the PBGC itself— and by extension insured beneficiaries or taxpayers—faces greater risks as the PBGC’s funding status has declined markedly in recent years, raising questions about its long term ability to insure promised benefits. Longstanding concerns about the current voluntary, tax subsidized framework for fostering private pension formation have been raised. On one hand, the existing system of tax preferences for pensions has played at least a supporting role in fostering current levels of pension plan coverage. Despite these tax incentives, private plan participation remains stalled at roughly 50 percent of the private sector workforce. Recent trends demonstrate that the slow growth in the number of retirement plans—as new plan formation barely exceeds plan terminations—may continue to lead to many workers continuing to work at employers that do not offer a plan and thus remain without access to the associated tax benefits of employer-sponsored pension plans. Furthermore, recent initiatives, such as automatic enrollment, may increase participation; however, even if this dramatically raises participation rates for those who work for an employer that sponsors a plan, millions of prime age private- sector workers would remain without access to a plan. Even for the 50 percent of the private sector workforce that does participate in a plan there are concerns about the distribution of pension tax benefits estimated to cost the federal government more than $100 billion per year. For DC plans, a disproportionate share of these tax incentives accrues to higher income earners. While 72 percent of those who make tax-deferred contributions at the maximum limit earned more than $126,000 annually in 2007, less than 1 percent of those who earned less than $52,000 annually were able to do so. Also, even the additional $5,500 contribution permitted to participants 50 and older may not allow moderate income workers to catch up anytime soon. Some options have been proposed to narrow this disparity by enhancing the ability of low- and middle-income workers to save more for retirement. We have demonstrated that different Saver’s Credit modifications could lead to improvements in retirement security for some lower income workers. However, we also illustrate the formidable challenge of achieving increased retirement income for this at risk group. For many American workers and their families, the challenges to retirement security are very real. Fostering retirement income security, especially for low- and middle- income workers, may require a serious review of current government efforts to assist workers in achieving adequate retirement income. We provided a draft of this report to the Department of Labor, the Department of the Treasury, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation for review and comment. Each provided technical comments which we incorporated as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution until 30 days after the date of this letter. At that time, we will send copies of this report to the Secretary of Labor, the Commissioner of Internal Revenue, the Secretary of the Treasury, the Director of the Pension Benefit Guaranty Corporation, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix II. To analyze trends in new private pension plan formation in recent years, we analyzed Form 5500 filings, which the Internal Revenue Service, Department of Labor (Labor), and the Pension Benefit Guaranty Corporation require most private tax-qualified pension plan sponsors to file. Labor collects the Form 5500 filings and makes the filing data publicly available on their Web site. We used the five most recent years (2003– 2007) of Form 5500 filing data available when we started our analysis. For our analysis, we only included single employer plans and multiple- employer, noncollectively bargained plans. Additionally, we did not include employer-sponsored retirement plans not required to file a Form 5500, such as simplified employee pension, Savings Incentive Match Plan for Employees of Small Employers, and excess benefit plans, which are not tax-qualified. If a plan had more than one valid filing during the year, we picked the one that Labor identified as the “best” for the purpose of counting plans, participants, and end of year assets. To identify plans as new we used two information fields on the Form 5500: one in which sponsors report if the filing is the first for a given plan and one in which sponsors report the effective year of the plan. In general, we included a plan as new if it reported a first year as the same as the filing year or if it indicated that this was the first filing for the plan. However, to account for errors in the filings, we did not include any plan as new that had filed a Form 5500 in a previous year. We also eliminated any plan for which the sponsor indicated it was the first filing, but the effective year was more than 2 years prior. Note that new plans include plans created from mergers and acquisitions that do not cover new plan participants. To identify if a new defined benefit (DB) plan sponsor also offered a defined contribution (DC) plan, we used the plan sponsors’ employer identification numbers. To identify the total number of plans in any given year, we used a Labor publication, Private Pension Plan Bulletin Historical Tables and Graphs, which adjusts the number of plans upward from the total number of filings based on the historical number of nonfilers. Labor estimates the number of nonfilers based on historical experience with the number of plans that do not file in a particular year but filed in the year prior and the year after and the number of sponsors that file a final return, indicating they are terminating their plan. To assess the reliability of the Form 5500 dataset, we interviewed agency officials knowledgeable about the data and reviewed relevant documentation of their internal reliability checks as well as methodology for selecting “best” filings. We also conducted electronic data testing to assess missing data and other potential problems. We determined the data were sufficiently reliable for the purposes of this report. To analyze contributions to DC plans, we used the Board of Governors of the Federal Reserve System’s Survey of Consumer Finances (SCF) to identify characteristics of individuals participating in DC plans and their households. This triennial survey asks extensive questions about household income and wealth components. We used the latest available survey from 2007. The SCF is widely used by the research community, is continually vetted by the Board of Governors of the Federal Reserve System and users, and is considered to be a reliable data source. The SCF is believed by many to be the best source of publicly available information on household finances. Because of the widespread reliance on SCF data and the assessments of others, we determined the SCF data to be appropriate for the purposes of this report. Further information about our use of the SCF, including sampling errors, as well as definitions and assumptions we made in our analysis are detailed below. To analyze how suggested incentives to increase retirement saving by low- income workers might affect retirement income, we used the Policy Simulation Group’s (PSG) microsimulation models to run various simulations of workers saving in DC plans over a career, changing various inputs to model different scenarios for modifying the Saver’s Credit. PSG’s Pension Simulator (PENSIM) is a pension policy simulation model that has been developed for Labor to analyze lifetime coverage and adequacy issues related to employer-sponsored pensions in the United States. We, along with the Department of Labor, other government agencies, and private organizations, have used it to analyze lifetime coverage and adequacy issues related to employer-sponsored pensions in the United States. We projected annuity income from DC accounts at age 70 for PENSIM-generated workers under different scenarios representing different pension features and market assumptions. We assessed the reliability of PENSIM and found it to be sufficiently accurate for our purposes. See below for further discussion of PENSIM and our assumptions and methodologies. To analyze the long-term effect of the recent financial crisis on retirement savings for U.S. workers, we reviewed recent studies and interviewed retirement and financial experts. Among the studies we reviewed, several were conducted by large plan administrators that analyzed the records of their respective DC plan sponsors and participants. Additionally, we reviewed studies from an industry association based on survey data of plan administrators. While the findings of these studies provide valuable insight into the activities of many plan sponsors and plan participants, they are not necessarily representative of the universe of DC plans and, with regard to workers, they do not reflect the population as a whole. We conducted interviews with officials at the departments of the Treasury and Labor and the Pension Benefit Guaranty Corporation, as well as academic experts from the Employee Benefits Research Institute, Brookings Institution, Heritage Foundation, New School for Social Research, Urban Institute, Center for Retirement Research at Boston College, and Syracuse University. We also interviewed plan administrators, providers, and consultants including Fidelity Investments, Vanguard, and Towers Watson. Finally we interviewed industry and research organizations such as the Investment Company Institute, AARP, and American Society of Pension Professionals and Actuaries. In addition, for this and all of the objectives we reviewed relevant federal laws and regulations. The 2007 SCF surveyed 4,418 households about their pensions, incomes, labor force participation, asset holdings and debts, use of financial services, and demographic information. The SCF is conducted using a dual-frame sample design. One part of the design is a standard, multistage area-probability design, while the second part is a special over-sample of relatively wealthy households. This is done in order to accurately capture financial information about the population at large as well as characteristics specific to the relatively wealthy. The two parts of the sample are adjusted for sample nonresponse and combined using weights to make estimates from the survey data representative of households overall. In addition, the SCF excludes people included in the Forbes Magazine list of the 400 wealthiest people in the United States. Furthermore, the 2007 SCF dropped four observations from the public data set that had net worth at least equal to the minimum level needed to qualify for the Forbes list. Although the SCF was designed as a household survey, it also provides some detailed individual-level economic information about an economically dominant single individual or couple in the household (what the SCF calls a primary economic unit), where the individuals are at least 18 years old. We developed individual level estimates of this population consisting of the economically dominant individual and their partner or spouse in each household. We created an additional sample containing information on 7,368 individuals by separating information about the respondents and their spouses or partners and considering them separately. When we refer to all workers, we are referring to a population of adult workers that is comprised of no more than two persons from each household and whose earnings can be expressed as an annual amount. By definition, this will differ somewhat from the entire population of workers. In households where there are additional adult workers, beyond the respondent and the spouse or partner, who may also have earnings and a retirement plan, information about these additional workers is not captured by the SCF and is therefore not part of our analysis. Because of this, estimates of total workers based on the SCF would likely understate the actual population and such estimates are generally not included in this report. We do, however, report estimates of percentages and percentiles at the individual level. Our analysis focused on estimating the characteristics of DC plan participants contributing at or above three statutory limits: (1) the 402(g) limit on individual employee contributions, (2) the 415(c) limit on combined employer and employee contributions, and (3) the 414(v) limit on catch-up contributions. Tax-deferred DC plan contributions may also be limited by the application of other statutory or plan-specific limits that we did not analyze in this report because of data limitations in the 2007 SCF. For example, there is a statutory limit on the amount of compensation that can be taken into account in determining the qualified pension plan contributions or benefits (26 U.S.C. § 401(a)(17)). There is also a statutory limit on the total amount of tax-deductible contributions that an employer may make to certain types of plans (26 U.S.C. §§ 404 and 4972). In addition, the SCF does not distinguish between tax-deferred and non-tax-deferred pension plan contributions or between qualified and nonqualified pension plans. Therefore, we were unable to identify DC participants whose tax-deferred contributions were equal to the statutory limits. DC plan contributions may also be subject to plan-specific limits. We were not able to identify whether participants were in DC plans that allowed them to make tax-deferred contributions, nor were we able to identify DC plan participants whose contributions were limited by plan- specific rules. We defined “workers” as individuals in the sample who were at least 18 years old, working at the time of the survey, and whose earnings could be expressed as an annual dollar amount. This definition included both public- and private-sector workers. We defined pension plan participants as workers who were included in any type of pension plan through their job. We defined eligible DC participants as workers who participated in a plan in which money is accumulated in an account. We did not include personal contributions to individual retirement accounts for any person in our sample, including persons who may be self-employed, nor did we consider Keogh plans in our analysis because of the scope of this report. Our definition of DC plans includes: 401(k), thrift or savings, profit- sharing, supplemental retirement annuity (including 403(b)s), or other account-based plans. We did not include Simplified Employee Pensions, Simplified Incentive Match Plans for Employers, or Salary Reduction Simplified Employee Pensions, as these plans are subject to different statutory limits. We classified individuals by gender, individual earnings, and household assets. We defined earnings as the sum of wage and salary income from a worker’s job(s) and business income (if any) from that job. For workers who did not report their earnings as annual amounts, we used information about hours worked per week and weeks worked per year to express earnings as an annual amount. Our analyses excluded individuals whose earnings could not be expressed as an annual amount. For all analyses, we used four earnings categories: less than $52,000 per year, $52,000–125,999 per year, $126,000–179,999 per year, and $180,000 or more per year. We chose the income cutoffs that were the median ($52,000), 90th percentile ($126,000), and 95th percentile ($180,000) for all DC participants in 2007. The SCF is a probability sample based on random selections, so the 2007 SCF sample is only one of a large number of samples that might have been drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 4 percentage points). This is the interval 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. In this report, all estimated percentages based on all DC participants have 95 percent confidence intervals of plus or minus 1 percentage point or less. Percentage estimates based on participants contributing below statutory limits have 95 percent confidence intervals within plus or minus 3 percentage points of the percentage estimate itself. Percentages based on participants at or above statutory limits have confidence intervals within plus or minus 12 percentage points of the estimate itself. Other numerical estimates (such as means, medians, or ratios) based on the 2007 SCF data are presented in this report along with their 95 percent confidence intervals. The SCF and other surveys that are based on self-reported data are subject to several other sources of nonsampling error, including the inability to get information about all sample cases; difficulties of definition; differences in the interpretation of questions; respondents’ inability or unwillingness to provide correct information; and errors made in collecting, recording, coding, and processing data. These nonsampling errors can influence the accuracy of information presented in the report, although the magnitude of their effect is not known. As part of the effort to maintain the confidentiality of survey respondents, most dollar amounts reported in the SCF, including the dollar amount of DC plan contributions, are rounded. The rounding scheme is designed to preserve the population mean, on average, and rounds some estimates down and some estimates up. For example, if the survey respondent reported making monthly DC plan contributions of $1,292, the contribution was rounded to either $1,200 or $1,300 based on the results of the rounding algorithm. This rounding scheme makes it difficult to precisely estimate whether survey respondents are at or above the statutory limits on DC plan contributions if annual contributions are close to the statutory limit. Therefore, our estimates of those contributing at or above the limit are approximate. Similarly, our estimates of those contributing below the limits are also approximate. To project lifetime income from DC pensions and to identify the effects of certain changes in policies, we used the PENSIM microsimulation model. PENSIM is a dynamic microsimulation model that produces life histories for a sample of individuals born in the same year. The life history for a sample individual includes different life events, such as birth, schooling events, marriage and divorce, childbirth, immigration and emigration, disability onset and recovery, and death. In addition, a simulated life history includes a complete employment record for each individual, including each job’s starting date, job characteristics, pension coverage and plan characteristics, and job ending date. The model has been developed by PSG since 1997 with funding and input by Labor’s Office of Policy and Research at the Employee Benefits Security Administration and with recommendations from the National Research Council panel on retirement income modeling. PENSIM simulates the timing for each life event by using data from various longitudinal data sets to estimate a waiting-time model (often called a hazard function model) using standard survival analysis methods. PENSIM incorporates many such estimated waiting-time models into a single dynamic simulation model. This model can be used to simulate a synthetic sample of complete life histories. PENSIM employs continuous- time, discrete-event simulation techniques, such that life events do not have to occur at discrete intervals, such as annually on a person’s birthday. PENSIM also uses simulated data generated by another PSG simulation model, Social Security and Accounts Simulator, which produces simulated macro-demographic and macroeconomic variables. PENSIM imputes pension characteristics using a model estimated with 1996—1998 establishment data from the Bureau of Labor Statistics Employee Benefits Survey (now known as the National Compensation Survey). Pension offerings are calibrated to historical trends in pension offerings from 1975 to 2005, including plan mix, types of plans, and employer matching. Further, PENSIM incorporates data from the 1996— 1998 Employee Benefits Survey to impute access to and participation rates in DC plans in which the employer makes no contribution, which the Bureau of Labor Statistics does not report as pension plans in the National Compensation Survey. The inclusion of these “zero-matching” plans enhances PENSIM’s ability to accurately reflect the universe of pension plans offered by employers. The baseline PENSIM assumption, which we adopted in our analysis, is that 2005 pension offerings, including the imputed zero-matching plans, are projected forward in time. PSG has conducted validation checks of PENSIM’s simulated life histories against both historical life history statistics and other projections. Different life history statistics have been validated against data from the Survey of Income and Program Participation, the Current Population Survey, Modeling Income in the Near Term, the Panel Study of Income Dynamics, and the Social Security Adminstration’s Trustees Report. PSG reports that PENSIM life histories have produced similar annual population, taxable earnings, and disability benefits for the years 2000 to 2080 as those produced by the Congressional Budget Office’s long-term social security model and as shown in the Social Security Administration’s 2004 Trustees Report. According to PSG, PENSIM generates simulated DC plan participation rates and account balances that are similar to those observed in a variety of data sets. For example, measures of central tendency in the simulated distribution of DC account balances among employed individuals is similar to those produced by an analysis of the Employee Benefit Research Institute-Investment Company Institute 401(k) database and of the 2004 SCF. We performed no independent validation checks of PENSIM’s life histories or pension characteristics. In 2006, the Employee Benefits Security Administration submitted PENSIM to a peer review by three economists. The economists’ overall reviews ranged from highly favorable to highly critical. While the economist who gave PENSIM a favorable review expressed a “high degree of confidence” in the model, the one who criticized it focused on PENSIM’s reduced form modeling. This means that the model is grounded in previously observed statistical relationships among individuals’ characteristics, circumstances, and behaviors, rather than on any underlying theory of the determinants of behaviors, such as the common economic theory that individuals make rational choices as their preferences dictate and thereby maximize their own welfare. The reduced form modeling approach is used in pension microsimulation models and the feasibility of using a nonreduced form approach to build such a model may be questionable given the current state of economic research. The third reviewer raised questions about specific modeling assumptions and possible overlooked indirect effects. PENSIM allows the user to alter one or more inputs to represent changes in government policy, market assumptions, or personal behavioral choices and analyze the subsequent impact on pension benefits. Starting with a 2 percent sample of a 1995 cohort, totaling 120,608 people at birth, our baseline simulation includes some of the following key assumptions and features: Workers accumulate DC pension benefits from past jobs in one rollover account, which continues to receive investment returns, along with any benefits from a current job. At retirement, these are combined into one account. Because we focus on DC plan balances only, we do not track Social Security benefits or benefits from DB plans. Our reported benefits and replacement rates therefore capture just one source of potential income available to a retiree. Plan participants invest all assets in their accounts in target-date funds, a type of life-cycle fund which adjusts the mix of assets between stocks and government bonds as the individual ages and approaches a target date in time. Stocks return an annual nonstochastic real rate of return of 6.4 percent and government bonds return a real rate of return of 2.9 percent. In an alternate simulation, we assume that stocks and government bonds earn an equivalent annual nonstochastic rate of return of 2.9 percent and find similar effects for each scenario (see table 7). Using different rates of return reflect assumptions used by the Social Security Administration’s Office of the Chief Actuary in some of its analyses of trust fund investment. Workers purchase a single, inflation-adjusted life annuity at retirement, which occurs between the ages of 62 and 70. Anyone who becomes permanently disabled at age 45 or older also purchases an immediate annuity at their disability age. We eliminated from the sample cohort members who: (1) die before they retire or before age 70, (2) immigrate into the cohort at an age older than 25, (3) emigrate prior to age 70, or (4) become permanently disabled prior to age 45. Stock returns on employer and employee contributions to DC plans are constant across scenarios. Because we were unable to model the current scenario of a nonrefundable Saver’s Credit given the structure of the microsimulation model, we used a scenario of no Saver’s Credit as our baseline. Starting with this baseline model, we vary key inputs and assumptions to see how these variations affect pension coverage and benefits at age 70. Policy scenarios we analyzed include: Refundable Saver’s Credit. A refundable Saver’s Credit was introduced in 2011 for up to $1,000 of DC contributions per person. All eligible tax filers received a 50 percent credit rate and the credit was deposited directly into the worker’s DC account. The adjusted gross income (AGI) limits remained as they were in 2010. The AGI limits were $27,750 for individuals with a filing status of single, married filing separately, or widow(er); $41,625 for individuals with a filing status of head of household; and $55,500 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation. Refundable Saver’s Credit with an increase in the AGI limits. A refundable Saver’s Credit was introduced in 2011 for up to $1,000 of DC contributions per person. AGI increased to $50,000 for individuals with a filing status of single, married filing separately, or widow(er); $75,000 for individuals with a filing status of head of household; and $100,000 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation, as under current law. All eligible tax filers received a 50 percent credit rate and the credit was deposited directly into the worker’s DC account. Refundable Saver’s Credit with an increase in the AGI limits and automatic enrollment. A refundable Saver’s Credit was introduced in 2011 for up to $1,000 of DC contributions per person. AGI increased to $50,000 for individuals with a filing status of single, married filing separately, or widow(er); $75,000 for individuals with a filing status of head of household; and $100,000 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation, as under current law. All employers sponsoring a DC plan automatically enrolled workers eligible to participate in the plan. All eligible tax filers received a 50 percent credit rate and the credit was deposited directly into the worker’s DC account. For each of these scenarios, we assume the utilization, or take-up rate, for the Saver’s Credit is 100 percent, presenting a best case scenario. In alternative simulations, we assume an aggregate take-up rate of 67 percent and find effects similar, but slightly lower, to those when the take-up rate is 100 percent (see table 8). One study found that the actual take-up rate may be about two-thirds because not all eligible tax filers are aware of the credit or choose to take it. In addition, studies have noted that tax filers are limited by the nonrefundable nature of the credit. We projected the percent of DC annuity recipients who had received the Saver’s Credit at some point over their working years (see table 9). Overall, 52–72 percent of DC annuity recipients had received the Saver’s Credit under our three scenarios. For annuity recipients in the lowest earnings quartile, the range was 75–81 percent. We projected the aggregate cost to the federal government of providing the Saver’s Credit for the year 2016. By this time, the modified credits in our scenarios would have been in place for 5 years and members of the 1995 cohort would be age 21, although our projection includes the cost for all eligible tax filers of any age—not simply those born in 1995. We found that the cost to the federal government of providing the credit for all qualified contributions to DC plans ranged from $6.7 billion to $14.8 billion under our three scenarios (see table 10). While the aggregate cost to the government of the refundable Saver’s Credit scenario was about $6.7 billion, the cost more than doubled when the AGI limits were increased and automatic enrollment was added. Lifetime summary statistics of the simulated 1995 cohort’s workforce and demographic variables give some insight into the model’s projected income from DC plans we report (see tables 11 and 12). By restricting the sample to those who have some earnings, do not immigrate into the cohort after age 25, do not emigrate or die prior to age 70, and do not become disabled before age 45, we reduce the full sample of 120,608 individuals to a sample of 70,110 individuals. Cross-sectional results of the sample cohort also provide some insights into the demographic, workforce, and pension participation characteristics of individuals in the 1995 cohort (see table 13). These statistics describe characteristics for individuals at ages 21 and 25 in order to provide a snapshot of pension plan participation and contributions for most of the sample during their early working years. Given that younger workers are more likely to be low-income, they are also more likely to be eligible for the Saver’s Credit. Individuals making key contributions to this report include Michael Collins, Assistant Director; Melinda Bowman, Analyst-in-Charge; Jennifer Gregory; and Aron Szapiro. Joseph Applebaum, Susan Bernstein, Bethany Boland, Edward Nannenhorn, Mimi Nguyen, Jeremy Ollayos, Mark Ramage, Carl Ramirez, Roger Thomas, and Frank Todisco also provided valuable assistance. Michael Hartnett, Sharon Hermes, Dana Hopings, and Gene Kuehneman Jr. verified our report findings. Social Security Reform: Raising the Retirement Ages Would Have Implications for Older Workers and SSA Disability Rolls. GAO-11-125. Washington, D.C.: November 18, 2010. Retirement Income: Challenges for Ensuring Income Throughout Retirement. GAO-10-632R. Washington, D.C.: April 28, 2010. 401(k) Plans: Several Factors Can Diminish Retirement Savings, but Automatic Enrollment Shows Promise for Increasing Participation and Savings. GAO-10-153T. Washington, D.C.: October 28, 2009. Retirement Savings: Automatic Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for Other Workers Could Face Challenges. GAO-10-31. Washington, D.C.: October 23, 2009. 401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings. GAO-09-715. Washington, D.C.: August 28, 2009. Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs. GAO-09-642. Washington, D.C.: July 24, 2009. Defined Benefit Pensions: Survey Results of the Nation’s Largest Private Defined Benefit Plan Sponsors. GAO-09-291. Washington, D.C.: March 30, 2009. Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers. GAO-08-8. Washington, D.C.: November 29, 2007. Private Pensions: Issues of Coverage and Increasing Contribution Limits for Defined Contribution Plans. GAO-01-846. Washington, D.C.: September 17, 2001. Private Pensions: “Top Heavy” Rules for Owner-Dominated Plans. GAO/HEHS-00-141. Washington, D.C.: August 31, 2000.
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Despite sizeable tax incentives, private pension participation has remained at about 50 percent of the workforce. For those in a pension plan, there is concern that these incentives accrue primarily to higher income employees and do relatively little to help lower income workers save for retirement. The financial crisis and labor-market downturn may have exacerbated these difficulties. Therefore, we examined (1) recent trends in new private pension plan formation, (2) the characteristics of defined contribution plan participants contributing at or above statutory limits, (3) how suggested options to modify an existing credit for low-income workers might affect their retirement income, and (4) the long-term effects of the recent financial crisis on retirement savings. To answer these questions, GAO reviewed reports, federal regulations, and laws, and interviewed academics, agency officials, and other relevant experts. We also analyzed Department of Labor and 2007 Survey of Consumer Finance (SCF) data, and used a microsimulation model to assess effects of modifying tax incentives for low-income workers. We incorporated technical comments from the departments of Labor and Treasury, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation as appropriate. Net new plan formation in recent years has been very small, with the total number of single employer private pension plans increasing about 1 percent from about 697,000 in 2003 to 705,000 in 2007. Although employers created almost 180,000 plans over this period, this formation was largely offset by plan terminations or mergers. About 92 percent of newly formed plans were defined contribution (DC) plans, with the rest being defined benefit (DB) plans. New plans were generally small, with about 96 percent having fewer than 100 participants. Regarding the small percentage of new DB plans, professional groups such as doctors, lawyers, and dentists sponsored about 43 percent of new small DB plans, and more than 55 percent of new DB plan sponsors also sponsored DC plans. The low net growth of private retirement plans is a concern in part because workers without employer-sponsored plans do not benefit as fully from tax incentives as workers that have employer-sponsored plans. Furthermore, the benefits of new DB plans disproportionately benefit workers at a few types of professional firms. Most individuals who contributed at or above the 2007 statutory limits for DC contributions tended to have earnings that were at the 90th percentile ($126,000) or above for all DC participants, according to our analysis of the 2007 SCF. Similarly, consistent with findings from our past work, high-income workers have benefited the most from increases in the limits between 2001 and 2007. Finally, we found that men were about three times as likely as women to make so-called catch-up contributions when DC participants age 50 and older were allowed to contribute an extra $5,000 to their plans. We found that several modifications to the Saver's Credit--a tax credit for low-income workers who make contributions to a DC plan--could provide a sizeable increase in retirement income for some low wage workers, although this group is small. For example, under our most generous scenario, Saver's Credit recipients who fell in the lowest earnings quartile experienced a 14 percent increase in annual retirement income from DC savings, on average. The long-term effects of the financial crisis on retirement income are uncertain and will likely vary widely. For those still employed and participating in a plan, the effects are unclear. Data are limited, and while financial markets have recovered much of their losses from 2008, it is not fully known yet how participants will adjust their contributions and asset allocations in response to market volatility in the future. In contrast, although data are again limited, the unemployed, especially the long-term unemployed, may be at risk of experiencing significant declines in retirement income as contributions cease and the probability of drawing down retirement accounts for other needs likely increases. The potential troubling consequences of the financial crisis may be obscuring long standing concerns over the ability of the employer-provided pension system in helping moderate and low-income workers, including those with access to a plan, save enough for retirement.
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FNS administers the Food Stamp Program in partnership with the states. It funds all of the program’s food stamp benefits and about 50 percent of the states’ administrative costs. FNS is primarily responsible for developing the program’s policies and guidelines, authorizing retail food stores to participate in the program, and monitoring storeowners’ compliance with the program’s requirements. Its 58 field offices assess financial penalties against storeowners who violate program regulations. In addition, federal, state, and local court actions can result in financial penalties against storeowners. Storeowners violate the program’s requirements when they accept food stamps for nonfood items such as paper towels, accept food stamp benefits when they are not authorized to participate in the program, or traffick in food stamp benefits. FNS’ seven regional offices are responsible for collecting the financial penalties and related interest charges, which are recorded as debts in FNS’ accounting records. The states are responsible for handling the day-to-day operation and management of the program, including conducting such duties as certifying the eligibility of individuals or households to participate in the program, delivering benefits to recipients, and monitoring recipients’ compliance with the program’s requirements. Recipients use food stamp coupons or an electronic benefits transfer card to pay for allowable foods. Food stamp electronic systems use the same electronic fund transfer technology that many grocery stores use for their debit card payment systems. After a food stamp recipient receives a card and a personal identification number, the recipient purchases food by authorizing the transfer of the food stamp benefits from a federal account to a retailer’s account. At the grocery checkout counter, the recipient’s card is run through an electronic reader, and the recipient enters a personal identification number to access the food stamp account. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement electronic benefits transfer systems by October 1, 2002, unless the USDA waives the requirement. As of October 1998, 26 states had implemented electronic systems statewide. Additionally, the District of Columbia is operating a District-wide electronic system. The remaining states are in various stages of implementing electronic systems. Collectively, electronic systems supplied about 47 percent of all food stamp benefits in 1998. Federal agencies’ debt collection policies, practices, and procedures are based on legislation, regulations, and direction from the Office of Management and Budget (OMB). The principal statutes are the Federal Claims Collection Act of 1966, the Debt Collection Act of 1982, and the Debt Collection Improvement Act of 1996. The applicable regulations are principally the Federal Claims Collection Standards and departmental regulations. These statutes and regulations establish mandatory requirements for federal agencies to follow. OMB Circular No. A-129 describes management direction for federal debt collection. During fiscal year 1993 through fiscal year 1998, FNS’ assessments and court actions resulted in $72.7 million in financial penalties and $5.0 million in interest against storeowners for violating the Food Stamp Program’s regulations. Furthermore, FNS and the courts collected $11.5 million from storeowners, and FNS waived, adjusted, or wrote off $49 million. (See table 1.) Table 1 shows the following for the 6-year period, fiscal year 1993 through fiscal year 1998: FNS and the courts collected only a small percentage of the financial penalties assessed against storeowners. During the 6-year period, the total penalties were $88.7 million, but they collected only $11.5 million, or about 13 percent. FNS reduced storeowners’ penalty debt through adjustments, waivers, or write-offs by several times the dollar amount of debt that it collected annually. For example, debt reductions averaged $8.2 million each year, while collections averaged $1.9 million. According to FNS, adjustments are changes in the amount of the original debt that should have been charged; waivers are relief from some or all of the debt; and write-offs occur when an agency determines that a debt is uncollectible after all appropriate debt collection tools have been used. FNS had large debt reductions because it was unable to collect most of the financial penalties assessed against storeowners. The dollar amount of penalty debt outstanding more than doubled from the end of year fiscal year 1993 to the end of fiscal year 1998 (from $12.3 million to $28.2 million), while the amount of collections increased slightly, from $1.8 million to $2.0 million. As table 1 shows, during fiscal year 1993 through fiscal year 1998, FNS reduced financial penalty debts for storeowners by $49 million. OMB Circular No. A-129 instructs federal agencies to establish effective write-off and closeout procedures for uncollectible accounts in order to permit agencies to focus their efforts on delinquent accounts with the greatest potential for collection. As discussed in greater detail later in this report, FNS has an opportunity to improve its debt collection, which, in turn, could potentially reduce the amount of debt that is written off as uncollectible. FNS’ accounts receivable records classify financial penalties against storeowners into the following seven types: Retailer/wholesaler fine—unauthorized use. A storeowner not authorized to participate in the program accepts and/or redeems food stamp benefits. Civil money penalty—transfer of ownership. A storeowner transfers ownership of a store during a period when the storeowner was disqualified from the program. Court-ordered restitution. A storeowner misused food stamps, and federal, state, or local court actions imposed a financial penalty. Retailer/wholesaler fiscal claim. A storeowner misused food stamps by, for example, selling nonfood items to program recipients. Civil money penalty—hardship. A storeowner is allowed to remain in the program in lieu of disqualification when removing the store would cause program recipients a hardship because of the unavailability of authorized stores in a given area. False Claims Act penalty. A storeowner submitted a false claim against the federal government and must pay a penalty under the False Claims Act. Such penalties usually involve storeowners caught trafficking who are not criminally prosecuted. Civil money penalty—trafficking. If a clerk is caught trafficking and the owner and store management were not involved, the owner can remain in the Food Stamp Program by agreeing to pay a financial penalty. As of September 30, 1998, storeowners owed FNS about $28.2 million in financial penalties. Table 2 shows the amount owed for each type of financial penalty. FNS almost always assessed financial penalties, when warranted, against storeowners who were identified through undercover investigations as violating the Food Stamp Program’s regulations. However, we found that FNS could have identified additional storeowners who violated program regulations if it more effectively used data on electronic benefits transfers. FNS has made limited use of this information because it has not developed an effective plan for reviewing and acting on this information, including designating responsible staff. FNS officials believe that they need more personnel to analyze the data on stores that are likely to be trafficking. FNS followed its procedures for assessing financial penalties in nearly all of the 259 cases we reviewed in which stores were found to have violated program regulations. Under its procedures, stores are penalized if the violations meet certain criteria, such as involving more than $100 in program benefits. Of the 259 cases we reviewed, 117 met these criteria, and FNS assessed penalties in 114 of these cases. In the remaining three cases, we found that FNS did not assess financial penalties when we believe it should have, and FNS concurred in our opinion. Through the use of data on electronic benefits transfers (EBT), FNS identifies stores that are probably engaged in trafficking, but it does not consistently follow up on this information with further analyses to determine whether violations are occurring and to assess penalties. Greater use of EBT data to identify and penalize storeowners in violation of program regulations would enable FNS to better leverage its enforcement resources. All states using EBT systems must provide their data on food stamp transactions to FNS for analysis. These data include the date, time, and amount of the sale; the store’s authorization number; and the recipient’s identification number. FNS’ computer program analyzes these data and identifies individual electronic transactions or transaction patterns that indicate trafficking may be occurring at a store. Each month, FNS prepares a list of hundreds of stores in each region that appear to be highly likely to be violating program requirements. This analysis of the electronic data offers a breakthrough in combating food stamp fraud, according to the Department’s Office of Inspector General and FNS’ Compliance Branch. Furthermore, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 provides that FNS may use electronic data alone, without the expense of conducting a labor-intensive undercover investigation, to initiate action—such as removal from the program—against storeowners violating the requirements of the Food Stamp Program. Before FNS staff in field locations can take action against any of the storeowners identified by FNS’ computer system, they must further analyze the data because all the stores on the list may not be engaged in trafficking. They have to consult other databases and documentation to determine whether other factors, such as a store’s sales volume, might have caused the computer system to flag that particular store. We found that field offices were using these data differently, with some offices providing a more thorough review than others. For example, two field offices further analyzed the data and took administrative action to penalize offending storeowners. However, four of the other five offices were not sure what to do with the data, and they either forwarded the report to the Compliance Branch or took no action at all. In the fifth office, the state was not using an EBT system. For example, the head of a field office told us that one monthly report indicated that over 100 of the stores in her area were probably engaged in trafficking, but she lacked the resources to further analyze the data on any of these stores and take action against them. Furthermore, FNS has no feedback system to inform headquarters of how many of the stores on the list of likely traffickers were actually reviewed in detail. Such information would enable headquarters officials to know the extent to which the lists were examined. Currently, FNS has no assurance that the stores on the monthly lists are consistently reviewed. The problems we found in the field offices show that FNS does not use the information on likely violative storeowners to the program’s full advantage. It has not assigned responsibility for, or provided guidance on, following up on lists of probable traffickers. Such an approach would enable FNS to make better use of its resources to identify and penalize violators. While FNS staff might need several days each month to review the lists sent from headquarters, undercover investigations require weeks or months of staff work. Nevertheless, FNS headquarters officials told us that FNS lacks the resources to effectively carry out its store-monitoring activities, including reviewing electronic data. Over the last 2 years, the agency has requested several hundred additional staff for store monitoring but has not been successful in obtaining them. Large amounts of debt owed by storeowners for Food Stamp Program violations go uncollected. During the 6-year period covered by our review, FNS collected about 11 percent of the storeowner debt for which it was responsible. According to agency officials, this small percentage reflects the difficulties involved in collecting this type of debt, such as problems in locating debtors as well as their refusal to pay. However, weaknesses in the agency’s debt collection procedures and practices also contributed to low collections. For example, the agency has not consistently implemented federal policies, practices, and procedures for, among other things, aggressively collecting debt, assessing interest on unpaid debt, and writing off uncollectible debt in a timely manner. Furthermore, the agency has not yet referred any delinquent debt to the Department of the Treasury, which could offset (deduct) the debt against any future federal payments, including an income tax refund due a storeowner. FNS expects to soon refer delinquent debt to the Department of the Treasury after it fully implements provisions of the Debt Collection Improvement Act of 1996. This law makes the Department of the Treasury primarily responsible for collecting debts delinquent for over 180 days and could help FNS better manage its collection activities. FNS has not consistently implemented several federal debt collection policies, practices, and procedures that are designed to ensure the effective collection of the debt owed to federal agencies. These practices include collecting debts aggressively; assessing interest on delinquent debts; collecting installment debt payments within 3 years; removing old uncollectible debts from accounts receivable; establishing procedures to identify the causes of delinquencies and developing the corrective actions needed; and referring delinquent debts to the Treasury Department, which can deduct the debt amounts from any federal payment due a storeowner and reporting to the Internal Revenue Service (IRS) debts written off, which are treated as taxable income to the storeowner. A discussion of the policies, practices, and procedures that FNS did not consistently implement follows. Federal Claims Collection Standards provide that agencies shall aggressively collect all debts of the United States. Collection activities are to be timely and followed up effectively. The standards state that three progressively stronger “demand letters” are to be sent out to debtors. The standards also cite a number of sources for federal collection agents to check or contact to locate debtors who do not respond to the demand letters, such as driver’s license records, automobile title and registration records, and other state and local government agencies. In all three FNS regions we visited, FNS personnel were not aggressively collecting the penalties storeowners owed. For example, two of the three FNS regional offices mailed out two progressively stronger demand letters to debtors 30 days apart and sometimes attempted to telephone them. The regional staff did little to locate storeowners who did not respond to the demand letters. They stated that they did not have the resources for more aggressive follow-up. Federal legislation requires agencies to charge interest on outstanding debt. FNS has not consistently charged interest on debt that is not fully paid when due. FNS officials told us that it is FNS’ current policy to assess interest on all delinquent debts when FNS has clear authority to do so. The officials stated that FNS does not assess interest on court-ordered restitution debts unless provided for in the court order. They said that some court orders provide for charging interest, while others do not. Excluding court-ordered restitution debts, as of September 30, 1998, FNS had a total of 1,182 storeowner debts. Of this total, we identified 1,053 debts that should have been charged interest because they were outstanding for at least 60 days. However, FNS did not charge interest to 177, or 17 percent, of these debts. Furthermore, for the three FNS regional offices we visited, interest was applied inconsistently for the same types of debts. For example, the Southeast Region had 19 civil money penalty—hardship debts that should have been charged interest. Of these debts, 16 had no interest charged. FNS officials stated that they noticed an inconsistency in FNS’ handling of interest charges on civil money penalty—hardship and —trafficking cases. The officials added that FNS would examine its policies on establishing interest on the various categories of debt. Federal Claims Collection Standards require federal agencies to collect debts in one lump sum payment or generally within 3 years if installment payments are used. About 400 storeowner debts were being paid during fiscal year 1998. FNS was responsible for establishing and collecting the financial penalties for 330 of these debts. Monthly payments collected by FNS on 125 debts, about 38 percent of the 330 storeowner debts, were so small in relation to the total debt owed that the debts could not be collected within 3 years. For example, one storeowner who had transferred ownership of the store during a period of disqualification was assessed a civil money penalty of $59,800 and was making installment payments of $10 a month. At that payment rate, this debt would be paid in about 498 years, even if no interest were assessed. FNS officials stated that the agency’s current policy is to follow the general requirements associated with the 3-year rule. According to OMB Circular No. A-129, effective write-off and closeout procedures on uncollectible debt are important because they permit managers to focus their efforts on the debts with the greatest potential for collection. Agencies are instructed to develop a two-step process that identifies and removes uncollectible accounts and establishes closeout procedures. We found that FNS’ write-off and closeout procedures are too general to guide the regional personnel responsible for this activity. The procedures do not specify the action that personnel should take if no collection is made on a debt during a specified period. According to our analysis of FNS’ storeowner debts as of September 30, 1998, FNS had many old debts with little or no collection activity. As of that date, FNS had a total of 1,393 storeowner debts, of which 1,003 of the debts, or 72 percent, had no collections during fiscal year 1998. And 691 of the 1,003 debts were over 1 year old. Even many court-ordered restitution debts had no collections. For example, 211 storeowner debts were a result of court actions—a total of $6.8 million. However, 89 of these debts, or 42 percent, had no collections during fiscal year 1998, and 79 of these debts were over 1 year old. FNS officials stated that collections on court-ordered restitution debts are supervised by the courts, not FNS, but FNS will examine the possibility of being able to refer these debts to Treasury for collection and for IRS Form 1099-C reporting if the debts were based on violations occurring after December 27, 1996. Table 3 shows the age and dollar amounts of storeowner debt as of September 30, 1998. FNS agreed that old debts should be removed from its accounts receivable records and stated that efforts under way with Treasury will help the agency define the optimum point for removing old debts from its records. Federal Claims Collection Standards instruct federal agencies to establish procedures to identify the causes of delinquencies and defaults and develop the corrective actions needed. Although FNS headquarters was aware that it collected only a limited amount of the storeowner debt, FNS has not developed a written action plan to deal with the agency’s problems in collecting debts from storeowners. When FNS develops a plan to deal with these problems, it could assess the merits of implementing certain federal debt collection policies, practices, and procedures that it does not currently follow. These include the practices of charging penalties and administrative costs to delinquent debts and referring delinquent debts to credit bureaus. FNS officials told us that some of these practices might require legislative changes before they could be implemented. FNS has not implemented the statutory requirement for the referral of delinquent debts to the Treasury Department. Under this requirement, agencies are to refer all accounts delinquent more than 180 days to Treasury, and Treasury is to deduct the debt amount from any federal payments due the storeowner. In addition, agencies are required to report to the Treasury Department any discharge of indebtedness over $600.Agencies report such amounts on IRS Form 1099-C as taxable income. FNS, which recognized as far back as 1990 that it did not refer delinquent debts to IRS for deduction from income tax refunds, has been slow to address this requirement. However, it has made progress and will soon be in a position to implement this requirement. In August 1994, FNS obtained statutory authority for debt referrals using Social Security numbers to other federal agencies. In December 1996, FNS issued regulations implementing this authority. In March 1999, USDA published final regulations allowing FNS to refer delinquent storeowner debts to Treasury for offset, including deductions from income tax refunds. FNS officials informed us that the Form 1099-C referral process is handled centrally by headquarters. They added that storeowner debts originating after December 27, 1996, for which FNS can share taxpayer identification numbers with IRS, would be eligible for referral. For debts that FNS referred to Treasury for collection, the agency has made arrangements for Treasury to refer written-off debts to IRS. As of April 1999, FNS had not referred any debt to Treasury for offset, which includes offset from any income tax refund due the storeowner. As noted elsewhere in this report, FNS has referred $3.5 million in debt to Treasury for limited services under cross servicing. FNS has also not referred any Form 1099-Cs to Treasury. The Debt Collection Improvement Act of 1996 authorized the Secretary of the Treasury to consolidate federal debt collection services within the Department. Among many requirements designed to improve debt collection in the federal government, the act established two requirements on agencies managing delinquent debt. It required agencies to refer to Treasury for offset all debts that are delinquent more than 180 days. This collection of federal offset programs includes the federal tax refund offset program. The act also required federal agencies to submit debts that are more than 180 days delinquent to Treasury for Treasury-operated collection services referred to as cross servicing. Under cross servicing, Treasury will issue specialized demand letters; attempt to contact the debtor; refer the debt to authorized collection agencies, credit bureaus, and the Department of Justice; and enter the debt into the Treasury offset program. As noted in this report, some of these services have not been conducted by FNS. To implement the act, Treasury issued guidance to other federal agencies in September 1996 on submitting all debts delinquent for more than 180 days to Treasury for its offset program. The guidance directed agencies to include taxpayer identification numbers to facilitate collection activities under Treasury’s offset program and to submit debt data electronically—by computer modem, computer disk, or magnetic tape. As shown in table 3, about 90 percent, or $25.1 million of FNS’ storeowner debt as of September 30, 1998, was old enough—over 180 days—to send to Treasury for debt collection. However, FNS informed us that as of January 1999, it was unable to submit information on debts electronically to Treasury because of (1) data format problems and a lack of computer systems analysts and (2) the need to issue regulations implementing FNS’ authority to disclose taxpayer identification numbers to Treasury. FNS expects to send information on delinquent debts to Treasury by October 1, 1999. FNS officials noted that FNS concentrated on getting debts owed by food stamp recipients, rather than storeowner debts, under Treasury’s new debt collection program. Since 1992, the state food stamp agencies, working with FNS, have referred debts owed by recipients, along with Social Security numbers, to IRS for tax return offset and have collected more than $320 million in delinquent overpayments. This collection from recipients illustrates that such offsets may be a useful tool for improving collections from storeowners. While FNS believes that it needs more resources to better identify storeowners who violate Food Stamp Program regulations by reviewing electronic data, it can also do so by better using its existing resources to analyze the available data. By improving its debt collection, FNS has an opportunity to increase the integrity of the Food Stamp Program by reducing waste and abuse, and to collect more of the debt, thereby reducing its write-off of uncollectible debt. While FNS has assessed millions of dollars in penalties, it has collected only about 11 percent of the debt it was responsible for collecting during the period we reviewed. Various constraints impeded FNS’ ability to use taxpayer identification numbers in its debt collection activities and to implement certain federal debt collection policies, practices, and procedures. Equally important, FNS has not acted promptly to overcome these constraints, which it knew about as early as 1990. With the Debt Collection Improvement Act of 1996, FNS has a new tool available to pursue storeowners who are not paying their penalties by sending debts that it is unable to collect to Treasury for collection. To improve the integrity of the Food Stamp Program, we recommend that the Secretary of Agriculture direct the Administrator, FNS, to develop guidance that specifies its field staff’s responsibilities, duties, and guidelines in reviewing data on electronic benefits transfers to identify and assess penalties against storeowners who violate the Food Stamp Program’s regulations; develop the corrective actions necessary, as required by the Federal Claims Collection Standards, to help prevent delinquencies and defaults, and determine the priority and resources it needs to assign to make debt collection more effective; and complete the actions needed to refer delinquent debts with storeowner taxpayer identification numbers to Treasury electronically in a timely manner. We provided a draft copy of this report to USDA and FNS for their review and comment. We met with and obtained comments from FNS officials, including the Directors of the Grants Management Division and Accounting Division, the Chief, Management Control and Audit Branch, Financial Management; and the Director, Benefit Redemption Division, Food Stamp Program. FNS officials were concerned that certain aspects of the draft report did not portray the agency’s debt collection activities accurately. First, they believed that the draft did not fully recognize the difficulties in collecting debt from storeowners. They noted that low collection rates reflect, among other things, (1) problems in locating storeowners that have been removed from the Food Stamp Program; (2) a lack of information relating to court-ordered restitution and unauthorized retailer/wholesaler debts; and (3) the refusal of some storeowners to pay their debts. We have revised the report to recognize such difficulties but continue to believe that weak debt collection practices also contribute to low collection rates. Second, agency officials questioned the extent to which fully implementing federal debt collection practices and procedures would significantly increase debt collections. In related concerns, FNS officials noted that the draft report did not compare FNS’ performance in managing debt to other federal agencies’ performance nor did it identify instances in which actual debt could have been collected and FNS failed to do so. Concerning the former, an analysis of FNS’ relative performance was not within the scope of our work, nor would it have changed our basic conclusions and recommendations. Concerning the latter, we acknowledge that we cannot quantify the amount of additional collections that would be associated with fully implementing the practices and procedures. However, we believe that the implementation of these practices and procedures would improve FNS’ collection efforts. Third, FNS officials stated that the draft report failed to fully recognize the obstacles to implementing certain debt collection tools, such as referring delinquent debts to Treasury for offset against future federal payments, as well as the agency’s efforts to overcome these barriers. We revised the draft to better highlight obstacles and the agency’s actions. Fourth, although FNS officials agreed with the report’s three recommendations, they questioned the need for them, noting that FNS already has these or comparable actions under way to address the problems cited in the report. As stated above, we have revised the report to better highlight the agency’s corrective actions. We believe our recommendations are still warranted because FNS’ actions are not complete. FNS officials also provided comments to clarify technical information or statements made in the draft report. We incorporated these changes in the report, where appropriate. We conducted our review from April 1998 through April 1999 in accordance with generally accepted government auditing standards. Appendix I discusses the scope and methodology for this review. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from the date of this letter. At that time, we will make copies available to congressional committees with responsibility for appropriations and legislative matters for USDA and to the Honorable Daniel Glickman, Secretary of Agriculture. We will also make copies available to others on request. Please contact me at (202) 512-5138 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. To identify the dollar amount of financial penalties, collections, and debt reductions (waivers, adjustments, or write-offs) for storeowners in the Food Stamp Program during fiscal year 1993 through fiscal year 1998, we interviewed and obtained financial reports and debt management information from officials in the Food and Nutrition Service’s (FNS) Accounting Division. Because of the quality control program operated by FNS and our review of past financial reports conducted by U.S. Department of Agriculture’s Office of Inspector General, we accepted FNS’ computerized debt collection data as reliable. To identify FNS’ procedures and practices for assessing financial penalties against storeowners for program violations, we interviewed and obtained information from FNS officials in headquarters and in seven field offices—Chicago and Springfield, Illinois; Columbia, South Carolina; Columbus, Ohio; Los Angeles and Sacramento, California; and Tallahassee, Florida. We reviewed (1) FNS legislation and guidelines relating to assessments, (2) the use of Office of Inspector General and FNS Compliance Branch investigation reports in the assessment process, and (3) 259 case files to determine the extent to which assessments were made by FNS staff. To identify the procedures and practices followed by FNS in collecting financial penalties levied against storeowners, we interviewed and obtained information from FNS officials in headquarters and three FNS regional offices—Midwest, Southeast, and Western. We selected these regions because they had the best and worst debt collection ratios in relation to total storeowner debt and had the largest accounts receivable balances. We analyzed various FNS reports on debt collections for fiscal year 1993 through fiscal year 1998. We also reviewed (1) FNS’ guidelines and practices for debt collection and (2) the Debt Collection Act of 1982, as amended; the Debt Collection Improvement Act of 1996; Office of Management and Budget Circular No. A-129; and the Federal Claims Collection Standards. We also discussed debt collection management activities with officials of the departments of Agriculture, Justice, and the Treasury. Since the focus of this work was on assessing and collecting financial penalties, we did not evaluate the merits of FNS’ reductions of financial penalties through adjustments, waivers, or write-offs. However, we did note and report that FNS had old uncollectible debts that it had not written off in a timely manner. Ron E. Wood, Assistant Director Richard B. Shargots, Evaluator-in-Charge Daniel Alspaugh, Senior Evaluator John K. Boyle, Senior Evaluator Oliver H. Easterwood, Senior Attorney Alan R. Kasdan, Assistant General Counsel William F. Mayo, Senior Evaluator Dennis Richards, Senior Evaluator Carol Herrnstadt Shulman, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO provided information on the Food and Nutrition Service's (FNS) efforts to maintain the integrity of the Food Stamp Program, focusing on the: (1) dollar amount of the financial penalties, collections, and debt reductions (waivers, adjustments, or write-offs) affecting storeowners violating program regulations during fiscal year (FY) 1993 through FY 1998; (2) effectiveness of the FNS' procedures and practices for assessing financial penalties against storeowners for program violations; and (3) effectiveness of FNS' procedures and practices for collecting financial penalties levied against storeowners. GAO noted that: (1) over the past 6 years, FNS and the courts have assessed or levied about $78 million in financial penalties and interest against storeowners for violating Food Stamp Program Regulations; (2) the penalties and interest are recorded as debts in FNS' accounting records; (3) during this period, FNS and the courts collected $11.5 million, or about 13 percent of the total penalties, and FNS reduced the amount owed by storeowners by about $49 million, or about 55 percent, through waivers, adjustments, or write-offs; (4) the dollar amount of penalty debt outstanding at the end of the year more than doubled, from $12.3 million in 1993 to $28.2 million in 1998; (5) in 7 FNS field offices, GAO reviewed 259 Department of Agriculture undercover investigations that identified program violations, and GAO found that FNS almost always assessed financial penalties against storeowners when warranted; (6) however, other storeowners who may have violated program regulations and could have been penalized were not identified; (7) FNS is not effectively using data on the electronic redemption of food stamp benefits to identify these storeowners; (8) FNS officials noted that the small percentage of debt collected reflected, in part, the difficulties involved in collecting this type of debt, including problems in locating debtors and their refusal to pay; (9) however, weaknesses in FNS' debt collection procedures and practices also have contributed to low collections; (10) FNS has not aggressively collected debt, consistently assessed interest on unpaid debt, and written off uncollectible debt in a timely manner; (11) FNS has not yet referred any delinquent debt to the Department of the Treasury, which could deduct the debt from any future federal payments due the storeowners; (12) FNS expects to soon be in a position to make such referrals as it completes the implementation of the provisions of the Debt Collection Improvement Act of 1996; and (13) this law makes the Treasury primarily responsible for collecting debts delinquent for over 180 days.
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The current foreclosure crisis has provided persons who may perpetrate mortgage foreclosure rescue and loan modification schemes with unprecedented opportunities to profit from homeowners desperate to save their homes. In March 2010, we reported that national default and foreclosure rates rose sharply from 2005 through 2009, to the highest level in 29 years. The most recent data from the Mortgage Bankers Association, which are for the first quarter of 2010, show that the number of home loans with payments more than 60 days past due, and therefore potentially facing foreclosure, is 2.7 million. As shown in figure 1, California and Florida have the highest numbers of potential foreclosures. The foreclosure process has several possible outcomes, but the homeowner generally loses the property, typically because it is sold to repay the outstanding debt or is repossessed by the lender. In response to the rising number of defaults and foreclosures, the administration announced the Making Home Affordable Program in February 2009, which includes a number of programs intended to assist homeowners facing potential foreclosure, including the Home Affordable Modification Program (HAMP). Under HAMP, Treasury shares the cost of reducing the borrower’s monthly mortgage payments with mortgage holders and investors so that homeowners might realize a reduction in their monthly mortgage payments. In addition to HAMP, there are other foreclosure prevention programs aimed at providing assistance to homeowners, including both governmental and private programs. For example, the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac have their own loan modification programs. Refinances are also available under the GSE Home Affordable Refinance Programs, and the Federal Housing Administration’s (FHA) Hope for Homeowners Program, which permits eligible homeowners to lower their monthly mortgage payments by refinancing their mortgage loans into fixed-term market rate loans. In addition, individual private financial institutions offer their own proprietary loan modification programs for homeowners who do not qualify for HAMP. Moreover, free counseling services, such as those provided by HUD-certified counseling agencies, are available to homeowners seeking to avoid foreclosure. One way that homeowners can access these counseling services is by calling the Homeowner’s HOPE™ Hotline (1-888-995-HOPE), which is run by a nonprofit organization that works with a coalition of governmental agencies, financial services institutions, and other nonprofit groups to help homeowners struggling to make their monthly mortgage payments. A number of federal and state law enforcement agencies perform different roles and use different legal authorities in their efforts to combat various types of financial- and mortgage-related crimes, including protecting consumers from foreclosure rescue and loan modification schemes (see table 1). Within the federal government, FTC, the U.S. Postal Inspection Service, and agencies within DOJ and Treasury all have key roles regarding the investigation and prosecution of persons who have engaged in these types of schemes. As we discuss later in this report, State Attorneys General and regulatory agencies also play key roles in combating these schemes. Officials with whom we spoke described several deceptive practices relating to foreclosure rescue and loan modification schemes that victimize vulnerable homeowners. Most officials are currently concerned with one particular loan modification scheme in which persons engaging in a scheme to defraud homeowners charge a fee in advance (typically, a fee of thousands of dollars) for the service of ensuring the modification of their mortgage loan to a loan with lower monthly payments, but they do not provide this service. Law enforcement officials reported that these schemes are difficult to combat because persons engaging in such schemes can start up or shut down their activities quickly and can do so across state lines. Although data that can provide a reliable indicator of prevalence are limited, information available to federal and state agencies and nonprofit organizations, such as consumer complaints and the number of enforcement actions, suggests that these schemes are a problem. Many federal and state officials that we interviewed identified the following two principal types of foreclosure rescue and loan modification schemes perpetrated against consumers: advance-fee loan modification schemes and sales-leaseback schemes. These officials more often pointed to the advance-fee loan modification scheme as the type currently most prevalent. These schemes are broadly described as follows: Advance-fee loan modification schemes: Federal and state officials with whom we have spoken, as well as nonprofit studies, reported that these schemes take the form of a person charging a fee in advance to negotiate someone’s mortgage with the mortgage lender, often with a money-back guarantee, then providing little or no services and not refunding the fee. In 25 of the 28 enforcement actions that FTC brought in 2008 and 2009 on the basis of foreclosure rescue and loan modification schemes, FTC alleged that the defendants charged an advance fee for services that were not performed. In addition, information that the Lawyers’ Committee for Civil Rights Under Law (Lawyers’ Committee) provided to us indicated that as of May 7, 2010, the average amount paid by homeowners for services they reported that they did not receive is about $3,000. A National Community Reinvestment Coalition—a nonprofit organization—study and an FTC press release, also indicated that persons engaged in this type of scheme may make misrepresentations to consumers regarding their ability to obtain a loan modification, such as claiming high success rates or special relationships with mortgage lenders. For example, 9 of FTC’s 28 enforcement actions alleged that the defendants misrepresented their affiliation with the federal government, a mortgage servicer or lender, or a nonprofit organization. In addition, as reported by FTC and evidenced by research conducted by the National Community Reinvestment Coalition, these schemes put homeowners in further jeopardy of losing their homes because they were instructed not to pay their mortgage or not to talk with the servicer, thereby increasing the likelihood that they would lose their home to foreclosure. See figure 1 for an illustration of how this scheme r an illustration of how this scheme may work. may work. Sales-leaseback schemes: An FTC official, state officials from three of our five case-study states, and two recent nonprofit studies also cited another type of foreclosure rescue scheme. The names used to describe the schemes vary, and the methods vary as well. Federal agencies and nonprofit sources explain that these schemes generally involve someone convincing a homeowner at risk of foreclosure to transfer the deed of their home to them as a means of saving the home from foreclosure. The person then has control of the property and can make money by either taking out a second loan on the home or selling the home. According to these sources, the original homeowner is permitted to lease the home from the person engaging in the scheme and told that he or she may buy the property back in the future. However, the person engaging in the scheme may have no intention of selling the property back to the original homeowner and may make the terms of the buy-back agreement too difficult for the original owner to comply with, thereby resulting in the homeowner losing the property. FTC and state officials believe that these schemes were more predominant before the decline in housing prices because higher housing prices provided more equity for persons engaging in the scheme to take from a homeowner, and the loans needed to refinance the homes were more readily available. Information provided by federal and state officials indicates that newer schemes have been emerging. For example, a March 2010 FTC consumer alert warned consumers to watch out for a forensic mortgage loan audit scam, which it explained as a “new twist on foreclosure rescue fraud.” In this scheme, someone charges a fee to conduct an “audit” intended to find regulatory violations in the mortgage loan origination in order to allow the homeowner to use the “audit” results to avoid foreclosure, accelerate the loan modification process, reduce the loan principal, or even cancel the loan. According to the FTC consumer alert, there is no evidence that forensic mortgage loan audits will help borrowers obtain a loan modification or any other foreclosure relief, even if the audits are conducted by a licensed, legitimate, and trained auditor; mortgage professional; or lawyer. Similarly, in May 2010, based on information provided in Suspicious Activity Reports (SAR), FinCEN described variations of advance-fee scams in which a person promises to eliminate a homeowner’s mortgage or other debt on the premise that the debts were illegal or the government would assume responsibility. Federal and state officials and representatives of nonprofit organizations told us that persons who have conducted foreclosure rescue schemes include former mortgage industry professionals who had been involved in the subprime market; career scam-artists; and licensed professionals, such as attorneys who allow their names or licenses to be used by those perpetrating schemes to add credibility to their promises to provide relief. Federal and state officials and nonprofit representatives explained that former mortgage industry professionals who had been involved in subprime lending became involved in these schemes because their businesses had slowed due to the foreclosure crisis and they were looking for new sources of income. In addition, Federal Bureau of Investigation (FBI) officials noted that career scam-artists gravitate toward these types of schemes whenever the federal government creates programs to assist people in desperate circumstances, such as the programs the government began promoting in early 2009, because scam-artists can claim that they are affiliated with a federal program as a way to gain people’s trust. As indicated by an official from the Florida State Attorney General’s office, because of coverage in the news media and other public sources, federal programs provide scam-artists with a “new script” with which they can attract consumers. Officials from four of our five case-study states also said that attorneys can provide cover for third parties that perpetrate these schemes, particularly in states that have laws that prohibit firms from charging advance fees but have exemptions for licensed attorneys. Most notably, the State Bar of California, according to one if its officials, created an internal task force to investigate consumer complaints related to loan modification companies in California because complaints had increased significantly between December 2008 and March 2009 regarding attorney involvement in loan modification schemes. During this period, according to the official, companies recruited attorneys to circumvent the state law prohibiting advance fees. Although federal and state officials lack comprehensive information on the potential victims of these schemes, officials believe that potential victims are likely to include anyone desperate to save their home from foreclosure, regardless of their economic status or demographic characteristics. For example, many federal and state officials said that persons engaging in these schemes will target anyone having difficulty in paying their mortgage loan, and an FTC official and officials from two of our case-study states said that even wealthy individuals or professionals may become victims of these schemes if they are unable to pay their mortgage. However, officials from three of our case-study states also said that they were specifically aware of schemes in which a particular ethnic or religious community was targeted. As explained by one state official and a representative of a local housing nonprofit organization, in these cases, persons engaged in the schemes gained the trust of those within the community because they spoke the same language as the homeowners or had emigrated from the same country. State law enforcement officials noted that these schemes are difficult to combat because state law enforcement authorities are often unable to locate the persons who committed the schemes or provide restitution to the victims. Federal and state officials also said that loan modification schemes in particular are difficult to combat because companies can easily start up and shut down and can be run solely on the Internet. In addition, as explained by California and Florida officials, persons engaging in the schemes often run large-scale operations across state lines, using methods similar to those of telemarketing schemes that allow them to solicit customers nationwide. In these operations, a California state official said, most of the employees work in sales, soliciting customers and obtaining payments, while performing no work on behalf of the customers. Because these schemes are operated across state lines, several state officials told us, they are more difficult for state law enforcement to combat. Officials said that pursuing out-of-state companies adds increased difficulties in litigating and enforcing judgments for State Attorneys’ General offices because they have no jurisdiction over companies being operated across state lines. In addition, legal restrictions and authorities vary by state in terms of what are considered to be prohibited practices regarding these schemes. FTC has proposed a rule that would, among other things, prohibit for-profit companies from being paid until they provide the promised services. Four of our case-study states—California, Florida, Illinois, and New York—have passed specific laws prohibiting companies that provide these services from collecting fees in advance, and officials from these states noted that these laws have helped them to take action against perpetrators of these schemes, although a Florida official said that these schemes persist despite the existence of the law. They explained that the existence of these laws generally allows them to cite a violation without having to otherwise prove criminal intent, which they explained can be more difficult to establish. Federal law enforcement agencies with key roles in combating these schemes—FTC, FBI, and the Executive Office for U.S. Attorneys (EOUSA)—had limited information that could be used to describe their prevalence, but most officials with whom we spoke considered these schemes to be an important consumer protection issue. Of these three agencies, only FTC had data directly pertaining to these schemes. While this data does not serve as a precise indicator of prevalence, FTC officials said that the number of enforcement actions they sponsored in 2008 and 2009 (i.e., 28), as well as the 71 warning letters they sent in response to their 2009 investigation of related Internet advertising indicated to them that these schemes pose a problem for consumers. In response to this concern, FTC provided consumers with the option of identifying these schemes on its 2009 Internet complaint form, but FTC officials stressed that while these data indicated a problem, they could not be used as a measure of prevalence for a number of reasons, one of which is that the data were self-reported resulting in a nonstatistically valid sample that cannot be used to predict the prevalence of the problem. FBI officials told us that they considered these schemes to be a problem on the basis of information received from their 56 field offices—50 percent of which reported the schemes as prevalent and another 20 percent of which identified them as emerging schemes—as well as their review of SARs that FinCEN collects from financial institutions. However, they could not identify the number of investigations they had undertaken, and FBI only developed plans to modify its case support system to track this information during the course of our investigation. Because the EOUSA case management system does not differentiate among the different types of mortgage fraud, no statistical information is available regarding the number of cases involving foreclosure rescue schemes in U.S. Attorney’s offices. However, some U.S. Attorneys in our five case-study states provided anecdotal observations that support their belief that these schemes are a problem. While several law enforcement representatives, including those of FBI and EOUSA, referred us to SARs as a potential indicator of prevalence, FinCEN officials said that these reports had limited use for this purpose due to the many variables associated with SAR filings. FinCEN reported that analyses of SARs could increase law enforcement’s understanding of the crime—for example, by identifying the techniques used by the persons perpetrating the schemes—but FinCEN officials said that these analyses were of limited usefulness for estimating prevalence. The officials noted that the primary purpose of SARs is to provide information on known or suspected violations of financial laws or regulations—such as those prohibiting money laundering or credit card fraud, rather than, for example, providing information on the specific types of businesses involved. In addition, FinCEN analysts indicated that many of the activities reported in SARs were anywhere from 12 to 18 months old, generally due to a lack of awareness of wrongdoing on the part of the financial institution at the time the activity occurred. Similar to FTC, law enforcement officials from our five case-study states told us that these schemes were a significant problem, based on the number of enforcement actions their agencies have taken pursuant to these schemes or on the number of consumer complaints they have received. The California Department of Real Estate described these schemes as the biggest consumer fraud it faced in 2009 and said that they initiated over 2,000 investigations into potential loan modification schemes in that year. The California State Attorney General’s office was pursuing 5 civil and 4 criminal cases as of June 2010, which the official with whom we spoke considers to be a relatively high number for its office. Similarly, a representative of the Florida State Attorney General’s office said that in 2009, mortgage foreclosure rescue scams were the most common category of consumer complaint that his office received, although as of March 31, 2010, these complaints had fallen to second position. Representatives of the Arizona, Florida, Illinois, and New York State Attorney General’s offices similarly reported taking enforcement actions against mortgage fraud cases in general, with foreclosure rescue cases sometimes accounting for the majority of these actions. The representative of the Illinois State Attorney General’s office noted that due to the number of consumer calls related to these schemes, staff members provide responses to general loan modification questions for callers in addition to handling their law enforcement duties. Representatives that we interviewed of nonprofit organizations involved in housing or related issues (the Homeownership Preservation Foundation, the Lawyers’ Committee, the National Community Reinvestment Coalition, the National Consumer Law Center, and NeighborWorks America®) likewise reported that they did not have data that could be used to reliably describe the prevalence of the schemes, but that they consider them to be a problem on the basis of research they have conducted or information available to them. This information included the following: Reports about potential schemes submitted to the Homeowner’s HOPE Hotline: The Homeownership Preservation Foundation, which sponsors the Homeowner’s HOPE Hotline, has tracked the number of times consumers have reported that they believe they have been victims of scams. These statistics indicate that from June 2009, when these statistics were first kept, until May 9, 2010, about 10,500 callers reported their belief that they had been scam victims. While these calls represent about 1 percent of callers to the hotline, the foundation believes they indicate a national problem and in February 2010 dedicated a team to request specific information about the callers’ experiences. Homeownership Preservation Foundation representatives told us that this number likely underestimates the number of callers to the hotline who may have been scammed, because some callers may not realize that they have been involved with a scam and therefore may not report it and the foundation has not actively screened calls for possible victims of scams. Mystery shopping by the National Community Reinvestment Coalition: To address concerns about these schemes, in mid-2009, the National Community Reinvestment Coalition used mystery shoppers—that is, individuals who posed as borrowers delinquent in their mortgage payments—to call national and local foreclosure prevention service providers to ascertain the nature of their services. While this study did not determine whether the assistance would actually have been provided, it did identify practices that would have been very troubling to homeowners. For example, in over 50 percent of the telephone calls, the service providers advised the mystery shoppers not to pay their mortgage and charged fees that ranged from $199 to $5,600 for different levels of service. The potential indicators of prevalence used by the agencies we contacted, such as the number of consumer complaints and law enforcement actions, all have limitations. As FTC noted, consumers can file complaints with any number of federal or state agencies, which makes the complaints difficult to aggregate. Furthermore, FTC noted that it does not have the resources to validate the large number of self-reported complaints it receives each year and these complaints may still only represent only a small portion of potential schemes. Also, as explained by several law enforcement officials, information on the number of enforcement actions is an imperfect measure of prevalence because the information is not always timely (i.e., cases may be prosecuted years after a crime has occurred), and the number of actions an agency can prosecute is dependent on its priorities and available resources. The primary multiagency effort to combat financial crimes, including foreclosure rescue schemes, is the FFETF, which an executive order established in November 2009. According to members with whom we spoke, the FFETF expanded previous federal efforts to combat foreclosure rescue schemes. The FFETF has five working groups, one of which—the Mortgage Fraud Working Group—is focusing on foreclosure rescue schemes as well as other types of mortgage fraud. According to members of the Mortgage Fraud Working Group that we contacted, the group provides a venue for member agencies to share information on best practices and to sponsor activities to enhance understanding of mortgage fraud. While the working group’s primary focus is on law enforcement activities, members have also expressed interest in supporting consumer education initiatives. Other efforts designed to protect consumers from these schemes involve federal, state, nonprofit, and private organizations and primarily focus on consumer education and outreach. As we have previously discussed, in November 2009, an executive order established the FFETF to strengthen the efforts of DOJ in conjunction with federal, state, and local agencies to investigate and prosecute significant financial crimes and violations relating to the current financial crisis and economic recovery efforts. The executive order established DOJ as the lead federal agency for the FFETF. The range of financial crimes and violations for which the FFETF is responsible is broad, including among others, bank fraud, mortgage fraud, securities and commodities fraud, and discrimination. While foreclosure rescue schemes are not specifically listed in the executive order, DOJ told us that such schemes are a type of mortgage fraud that falls within the FFETF’s purview. Moreover, the executive order described the FFETF’s mission and functions as (1) providing advice to the Attorney General on the investigation and prosecution of financial crimes and violations when the Attorney General determines such cases to be significant; (2) making recommendations to the Attorney General for action to enhance cooperation among federal, state, local, tribal, and territorial authorities responsible for the investigation and prosecution of significant financial crimes and violations; and (3) coordinating law enforcement operations with representatives of these same authorities. The U.S. Attorney General is chair of the FFETF, and DOJ appointed an executive director in February 2010 to oversee its operations. The FFETF includes 25 federal departments, agencies, and offices, as well as numerous inspectors general, and state and local authorities. Moreover, the executive order encourages the FFETF to invite representatives of state and local law enforcement agencies and specifically the National Association of Attorneys General and the National District Attorneys Association to participate in the task force to coordinate law enforcement operations. In addition, the executive order requires the FFETF to conduct outreach with representatives of other organizations, such as financial institutions and nonprofit organizations. According to some of the FFETF members that we contacted, the FFETF expands upon the administration’s earlier multiagency effort to combat financial crimes, including foreclosure rescue schemes, that was first announced on April 6, 2009. This earlier effort was intended to coordinate the efforts of federal and state agencies, as well as private sector entities, to protect homeowners seeking assistance under the Making Home Affordable Program. According to agency officials, individual efforts established in relation to the April 2009 announcement, particularly those by FTC and FinCEN, continue under the respective agencies. Federal agencies that participated in this announcement—FTC, Treasury (FinCEN), HUD, and DOJ—undertook various supporting activities that sometimes were a continuation of their previous efforts, including the following examples: FTC officials indicated that the agency had coordinated two enforcement sweeps in conjunction with other federal and state agencies against persons perpetrating loan modification schemes, which according to FTC resulted in over 300 independent enforcement actions. FTC had undertaken law enforcement actions against companies involved in the sale of foreclosure rescue services and published its first consumer warnings about these practices on its Web site in February 2008. Additionally, FTC officials noted that they had developed a public service video for distribution to community groups and legal aid offices, among others. At the time of the April 6, 2009, announcement, FinCEN also issued guidelines to financial institutions identifying and submitting SARs for suspected foreclosure rescue scams that it had been developing prior to the April announcement. FinCEN officials stated that the agency has devoted significant resources to supporting state law enforcement efforts to pursue these schemes—for example, by developing a database with investigative information that could be useful to agencies targeting the same suspects. In addition, FinCEN provides direct research and analytical support to state and local law enforcement agencies on individual cases and provides training to states on how to utilize FinCEN’s law enforcement support functions—for example, by showing them how to query its databases. In support of the April 6, 2009 announcement, DOJ established four working groups to discuss ways of addressing mortgage fraud, including foreclosure rescue schemes, through information sharing and coordination. The groups met several times before the creation of the FFETF, at which point their activities were largely incorporated into the new larger effort. HUD officials stated that while not in direct response to the April 2009 announcement, the agency used its HUD-approved and HUD-funded housing counseling network to help borrowers determine their eligibility for the federal loan modification and refinancing programs we have previously discussed. Representatives with whom we spoke of participating federal and several state agencies said that they derived value from the additional coordination provided by the April 2009 announcement, noting particularly that they began to collaborate more closely with other agencies. In particular, they noted working more closely with FTC, and some state agencies noted receiving an unprecedented amount of assistance from FinCEN in using information from SARs for their own investigative leads. Moreover, some federal and state officials involved in the April 2009 effort said that the April 6, 2009, announcement was useful in focusing the federal government’s and the public’s attention on the issue of foreclosure rescue schemes. DOJ officials told us that while the FFETF’s Mortgage Fraud Working Group covers different types of mortgage fraud, the working group has sponsored activities that have contributed to addressing foreclosure rescue schemes. According to DOJ officials, the working group coordinates efforts to combat all types of mortgage fraud, including common “flipping” schemes and organized criminal enterprises preying on government programs, such as FHA loan guarantee programs, as well as foreclosure rescue schemes. Members of the working group we interviewed indicated that these schemes were discussed at various working group meetings. The Mortgage Fraud Working Group keeps written agendas that describe the presenters and the subjects covered at meetings, as well as presentation materials and attendance sheets. While these materials show that foreclosure rescue schemes are discussed at meetings, the extent of that discussion cannot be determined because the working group does not keep meeting minutes. Working group members told us that the meetings provided them with a venue to discuss broader issues (e.g., best practices on combating mortgage fraud and emerging schemes), as well as operational issues, but that they generally do not discuss individual cases. The working group as a whole has met three times—in December 2009, February 2010, and June 2010—but according to DOJ officials, members also engage in numerous ad hoc meetings, in person or by teleconference. According to DOJ officials, these working group discussions have resulted in activities that have provided them with additional information about mortgage fraud and promoted best practices in combating this fraud, including foreclosure rescue schemes. According to information provided by the FFETF, the working group hosted mortgage fraud summits during the first half of 2010 in four cities—Columbus, Detroit, Miami, and Phoenix—that are in regions of the country that were experiencing high rates of foreclosure. During these summits, community group members briefed working group members on the types of mortgage fraud that they are experiencing, and federal, state, and local law enforcement officials held separate closed discussions. In early March 2010, the FFETF conducted a 3-day Mortgage Fraud Task Force course at the National Advocacy Center for both federal and state law enforcement officials, which included, among other things, discussions of best practices and enforcement tools as they relate to different types of mortgage fraud, including foreclosure rescue schemes. In addition, in late May 2010, the FFETF conducted another 3-day Mortgage Fraud Seminar at the National Advocacy Center, including a session specifically focused on foreclosure rescue schemes. Members of the Mortgage Fraud Working Group that we contacted and others aware of its activities expressed a positive view of its initial efforts to date. For example, several officials involved in the effort indicated that the working group is creating partnerships and opening lines of communication, particularly between state and federal agencies. DOJ officials also reported that the Mortgage Fraud Working Group was responsible for coordinating Operation Stolen Dreams, a series of federal and state law enforcement actions undertaken by agencies represented on the FFETF between March 1, 2010, and June 17, 2010. DOJ reported that this operation involved more than 1,500 criminal defendants—119 of whom were allegedly involved in foreclosure rescue schemes—and 191 civil enforcement actions, of which more than 100 pertained to foreclosure rescue schemes. According to DOJ officials, the announcement of this sweep to the public reinforced the consumer awareness and deterrence objectives of the working group. In addition, FFETF’s leadership, as well as two of its members, indicated that they are looking for other opportunities to enhance consumer education. For example, the FFETF launched a Web site (www.StopFraud.gov) in April 2010 to provide information about FFETF activities and information for consumers, including descriptions about foreclosure rescue schemes and how to report them. The Web site provides links to consumer advisories, including those posted by FTC, the Board of Governors of the Federal Reserve System, and NeighborWorks America. In addition, according to FFETF agendas, working group members have held specific discussions on how to warn the public about foreclosure rescue schemes. In addition to the FFETF, there are other coordinated efforts involving federal, state, private, and nonprofit entities aimed at addressing the problem of foreclosure rescue schemes through activities intended to enhance consumer outreach and education. In June 2009, the Loan Modification Scam Prevention Network (the Network) was formed primarily by four organizations—Fannie Mae, Freddie Mac, the Lawyers’ Committee, and NeighborWorks America—to coordinate efforts educating homeowners about these schemes and to gather information about their prevalence. According to a representative of Fannie Mae, coordination is important to avoid confusing consumers with mixed messages from different sources. The FFETF Mortgage Fraud Working Group invited a representative of the Network to describe its efforts at the Mortgage Fraud Summit in Detroit, Michigan, on April 23, 2010. As explained by Fannie Mae and the Network’s members, member organizations support the following activities: Consumer outreach and education: This initiative is primarily led by NeighborWorks America, which was appropriated $6 million by Congress in March 2009 to develop a national campaign warning the public about loan modification scams. NeighborWorks America subsequently launched the campaign—Loan Modification Scam Alert—in October 20 and is targeting African American, Asian, Hispanic, and senior homeowners in 25 areas with high risk of foreclosure. NeighborWorks America has reported that it has used various media in these area service announcements, and its campaign Web site (www.LoanScamAlert.org)—to reach people and encourage them to dial the HOPE Hotline for loan modification assistance, find a local c ounselor, or visit the Web site to learn about or report scams. PE Hotline believing they have been subject to a scam and obtains the homeowner’s consent to provide this information to the Lawyers’ Committee. The Lawyers’ Committee compiles this information, as well a complaints it has received through its Web-based complaint form, into single database. To make the Web-based complaint form accessible to homeowners, the form is hyperlinked to the Loan Modification Scam Alert campaign Web site as well as to the Web sites for Making Home Affordable and the FFETF, H OPE Hotline. which are sites that also list the telephone number of the Providing Information to FTC: To support federal and state law enforcement efforts, the Lawyers’ Committee began submitting these data from its database to the FTC’s Consumer Sentinel complaint database o n May 14, 2010. In April 2010, the Lawyers’ Committee reported that the primary s Hource of complaints on foreclosure rescue schemes is the HOPE otline. Our analysis of interviews with representatives of federal and state agencies and nonprofit organizations suggests that several factors may affect the federal government’s likelihood of success in combating foreclosure rescue schemes. A broad array of federal and state officials, including law enforcement officials, as well as representatives of nonprofit organizations, indicated that it is essential to make consumers aware of these schemes, to provide them information on legitimate alternatives to using such services, and to encourage them to report suspicious incidents to authorities. As noted by several law enforcement agencies, it is easier to stop a crime from taking place than it is to catch the criminal later and obtain restitution. Representatives of several nonprofit organizations told us that implementation of a widespread media campaign—using newspapers, radio, and television—would be the most effective way of communicating this information. A representative of NeighborWorks America also noted that most local organizations do not have the funds to compete with the money the persons perpetrating the schemes spend on misleading advertising. A representative of Consumers Union noted that it was important to find ways of delivering information to hard-to-reach communities (e.g., those where a large number of the individuals are not native English speakers or do not have ready access to or proficiency with computers). Another factor we identified in our analysis as being important to the federal government’s efforts is coordinating law enforcement activities. Representatives of both federal and state law enforcement agencies said that the coordination of federal and state law enforcement efforts is important for several reasons, including the need to share investigative information, consolidate resources, and decide on the most appropriate legal action and whether a federal or state agency should take the action. Several law enforcement officials, as well as two nonprofit organizations, explained that sharing investigative information across agencies was particularly needed because these schemes are often perpetrated by entities that operate across state lines. Thus, these and other officials commented on the usefulness of information—such as complaint information made available through the FTC’s Consumer Sentinel, SARs provided by FinCEN, and information that states may have on emerging schemes—that can be brought to the attention of the federal government. In addition, some officials mentioned that it is important for different agencies working on the same case to coordinate their activities to share information and not duplicate efforts. The importance of federal and state law enforcement coordination was also supported by how federal and state officials described their respective roles. The U.S. Attorneys from most of our five case-study states told us that they usually only undertake cases in which the dollar value of the loss is substantial—for example, at least $1 million in the case of mortgage fraud—or if the nature of the case is particularly complex, such as cases involving attorneys, title companies, straw buyers, and financial service providers. According to DOJ officials, U.S. Attorney offices, given their limited resources, competing demands and differing crime patterns in various districts, may employ loss thresholds, which result in the referral of cases to local prosecutors’ offices. Thus, U.S. Attorneys are less likely to pursue advance-fee schemes, which typically involve much smaller dollar losses (approximately $3,000 per homeowner). In contrast, most of the State Attorneys General we interviewed referred to state laws or regulations that in their view either discouraged the perpetration of these schemes or made it easier for them to take enforcement actions. However, representatives of each of these states also identified the benefits of federal assistance in investigating and prosecuting these schemes, particularly where they are conducted across state lines. Several of the state representatives also noted the usefulness of federal support for their own investigations, such as the training provided by FinCEN to help understand and interpret Bank Secrecy Act data. In addition, representatives of several nonprofit organizations and law enforcement officials noted that strengthening laws could be an important factor in combating schemes. There is no federal statute specifically prohibiting foreclosure rescue and loan modification schemes; therefore, federal agencies rely on investigating and prosecuting under general federal laws that may have been violated, such as wire fraud and false advertising, or in assisting state authorities with their investigations and prosecutions. Several officials noted that a federal law prohibiting the charging of fees in advance for loan modification services would be more effective in deterring these schemes than laws enacted as part of a state- by-state approach, and other officials observed that such laws would make filing enforcement actions easier because they would remove any ambiguities about whether a crime was committed. Several state and federal officials also indicated that additional resources were needed to investigate and pursue more cases. The Mortgage Fraud Working Group has developed an action plan that describes the composition and function of the group and that addresses some of the factors in combating these schemes. The plan articulates the primary purpose of the working group as being “to increase enforcement in the area of mortgage fraud, and to do so through greater coordination among law enforcement agencies, the development and sharing of enforcement strategies, and training.” The action plan also describes activities undertaken by the working group between November 2009 and June 2010 and activities contemplated for the period between late June 2010 and the subsequent meeting of the full Task Force Committee to be held in late November 2010. Finally, the action plan contains a section that identifies the metrics that the working group is using or considering for use in evaluating its progress in the area of mortgage fraud enforcement. Among these metrics are the proliferation of local mortgage fraud task forces, number of people trained in mortgage fraud, and number of enforcement sweeps conducted. The activities identified in the working group’s action plan address two of the factors that we identified as being important to the efforts to combat these schemes—consumer education and law enforcement coordination. For example, the action plan lays out various proposals on ways to warn the public about foreclosure rescue schemes but does not specify agreements on the roles and responsibilities of member agencies, as well as those that might be developed with nonfederal agencies already active in this area, in carrying out consumer education efforts. The bulk of the action plan items focus on activities to improve coordination between federal, state, and local law enforcement agencies regarding combating mortgage fraud. Specifically, the action plan identifies the following key coordination efforts: mortgage fraud summits to be held in additional cities across the country, and additional mortgage fraud training sessions to be held at the National Advocacy Center for both federal and state law enforcement officials. As we have discussed previously, during the summits, community groups are invited to discuss the types of mortgage fraud that they are experiencing, and separate sessions are held with federal, state, and local law enforcement officials to discuss coordination issues related to mortgage fraud enforcement efforts. The FTC has proposed a rule that, among other things, restricts practices concerning companies collecting an advance fee for loan modification services. The comment period for the proposed rule has closed, and FTC officials said that they are in the process of reviewing public comments and finalizing the proposed rulemaking. Although the Mortgage Fraud Working Group’s action plan addresses some of the factors that could impact the federal government’s success in combating mortgage schemes, the plan does not include some key practices that our prior work has found can help enhance and sustain collaboration among federal agencies. Of the eight practices that we have found to enhance multiagency coordination efforts, four in particular appear relevant to the Mortgage Fraud Working Group’s current efforts: defining and articulating a common outcome; establishing mutually reinforcing or joint strategies designed to help align activities, core processes, and resources to achieve a common outcome; agreeing on roles and responsibilities, including leadership; and developing mechanisms to monitor, evaluate, and report on the results of the collaborative effort. The Mortgage Fraud Working Group’s action plan does identify common outcomes or goals for the working group. However, although the goals outlined in the action plan—increasing coordination among law enforcement agencies, developing and sharing of enforcement strategies, and training—appear to be long term in nature, they are supported by activities that do not go beyond 6-month intervals. The working group’s action plan also does not discuss the need for the collaborating agencies to establish strategies that work in concert with those of their partners or that are joint in nature. Such strategies help in aligning the partner agencies’ activities, core processes, and resources to accomplish the common outcome. Additionally, the action plan does not address agreements on the roles and responsibilities of the working group members regarding activities to be undertaken to achieve the group’s goals. Similarly, the performance measurements in the action plan—such as the frequency of, attendance at, and types of mortgage fraud discussed at the summits—are useful for evaluating the activities themselves but not the extent to which the activities have strengthened progress toward the broader goal of increasing coordination activities. Without performance measures that can be used to measure progress toward the working group’s long-term goal, the working group may not be able to evaluate its effectiveness in strengthening law enforcement efforts, including efforts to combat foreclosure rescue schemes, or to determine whether its current activities are the best ones to strengthen law enforcement efforts and address the needs of its federal and state members. In addition, the action plan does not tailor strategies to the various types of mortgage fraud that the working group addresses. Consequently, the plan does not include strategies or performance measures that relate to foreclosure rescue and loan modification schemes. Planning that reflects the specific nature of these schemes may be important. For example, as we have previously discussed, schemes often operate across state lines. State Attorneys General indicated to us that they need federal assistance in pursuing persons that operate these schemes across the borders of their states. U.S. Attorneys also told us that they generally do not pursue these types of schemes due to the need to focus on schemes involving larger dollar amounts. The lack of strategies to effectively deal with the unique nature of these schemes may negatively impact the efforts of the working group to increase coordination among relevant law enforcement agencies to combat schemes that cross state lines. In addition, the group may be limited in its ability to develop performance measures related to these particular schemes. Because data on the prevalence of foreclosure rescue schemes are limited, it is difficult to establish a reliable estimate of just how often these schemes are occurring. Nevertheless, available data and views from a wide variety of sources suggest that foreclosure rescue schemes are indeed an important consumer problem and that new types of schemes are emerging. Furthermore, state law enforcement officials have expressed concern that schemes can be difficult to combat because they are often perpetrated across state lines and those engaging in them can relocate the schemes to other parts of the country very quickly. While the April 2009 announcement signaled the federal government’s interest in strengthening efforts to specifically combat foreclosure rescue schemes, it is not clear to what extent that the announcement resulted in significant interagency collaboration among the key federal law enforcement agencies. However, several individual agencies, notably FinCEN and FTC, appear to have undertaken various major initiatives subsequent to the April 2009 announcement that involve extensive collaboration with state agencies, which they believe added momentum to the federal government’s efforts to support law enforcement actions against these schemes. The subsequent creation of the FFETF appears to build on the April 2009 announcement by expanding the focus of the federal government’s coordinated efforts to financial fraud in general, including mortgage fraud. However, the focus on foreclosure rescue and loan modification schemes is not as clear as in the April 2009 announcement. The Mortgage Fraud Working Group has developed an action plan that identifies the working group’s primary purpose as increasing enforcement in the area of mortgage fraud. The action plan also, in part, addresses two of the key factors that we identified as important to federal efforts in combating foreclosure rescue and loan modification schemes—educating consumers about deceptive practices and effectively coordinating law enforcement efforts to combat these schemes. Consumer education is a key factor in combating these schemes, since law enforcement agency officials indicated that it is easier to stop a crime from taking place than it is to catch the criminal later and obtain restitution. Greater coordination in the area of mortgage fraud is also particularly important given the wide array of federal, state, and local agencies involved, as well as nonprofit partners. However, the action plan does not address key practices that can help enhance and sustain collaboration among federal agencies, such as the need for a clear, long-term strategy; clear delineation of roles and responsibilities; and results-oriented performance measures. Without an action plan that identifies roles and responsibilities and key metrics, the working group may not be able to optimize the efforts of its members to combat mortgage fraud through enhanced coordination of federal, state, and local agencies. In addition, the working group’s action plan does not specify strategies for foreclosure rescue and loan modification schemes, and the distinctive nature of these schemes suggests that they warrant a specific approach, particularly in identifying ways for supporting state- level law enforcement efforts. By developing a strategy that clearly delineates short- and long-term strategic goals, differentiates between types of mortgage fraud, and includes accompanying performance measures, the Mortgage Fraud Working Group could enhance its ability to contribute to law enforcement efforts to combat foreclosure rescue schemes and other types of mortgage fraud. To develop a comprehensive strategy for the FFETF’s Mortgage Fraud Working Group’s efforts to combat mortgage fraud, we recommend that the U.S. Attorney General, as the head of the FFETF, do the following: (1) develop clear, long-term strategies and performance measures that the working group can use to evaluate its progress toward achieving its long- term goal of increasing enforcement in the area of mortgage fraud and (2) to the extent that the working group considers foreclosure rescue schemes to be a priority, develop strategies specific to these schemes, including those that enhance coordination of law enforcement agencies and that provide consumer education. We provided a draft of this report for review and comment to the heads of the Departments of Housing, Justice, and the Treasury and the Federal Trade Commission. We received written comments from the Department of Justice. These comments are summarized below and reprinted in appendix II. DOJ, FTC, HUD, and on behalf of Treasury, the Financial Crimes Enforcement Network and the Office of the Comptroller of the Currency, provided technical comments, which we incorporated in this report, where appropriate. In its written comments, DOJ concurred with our recommendations that the FFETF develop clear, long-term strategies and performance measures to evaluate its progress in increasing enforcement in the area of mortgage fraud and consider developing strategies specific to foreclosure rescue schemes. DOJ stated that it agreed that incorporating additional long-term strategies and metrics, as feasible, into its action plan, as we recommended, could enhance and sustain the progress to date of the Mortgage Fraud Working Group’s efforts to improve federal, state, and local law enforcement agencies’ abilities to coordinate and adapt to the everchanging schemes. DOJ also stated that it would provide a detailed plan of action in its response to Congress. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to other interested congressional committees, the Attorney General of the United States, the Secretary of the Department of Housing and Urban Development, the Secretary of the Treasury, the Chairman of the Federal Trade Commission, and other interested parties. The report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To determine what is known about the nature and prevalence of mortgage foreclosure rescue and loan modification schemes, we collected available data from and interviewed representatives of the four federal agencies— the Federal Trade Commission (FTC) and the Departments of Justice (DOJ), the Treasury (Treasury), and Housing and Urban Development (HUD)—and their relevant bureaus or divisions that were identified as members of a multiagency initiative to combat these schemes as announced by the administration on April 6, 2009. Within DOJ, we interviewed officials from the Executive Office for U.S. Attorneys, the Federal Bureau of Investigation (FBI), Criminal Division, Civil Rights Division, and Office of Justice Programs. In addition, we analyzed information related to the enforcement actions that FTC brought in calendar years 2008 and 2009 against individuals engaged in foreclosure rescue and loan modification schemes. Furthermore, we contacted national nonprofit organizations that collect consumer information or have conducted studies related to foreclosure rescue and loan modification schemes. These organizations include NeighborWorks America®, the Lawyers’ Committee for Civil Rights Under Law (Lawyers’ Committee), the Homeownership Preservation Foundation, the National Community Reinvestment Coalition, and the Council of Better Business Bureaus. We also contacted other nonprofit organizations knowledgeable about these schemes, including the Consumers Union and the Hope Now Alliance. We interviewed representatives of these national nonprofit organizations, which allowed us to obtain additional information on the nature of the schemes, as well as the likely persons engaged in and potential victims of these schemes. Several of these organizations also provided us with information about the number of potential victims, although we determined the information could not be used for the purpose of estimating the prevalence of these schemes. This information included the number of people who reported that they may have been victimized to the Homeownership Preservation Foundation’s Homeowner’s HOPE™ Hotline (1-888-995-HOPE), and the number of people who had complaints about possible scams reported by the Lawyer’s Committee. Lastly, we obtained information on the characteristics of potential schemes from a study published by the National Community Reinvestment Coalition. To obtain additional information on the nature of these schemes, including descriptions of persons likely to engage in them and potential victims, we collected information specific to five states—Arizona, California, Florida, Illinois, and New York. We selected these five states because they featured some of the highest numbers of potential foreclosures, calculated using Mortgage Bankers Association’s fourth quarter 2009 information on the total loans past due by state, and we also considered geographic dispersion. In each state, we conducted structured interviews with representatives of the State Attorney General’s office, a U.S. Attorney’s office, and one other agency or nonprofit organization in each state who was knowledgeable about these schemes. In the absence of information that could reliably be used to assess the prevalence of these schemes, we asked state officials to provide us with information on the indicators that they typically use to assess the likely prevalence of a consumer problem in their states, such as the number of consumer complaints, enforcement actions, or investigations. We also asked state officials to provide us with information on the state laws and regulations that they use to take actions against persons who engage in these schemes. To obtain information on the activities of the Financial Fraud Enforcement Task Force (FFETF), we interviewed a Deputy Attorney General within DOJ and the Executive Director of the FFETF. To obtain information about the FFETF’s specific activities related to combating foreclosure rescue and loan modification schemes, we interviewed the federal and state agency cochairs of the FFETF’s Mortgage Fraud Working Group, which includes representatives of DOJ’s Civil Justice Division, the U.S. Attorneys’ Offices, FBI, HUD’s Office of Inspector General, and the National Association of Attorneys General (state representative). We also interviewed select members of the Mortgage Fraud Working Group—FTC, Treasury’s Financial Crimes Enforcement Network (FinCEN), and the U.S. Postal Inspection Service—we selected on the basis of their roles in combating foreclosure rescue and loan modification schemes and recommendations from the working group’s cochairs. In addition, to understand how the FFETF and the working group functioned, we obtained and reviewed (1) the executive order establishing the FFETF’s mission and key functions and meeting agendas; (2) perspectives from the working group’s cochairs and previously listed members; and (3) available documentation on the working group’s activities related to these schemes as identified by members (e.g., training, mortgage fraud summits, and meetings). We also attended the public session of the FFETF’s Mortgage Fraud Summit in Detroit, Michigan, on April 23, 2010, to determine the extent to which these summits addressed the problem of foreclosure rescue and loan modification schemes. To obtain information about other federal efforts to combat these schemes, we interviewed the federal agencies and state representatives that announced efforts to combat these schemes on April 6, 2009—including FTC, DOJ, Treasury’s FinCEN, and HUD—and collected documentation on their activities. We also interviewed state officials involved in the April 2009 announcement, including State Attorney General representatives who participated in the press announcement and the DOJ working groups that were formed following this announced effort. To identify other major efforts related to combating these schemes, we interviewed federal, state, private, and nonprofit officials, such as those involved in the Loan Modification Scam Prevention Network (the Network), primarily two government sponsored enterprises—Fannie Mae and Freddie Mac—and two national nonprofit organizations—the Lawyers’ Committee and NeighborWorks America, about national efforts to combat these schemes. We collected and reviewed descriptive information on what the Network described as its key efforts—primarily the media consumer education campaign run by NeighborWorks America and an effort by the Lawyers’ Committee to collect consumer complaint information from victims of foreclosure rescue and loan modification schemes. We also reviewed additional individual consumer education activities that the federal, state, and nonprofit agencies we have previously mentioned described using publicly available information. To identify what factors may affect federal efforts’ likelihood of success in combating foreclosure rescue and loan modification schemes, we analyzed information provided by the representatives of the federal and state agencies and national nonprofit organizations that we interviewed throughout the course of our review. This information largely pertained to what these representatives identified as the challenges to combating these schemes but also included information on factors that they identified as important in combating these schemes, such as the nature of law enforcement coordination. In addition, to assess how factors related to strategic planning could affect the federal effort’s likelihood of success, we considered our October 2005 report on practices that can help enhance and sustain collaboration among federal agencies when assessing how the FFETF’s current planning practices could affect collaboration among its many federal agencies and other partners, such as state and nonprofit agencies. We conducted this performance audit from September 2009 to July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact above, Harry Medina (Assistant Director), Meghana Acharya, Sonja J. Bensen, Kristy Brown, Elizabeth H. Curda, Melissa F. Kornblau, Otis S. Martin, Marc Molino, Linda Rego, Jennifer W. Schwartz, Andrew Stavisky, James D. Vitarello, and Heneng Yu made key contributions to this report.
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One of the most devastating aspects of the current financial crisis for homeowners is the prospect of losing their homes to foreclosure, and many homeowners have fallen victim to foreclosure rescue and loan modification schemes. In 2009, the administration created the Financial Fraud Enforcement Task Force (FFETF), which is led by the Department of Justice (DOJ), to combat these and other financial crimes. This report examines (1) the nature and prevalence of these schemes, (2) federal efforts coordinated to combat these schemes and other major efforts, and (3) factors that may affect federal efforts' success in combating these schemes. To address these objectives, GAO obtained information from federal agencies participating in the FFETF and interviewed representatives of five states with high exposure to potential foreclosures and nonprofit organizations undertaking related activities. Although data that would establish the prevalence of foreclosure rescue and loan modification schemes are limited, officials told GAO that these schemes can take several forms--the most active scheme is one in which individuals or companies charge a fee for services not rendered. Agency and nonprofit officials said that the perpetrators of these schemes are likely to be former mortgage industry employees, professional scam artists, and unethical attorneys and that the range of potential victims is wide. Law enforcement officials said that the nature of the schemes makes them difficult to combat because they can easily be conducted by Internet or across state lines. While law enforcement agencies and nonprofits have information, such as research studies and consumer complaints, that supports their belief that these schemes are widespread, there are no nationwide data that can reliably be used to describe their prevalence. Collaborative federal law enforcement efforts and other coordinated efforts involving federal and private organizations are under way to combat foreclosure rescue and loan modification schemes. The FFETF was established in November 2009 to strengthen the efforts of federal, state, and local agencies to investigate and prosecute a variety of financial crimes, including foreclosure rescue and loan modification schemes. Prior to the FFETF, the administration announced a multiagency effort to combat these schemes in April 2009, for which agencies, notably the Financial Crimes Enforcement Network and the Federal Trade Commission, took supporting actions. The FFETF's Mortgage Fraud Working Group, which has primary responsibility for coordinating activities related to these schemes, has focused on facilitating communication and exchanging information among law enforcement agencies by sponsoring training sessions and conferences. In addition to the FFETF, there are other major coordinated efforts aimed at combating these schemes, such as a public-private effort that focuses primarily on consumer education and outreach. Several factors may affect federal efforts to combat foreclosure rescue and loan modification schemes, and lack of a clear, long-term strategy could limit the FFETF's effectiveness. Key factors affecting federal success in combating these schemes include educating consumers about them and coordinating federal and state law enforcement efforts. The Mortgage Fraud Working Group has created an action plan that partly addresses these factors but does not fully incorporate certain key practices to enhance and sustain interagency collaboration. In particular, the plan largely focuses on short-term strategies, does not clearly identify members' roles and responsibilities, and does not clearly identify performance indicators that would allow it to measure progress over time. In addition, the plan outlines strategies for addressing mortgage fraud as a whole and identifies few specific approaches to combating foreclosure schemes. Without long-term strategies and performance measures specific to foreclosure schemes, the working group may be limited in its ability to combat these schemes. GAO is recommending that the U.S. Attorney General direct DOJ to develop clear, long-term strategies and performance measures that DOJ can use to evaluate its progress toward combating mortgage fraud, and consider developing strategies specific to foreclosure rescue schemes. DOJ concurred with these recommendations.
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INS, a component of the Department of Justice (DOJ), is responsible for administering the immigration and naturalization laws relating to the admission, exclusion, deportation, and naturalization of aliens. Under the Immigration and Nationality Act, the Attorney General has sole authority to determine alien status and to initiate deportation proceedings. The act also authorizes the Attorney General to apprehend and deport aliens who have been convicted of serious crimes, including aggravated felonies; crimes of moral turpitude; multiple crimes; and drug and firearm offenses. These apprehension and deportation authorities have been delegated to INS. INS has five electronic databases containing the primary information it relies upon for its day-to-day operations. The databases are as follows: The Central Index System (CIS) is the central file for all aliens with whom INS has had contact except nonimmigrant aliens. It also contains cross references to other databases in which individuals have files. The Deportable Alien Control System (DACS) contains data on all aliens who currently are or have been in deportation proceedings, including criminal aliens. DACS also contains information on aliens who have been apprehended upon entering the country illegally and returned involuntarily to their countries. DACS supports INS’ enforcement activities. The National Automated Immigration Lookout System II (NAILS II) is a lookout enforcement system which contains data about persons of interest to INS, including aliens who are suspected of illegal activities and/or have been previously deported. NAILS II is used by inspectors at various ports of entry throughout the country. The Nonimmigrant Information System (NIIS) contains arrival, departure, and ancillary information pertaining to nonimmigrant aliens entering the United States legally on tourist or business visas. The Student and Schools System (STSC) is the primary vehicle for identifying, locating, and determining the status or benefit eligibility of nonimmigrant students and their dependents. Appendix I provides a more detailed description of the databases. All alien case files in the databases, with the exception of NIIS and STSC, have corresponding paper files, which contain information on all service and, if applicable, enforcement actions that INS has taken or is taking. The paper file for criminal aliens generally includes a set of fingerprints, the Federal Bureau of Investigation (FBI) criminal history, and other identifying information, such as a photograph. The pilot phase of LESC started in July 1994 and is scheduled to last 15 months and will conclude September 30, 1995. Its objectives are to develop an interim site in Burlington, Vermont, and, using INS staff temporarily detailed to the site, field test LESC’s ability to respond to inquiries, initially from the Phoenix Arizona Police Department and, starting in November 1994, from the Maricopa County, Arizona, Sheriff’s Department. This phase is estimated to cost $1.4 million. During fiscal years 1996 and 1997, LESC will accept queries from California, New York, Florida, Texas, and Illinois in addition to Arizona. In its fiscal year 1996 budget, INS has requested 39 staff positions to operate LESC and estimates that LESC operating expenses will total $3.4 million and $3.6 million for fiscal years 1996 and 1997, respectively. An interim independent assessment of the LESC pilot operating results through February 1995 concluded that the LESC concept was viable and recommended that the pilot continue so that a full assessment can be made at the conclusion of the pilot test. In October 1995, the Justice Management Division of DOJ plans to perform a full evaluation of LESC’s first year of operation. If this evaluation indicates that LESC should be expanded nationwide, INS plans to conduct this expansion over a 3-year period, subject to Justice and Office of Management and Budget approval. In addition, INS officials told us that a site survey will be done based on GSA’s site selection criteria before a permanent location is selected. The pilot links LEAs in Phoenix and Maricopa County with LESC in Burlington, Vermont, so that the LEAs can have access to information in INS’ five databases to determine whether a person who has been arrested for an aggravated felony is an alien. The INS Phoenix District Office provides investigative support for all LEAs in Arizona. In Phoenix, when individuals are arrested for aggravated felonies and identify themselves as foreign-born, the LEA official initiates a query to LESC. However, queries from Maricopa County (the largest LEA in Arizona) are not limited to aggravated felonies; they are initiated for all foreign-born individuals arrested for any offense. These queries are initiated automatically when information that an individual is foreign-born is entered into the booking terminal. INS officials told us that the decision to include all arrests was made because the LESC staff needed a much greater number of inquiries than it was receiving from the Phoenix police department so that they could more effectively test the mechanics of the LESC electronic computer system. The two LEAs initiate queries to LESC through the existing National Law Enforcement Telecommunications System (NLETS) network, which LEAs routinely use for interagency exchange of criminal justice and related information. Figure 1 shows how queries are routed between LEAs and LESC. In Burlington, Vermont, an LESC staff member receives printed teletyped queries from the LEAs and enters the name, date of birth, and other information submitted by the LEAs into computer software that initiates a sequential search of the five INS databases in the mainframe at the DOJ Data Center in Dallas, Texas. The search will either reveal that no information that matches the name and date of birth of the individual who has been arrested is available or will list the name or names of any persons in the databases who are possible matches. The LESC staff member compiles the information and teletypes a response to the LEA which states, “This is not an INS detainer.” The response ends with the following message: “For further information, contact (agent’s name), Phoenix INS , (agent’s telephone number).” The response from LESC travels back to the LEA over the same path that the initial query used. The LESC staff member concurrently sends a copy of the response to the INS Phoenix District Office. There, an investigator assigned to the pilot is responsible for analyzing the response. In the early months of the pilot, before Maricopa County was added, the INS investigator first obtained the paper files of the individuals proposed as possible matches. If the paper files were not in the Phoenix District Office, the investigator queried CIS to determine their location and called that location to expedite the file’s transfer. According to the Phoenix INS investigator, files are usually transferred within 24 hours for expedited requests. After obtaining the paper file, the Phoenix INS investigator reviewed it for unique identifying information, such as the fingerprint card. In some cases, the investigator would compare the arrested person’s fingerprint card, obtained from the LEA, to the fingerprint card in the INS file. If identifications could not be made from the file data, the investigator interviewed the individuals to determine their alien status. The Phoenix investigator told us he could usually determine whether the individuals were aliens from interviews, since INS investigators are trained to identify aliens through interrogations. If the arrested person is identified as an alien subject to deportation, INS will issue a detainer, which requires the LEA to notify INS before releasing the individual from custody. Therefore, if the LEA plans to release individuals on bond or their own recognizance at any point in the criminal proceedings, INS will be notified in time to take these individuals into custody and begin the deportation process on the basis of any previous convictions or deportations. Conversely, if the LEA prosecutes and convicts aliens of aggravated felonies, INS can either initiate deportation proceedings on the basis of these convictions while they are incarcerated or take them into custody and begin deportation proceedings after they have served their sentences. In order to determine whether LESC can identify individuals arrested for aggravated felonies as aliens, we interviewed the INS investigator in the Phoenix District Office and police officers in the Phoenix Police Department and the Maricopa County Sheriff’s Office. In addition, we reviewed over 300 responses sent to LEAs by LESC during November and December 1994. We obtained the results of LESC operations from July 1994 through May 1995. To determine whether other current INS initiatives will allow identification of aliens arrested for aggravated felonies, we interviewed senior managers and information resource management (IRM) officials at INS headquarters and reviewed documentation pertaining to two initiatives—an INS identification system and a project between INS and the California Department of Justice. We did not perform an in-depth review of these initiatives to assess such issues as feasibility of implementation schedules, cost effectiveness, and appropriateness in meeting mission needs. To determine whether criminal alien information in INS’ databases is complete and accurate, we focused our review on DACS, INS’ repository for information on identified criminal aliens. We defined our universe as all files for identified criminal aliens recorded in DACS for which the corresponding paper files were located in 17 INS locations. The 17 INS locations were selected because they represented areas with the most known criminal aliens and because of their proximity to our regional offices. This defined universe represented 79 percent of the total number of criminal alien electronic files recorded in DACS. We selected a statistically valid random sample of DACS electronic files from our defined universe and obtained the corresponding CIS electronic files. We compared these electronic files to the corresponding paper case files to determine accuracy and completeness. In addition, we selected a judgmental sample of paper files of aliens for whom deportation proceedings had begun or had been completed to determine whether they had been entered into DACS. Our review was conducted between December 1993 and June 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Attorney General or her designee. On June 15, 1995, the INS Associate Commissioner for Enforcement, the Assistant Commissioner for Investigation, and the Assistant Commissioner for Data Systems Division provided us with oral comments, which are discussed in the Agency Comments and Our Evaluation section of this report. INS officials also provided us with updated information on the status and results of the LESC, IDENT, and CAL/DOJ initiatives following the period of our review. In addition, the FBI provided technical comments on factual matters in our report. These INS and FBI comments have been incorporated where appropriate. Appendix II provides a more detailed discussion of our scope and methodology. Although LESC gives LEAs access to INS information, limitations inherent in INS’ name-based databases delay identification of arrested persons as aliens until an INS investigator can make a conclusive determination. LESC searches INS files using the name and date of birth of arrested individuals to attempt to match them with aliens in its databases. These searches are inconclusive because names and dates of birth in the files are not unique to an individual and can be easily falsified. Unlike LEAs, who establish criminal history files based on fingerprints, INS establishes paper and electronic files for aliens—for both enforcement and service purposes—based on the name, date of birth, and other personal information that an individual provides. However, some individuals may have the same or similar names and dates of birth as other persons. In addition, aliens who commit crimes often provide aliases and other false information in their encounters with INS. As a result, INS may unknowingly create multiple files for the same individual and, during a search by name, may not locate all information on the individual. In our statistical sample of 383 criminal aliens in DACS, we found that 317, or about 83 percent, had used one or more aliases and 184, or 48 percent, had supplied more than one birth date to INS. The following tables provide more detailed information on the use of multiple aliases and birth dates by the criminal aliens in our sample. From the inception of the LESC pilot in July 1994 through May 31, 1995, LESC received 6,738 queries. For 56 percent of the queries, no record was found in the electronic files. INS officials told us that the two major reasons why no records were found were that (1) the alien gave a different name or date of birth than that recorded in INS’ databases or (2) the alien entered the country illegally and thus was not recorded in any of INS’ databases. The automatic search process provided a possible match for about 10 percent of the queries. However, the LESC staff was able to provide possible matches for an additional 34 percent of the queries by searching each database separately using variations of the name. Then the INS investigator either reviewed the paper file or interviewed the individual to conclusively determine that the individual was an alien. The time required for LESC’s electronic search and the subsequent investigation limits INS’ ability to detain aliens arrested for aggravated felonies. According to Phoenix police officers, they usually need confirmation that arrested individuals are aliens and an INS detainer within 8 hours of arrest to ensure that these persons are not released before INS can take action. As a result of the combined electronic search and subsequent investigations from July 1994 through May 1995, INS took enforcement action on 1,935 aliens. During this period, however, LEAs released 920 aliens that INS would have detained because INS did not identify them as aliens before bond was posted or they were released on their own recognizance. Of the 920 individuals, the Phoenix investigator estimated that between 5 and 10 percent (46 to 92) of the released aliens had been arrested for aggravated felonies—the population targeted by the mandate. The remaining individuals that had not been arrested for aggravated felonies had either been previously deported or had prior convictions and INS could have taken enforcement action against them if they had not been released. Two other INS initiatives use fingerprints as unique identifiers for aliens. In the first, INS is developing the INS Identification System (IDENT), an automated fingerprint database of aliens INS processes for either enforcement or benefit purposes. According to INS, once IDENT is implemented, the fingerprint of an arrested individual could be matched against INS’ automated fingerprint database to obtain all available information on that individual, thus allowing INS to determine the correct course of action to take. In the second initiative, the California Department of Justice (CAL/DOJ) is flagging the state criminal histories of previously deported criminal aliens based on fingerprint cards supplied by INS. This allows LEAs to detain these individuals until INS takes them into custody. Because both of these initiatives use fingerprints rather than names and dates of birth, they offer possibilities for more effectively identifying aliens. However, INS will continue to rely on a name search capability for millions of aliens not covered by the fingerprint initiatives. In calendar year 1995, INS began to implement IDENT, a fingerprint-based identification system that uses images of the right index finger to classify and identify individuals. According to the November 14, 1994, IDENT draft project plan, “The solution [to INS’ current identification problems] is to move away from names and use individually-unique biometrics. The most reliable and commonly used biometrics are the fingerprints.” IDENT will use the single fingerprint as an identifier to retrieve the proper case information related to an individual. According to INS officials, IDENT workstations equipped with computerized devices to capture fingerprint images will be installed throughout INS by 1999. As these workstations are deployed, INS staff will begin to develop the IDENT database by scanning and storing fingerprint images when individuals are first processed for either enforcement or benefit purposes. In all subsequent encounters, INS plans to check these individuals’ fingerprints against its fingerprint database to verify identity. INS officials told us IDENT is designed to support (1) criminal alien lookout checks for all enforcement arrests, (2) verification and authentication of benefit applicants, (3) prevention of recidivism (repeated illegal entry into the country), (4) trend analysis of border apprehensions, and (5) identification and verification of holders of INS-issued identification cards. INS estimates that, over the next few years of operation, IDENT’s automated fingerprint database will contain up to 1.5 million recidivists, 450,000 criminal aliens, and 25 million benefit applicants. The preliminary IDENT 3-year implementation schedule calls for IDENT to be installed in INS’ southwest border sites by the end of calendar year 1995, in INS’ district offices and the four service centers by the end of 1996, and in the major ports of entry by the end of 1997. Therefore, IDENT should be deployed to most existing INS locations nationwide by 1997. In fiscal years 1998 and 1999, IDENT will be deployed to certain remaining INS locations yet to be determined. INS began a field test in San Diego, California, in October 1994 to evaluate the speed and accuracy of fingerprint technology in identifying aliens who repeatedly enter the country illegally. According to an INS official, as of June 13, 1995, prints associated with 310,261 apprehensions at the California border had been registered in a fingerprint database. An analysis of the fingerprints showed that about one-third were repeat offenders. According to an INS official, the fingerprint technology tested required an average of less than 2 minutes to determine whether the fingerprints of an individual apprehended matched any of those registered in the database. According to an INS official, fingerprint information from paper files of 1,870 identified criminal aliens in INS’ databases had been added to the fingerprint database as of June 1995. Using this system in the San Diego area, 41 previously deported criminal aliens had been identified and detained. Fingerprint information for an additional 20,254 criminal aliens was to be added to the criminal alien data set by August 1, 1995. INS plans to spend $28 million to develop and begin deploying this system servicewide in calendar year 1995. INS estimates continued development and deployment costs between 1995 and 1999 at about $50 million and $8 million annually for subsequent centralized maintenance of the automated fingerprint database. If IDENT is implemented as planned, it will provide a unique identifier for all aliens added to INS’ CIS, DACS, and NAILS databases after fiscal year 1997. If this information can be made available to LEAs, INS can issue detainers for those arrested individuals who have a positive fingerprint match without having to conduct personal interviews. At the time of our review, however, no strategy had been adopted to facilitate this exchange of information. IDENT will not include the 20 million noncriminal aliens in INS’ CIS database before the start of the project, except for those who subsequently come into contact with INS for enforcement or benefit processing purposes. These individuals include naturalized citizens and legal permanent residents. Nor will IDENT include fingerprints of aliens in the Nonimmigrant Information System (NIIS) or the Student and Schools System (STSC), which together included about 22 million aliens in 1993. In September 1994, the State of California and INS initiated a program, funded by a $250,000 federal grant, to enhance California’s ability to identify criminal aliens. Under this program INS gives the California Department of Justice (CAL/DOJ) fingerprint cards of criminal aliens deported from California. CAL/DOJ reads INS’ fingerprint cards into California’s automated fingerprint processing system to compare these fingerprints to those in California’s automated fingerprint database. For those for which there is a match, CAL/DOJ places an alert flag in the individual’s state criminal history file. The criminal alien flag states that the person has been previously deported and directs the LEA to contact INS at a central telephone number, which has operators on duty 24 hours a day, 7 days a week. In California, many individuals deported as criminal aliens reenter the country illegally after deportation and become repeat offenders. When they are rearrested in California, the LEA, using the established law enforcement procedures, takes fingerprints, accesses the person’s California criminal history, sees the flag, and contacts INS. INS has agreed to send a local INS agent to the LEA within 48 hours of being contacted to take custody of the individual. If the underlying offense does not dictate that the subject be prosecuted in California, INS takes the alien into custody for federal prosecution or deportation proceedings. This saves California the costs of custody and prosecution. Based on INS data, CAL/DOJ plans to place an alert flag on the records of approximately 7,000 previously deported criminal aliens during fiscal year 1995. As of June 20, 1995, 5,113 alien alert flags had been entered into California’s criminal history system. This program has enabled the LEAs to identify 553 individuals as criminal aliens and report them to INS, who has either taken them into custody or placed a detainer on them. Although CAL/DOJ is a California initiative, other states can access California’s criminal alien information through the Interstate Identification Index. LEAs can query the Interstate Identification Index through the National Crime Information Center (NCIC) to determine whether an arrested individual has an available criminal history record. Thus, LEAs across the nation can access California’s criminal histories and, when the criminal history contains a criminal alien flag, identify criminal aliens they have arrested. We found serious problems with the quality of the criminal alien data in INS’ Deportable Alien Control System (DACS) and the corresponding Central Index System (CIS) files. First, the electronic files did not contain complete information on the aliases used by criminal aliens. For over 80 percent of the criminal aliens we identified in our statistical sample, the electronic files did not contain a complete listing of the aliases available in the paper files. For example, one individual in our sample had 24 aliases listed in the paper file but none was recorded in the corresponding DACS and CIS electronic files. Consequently, an electronic search using one of those aliases would not locate that person’s file, resulting in a response that no record existed for the alien. Second, 22 percent of the DACS electronic files in our statistical sample contained either misspelled names, incorrect order of names, or incorrect nationality. Based on these results, such errors are projected to occur in about 22,000 of the over 101,000 electronic files for criminal aliens in our DACS test population. Consequently, LESC searches using the correct spelling, order of names, and nationality may not locate the alien electronic file. Third, the FBI number—which is linked to fingerprints and uniquely identifies persons previously arrested for serious offenses—was missing from the CIS files for most of the criminal aliens in our sample. The FBI number was in the paper files for 290 of the criminal aliens in our statistical sample but was missing from 216 (74 percent) of the corresponding CIS files. Fourth, INS did not have both electronic and paper files for all individuals. For the 410 criminal aliens in our statistical sample of criminal aliens recorded in DACS, 27 of the corresponding paper files could not be located. Since the paper files are used to verify the accuracy and completeness of the data in the electronic files, the data in these files could not be verified. Nor could the investigator consult these paper files to conclusively identify these aliens. In addition, electronic files alone will not support deportation hearings. We also found instances where paper files existed, but electronic files did not. We selected a judgmental sample of 400 paper case files of aliens for whom deportation proceedings had begun or had been completed and attempted to find a corresponding electronic file in DACS. There were no corresponding electronic DACS files for 77 (19 percent) of the 400 paper case files we selected. As a result, a query of DACS would not identify these 77 individuals as aliens who had been deported or were under deportation proceedings for a criminal offense. Of the 323 DACS electronic files we did find for our sample of paper files, our review of the paper files showed that 175 of the electronic files should have contained alert codes designating individuals who had been convicted of criminal activity. Because 72, or 41 percent, of the 175 electronic files did not have the alert code, a query of DACS would not inform INS staff that these individuals were criminal aliens and thus subject to deportation. The missing alert codes also prevent INS from knowing the total number of criminal aliens in its database. In oral comments on this report, INS officials acknowledged that keying errors do occur when information from manually prepared enforcement forms is entered into DACS. They stated that in the future, rather than preparing a paper form, this information will be entered into the planned Enforcement Case Tracking System (ENFORCE) Phase I and downloaded to DACS, thus eliminating the need for duplicate data entry and any resulting key-entry errors. The ENFORCE Phase I is currently being prototyped in the McAllen, Texas, and San Diego, California, Sectors and the Philadelphia District; the interface will be tested in New York. According to the Assistant Commissioner, Data Systems Division, ENFORCE Phase I (and the DACS interface feature) will be implemented in New York, Texas, California, Florida, and Illinois after it is successfully prototyped and tested. INS officials acknowledged that they do not have servicewide procedures directing staff to update the electronic files with critical new information received after the file has been established—such as the FBI number or information on aliases. In addition, INS did not have procedures for ensuring that data are entered correctly and completely. INS officials stated that they had begun taking action to improve data reliability. In April and June 1995, memoranda were issued to all Regional Directors and the Director of International Affairs requiring them to establish a method that will ensure timely input of data into DACS and specifying the data elements that were to be tracked. However, these memoranda did not contain specific procedures for ensuring data accuracy and completeness, nor did they provide for an independent verification to ensure that such procedures are followed. Identifying individuals arrested for aggravated felonies as aliens is critical to joint INS and LEA efforts to prevent the release of these individuals before INS can take action. LESC is an attempt to provide this identification capability; however, this approach is inherently limited by the existing name-based systems that it depends upon. Until INS successfully implements a system that identifies individuals based on biometric information, INS’ ability to make timely identification of arrested individuals as aliens will continue to be limited. INS’ planned move to the IDENT automated fingerprint database is intended to address the need for an improved identification method for individuals who will be processed for either enforcement or benefit purposes. Further, accurate and complete criminal alien data in INS’ DACS and CIS databases are essential. Unless INS’ data reliability problems are resolved, INS risks making decisions based on inaccurate and incomplete information. In view of the limitations inherent in name-based databases, we recommend that the Attorney General direct the Commissioner of INS to take the following actions before deciding whether to expand LESC nationwide. Assess whether the information generated by LESC’s electronic searches justifies the expense and level of resources required to expand and maintain a nationwide facility. Determine whether any other alternative would be more effective and efficient than LESC in helping identify which arrested individuals are aliens. To improve the reliability of the criminal alien data in DACS, and the corresponding electronic files in CIS, we recommend that the Attorney General direct the INS Commissioner to develop procedures that will ensure data reliability for both DACS and CIS. At a minimum, these procedures should ensure that electronic files are created for all known criminal aliens; all criminal alien information—including name, date of birth, nationality, and aliases used—is entered into the electronic files accurately and completely; alert codes are included in all criminal alien electronic files; and the Regional Directors and the Director of International Affairs are directed to take appropriate actions to ensure that all paper files supporting the criminal alien electronic files are located or, if necessary, reconstructed. Finally, after these procedures are implemented, we recommend that the Attorney General direct the Commissioner to develop a strategy to independently verify that the procedures are followed and that data reliability is improved. We discussed a draft of this report with INS’ Associate Commissioner for Enforcement, the Assistant Commissioner for Investigations, and the Assistant Commissioner for Data Systems Division. While these officials agreed with most of our findings and recommendations, they took issue with several points. First, the Associate Commissioner for Enforcement stated that we had misinterpreted the legislative mandate for INS contained in the Anti-Drug Abuse Act of 1988 by stating that INS was required to immediately identify aliens arrested for aggravated felonies. He stated that under the congressional mandate, INS is only required to provide—on a 24-hour basis—federal, state, and local criminal justice entities with all available information it has on suspected aggravated felons at the time of their reported arrest with follow-up action to confirm identity and alien status in the course of the criminal justice process. We believe INS has misstated the content of our draft. We agree that the congressional mandate does not require INS to immediately determine whether arrested persons are aliens. Our draft stated only that INS is limited in its ability to take appropriate enforcement action against aliens who are arrested for aggravated felonies because of the lengthy time required by LESC to conduct the electronic search and by an INS investigator to conclusively identify the arrested individual as an alien. To more precisely reflect the language in the law, we have clarified the section of the report concerning INS’ legislative mandate. Second, the Associate Commissioner for Enforcement expressed concern that the report repeatedly suggested that the LESC approach was flawed because of its use of name-based methodology and that the report failed to note that almost all law enforcement systems, including the FBI’s NCIC, presently operate in this manner. Our report does point out that INS’ existing name-based databases limit LESC’s ability to make timely determinations of whether arrested persons are aliens. INS itself has acknowledged these same limitations and is, for this reason, developing IDENT, a fingerprint-based identification system to provide quick, accurate identification of individuals who will be processed for either enforcement or benefit purposes. While NCIC does provide for name searches, it differs from INS databases by relying on fingerprint-based information to establish case files. This reduces the risk—that INS still faces—of creating multiple files on an individual. INS officials disagreed with our recommendation regarding the evaluation of the LESC pilot. They stated that we did not need to recommend that INS include an evaluation of alternatives and the advisability of expanding LESC nationwide in its final evaluation because these factors are already part of their planned evaluation document. The officials, however, declined to provide a copy of this document until it is approved by the Department of Justice. Finally, in reference to our recommendation on data quality, INS officials stated that steps have been taken to improve the accuracy and completeness of the information in DACS and that these steps were not reflected in the report. We have modified the report to reflect that INS (1) plans to deploy an electronic interface to reduce keying errors and (2) has instructed its field officials to establish a method of timely and consistent input of data. However, since INS has not established specific procedures for ensuring that data in DACS and CIS are accurate and complete, we have revised the recommendation to state that INS should develop a strategy to independently verify that procedures are followed and data reliability is improved. We are providing copies of this report to the Attorney General; Commissioner of INS; the Director, Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. Major contributors to this report are listed in appendix III. Please contact me on (202) 512-7487 if you need any additional information or have any further questions concerning this report. CIS a centralized, computer-based information system that serves as the heart of INS mission support, in both service benefits and law enforcement. The Central Index contains data on lawful permanent residents, naturalized citizens, violators of immigration laws, aliens with Employment Authorization Document information, and others for whom the Service has opened alien files or in whom it has a special interest. Each physical file with a corresponding electronic file in DACS should have an electronic file in CIS. The major search keys for CIS are A-number and Name. Variations of the Name Search are provided by allowing a direct search using Exact Name or a Sounds-like (Soundex) search using a similar-sounding name or alias name. Additionally, the Name Searches allow other identifying information as secondary search criteria, such as Date of Birth, Country of Birth, and Files Control Office; Date of Birth is the most often used secondary search criteria. DACS supports INS’ enforcement activities. It provides information on the status and disposition of deportation cases and on the statistics and summary data representing cases by status type and other activities. DACS captures deportation data; tracks aliens who are arrested, detained, or formally removed from the country; produces deportation reports; and makes the information accessible on-line to deportation officers and other INS users. DACS maintains information on aliens detained by INS and reports on detention activity. NAILS II is a lookout enforcement system that contains information about persons of interest to INS for law enforcement purposes. It expedites the determination of traveller admissibility into the United States at the various ports of entry and identifies individuals who are suspected of illegal activities. NAILS II is used by inspectors at various ports of entry throughout the country. NIIS contains arrival, departure, and ancillary information pertaining to nonimmigrant aliens entering the United States. It contains data on the individual’s status, identifies individuals who may have overstayed, and provides statistical information to INS managers. It provides for queries based on biographical, classification, and citizenship data. There are no physical files to complement the NIIS electronic file. STSC is the primary vehicle for identifying, locating, and determining the status or benefits eligibility of nonimmigrant students and their dependents. The data in STSC includes requests for extensions, change of status, transfers, and employment authorization. It also maintains records on approved schools, school officials, and current or past violations. To determine the type of information provided to requesters in responses from LESC, we performed test queries at both LESC in Burlington, Vermont, and the Phoenix Police Department in Phoenix, Arizona. In addition, we reviewed over 300 LESC responses sent to LEAs for November and December 1994. We interviewed senior managers and IRM officials at INS headquarters to discuss criminal alien information and initiatives underway to address existing problems with identifying aliens. We also reviewed documentation pertaining to two initiatives—an INS identification system and a project between INS and the California Department of Justice. We did not perform an in-depth review of these initiatives to assess such issues as feasibility of implementation schedules, cost-effectiveness, and appropriateness in meeting mission needs. We interviewed the Director of LESC, special agents assigned to LESC, and police officers in the Phoenix Police Department to discuss the operations at LESC. In addition, we interviewed FBI officials to discuss their Integrated Automated Fingerprint Identification System and the FBI fingerprinting process. We tested the accuracy and completeness of criminal alien information in INS’ Deportable Alien Control System (DACS)—the repository for information on identified criminal aliens—by comparing source documents in the paper case file to the information in DACS’ electronic file. Our statistical sample of case files for 410 individuals was selected from DACS, which had electronic files for 959,349 individuals who were or had been in deportation proceedings as of May 20, 1994. Of those, we included for testing only those that had a criminal record in the electronic file, 136,744 individuals. We then scoped this universe to 17 INS locations representing 79 percent of the population of individuals with criminal records recorded in DACS, or 108,502 individuals. We also obtained the corresponding CIS electronic files for the 410 individuals in our sample and compared them to the paper case files and to the DACS electronic files. In addition, at 16 of the locations where we performed paper case file reviews, we judgmentally selected an additional 400 physical case files—25 at each location—and determined if there was a corresponding electronic file in DACS. For our statistical sample, the sampling method used allowed us to estimate, at a 95-percent confidence level, the (1) instances of inaccurate recording of aliases, (2) the number of files without the FBI number, (3) the number of errors in names or nationality, and (4) the number of paper case files that could not be located. Our projections are expressed as point estimates that fall within confidence intervals. This means that if you were to determine an estimate for 100 different random samples of the same size from this population, the estimate would fall within the confidence interval 95 out of 100 times. In other words, the true value is between the lower and upper limits of the confidence interval 95 percent of the time. Our case file reviews were performed at the following INS district offices: Chicago, Illinois; Los Angeles, San Francisco, and San Diego, California; Phoenix, Arizona; San Antonio, El Paso, and Houston, Texas; Miami, Florida; New York City, New York; Denver, Colorado; New Orleans, Louisiana; Newark, New Jersey; and Arlington, Virginia. Additional locations included the Varick, New York; El Centro, California; Florence, Arizona; San Pedro, California; and El Paso, Texas, Service Processing Centers. We also performed reviews at the federal prison in Oakdale, Louisiana. We reviewed previous GAO reports pertinent to the Criminal Alien Program, as well as reports of the Justice Office of the Inspector General pertinent to fingerprint requirements and the National Automated Immigration Lookout System II. Delores J. Lee, Evaluator Yola Lewis, 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. 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Pursuant to a congressional request, GAO reviewed Immigration and Naturalization Service (INS) initiatives for identifying arrested individuals that are aliens, focusing on whether: (1) the Law Enforcement Support Center (LESC) can use existing databases to identify as aliens individuals arrested for aggravated felonies; (2) other INS initiatives will allow identification of aliens arrested for aggravated felonies; and (3) criminal alien information in two INS databases is complete and accurate. GAO found that: (1) LESC allows law enforcement agencies continuous access to INS data, but LESC electronic searches cannot conclusively identify aliens arrested for aggravated felonies, since name-based data can be easily falsified; (2) LESC has initiated enforcement actions on 1,935 aliens, but released 920 additional aliens for various reasons; (3) at least 46 of the 920 aliens released had been arrested for aggravated felonies; (4) INS is planning to fully implement its INS Identification System in 1999 to provide a unique and effective identifier for aliens encountered for enforcement or benefit purposes, but it will include only known criminal aliens in INS databases; (5) INS has recently implemented an initiative to identify criminal aliens entering the country illegally, based on fingerprint data for criminal aliens deported from California; and (6) INS omitted important criminal alien information from certain databases, causing them to be incomplete and inaccurate.
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The economic well-being of the United States is dependent on the reliability, safety, and security of its physical infrastructure. The nation’s infrastructure is vast and affects the daily lives of virtually all Americans. In total, there are about 4 million miles of roads, 117,000 miles of rail, 600,000 bridges, 79,000 dams, 26,000 miles of commercially navigable waterways, 11,000 miles of transit lines, 500 train stations, 300 ports, 19,000 airports, 55,000 community drinking water systems, and 30,000 wastewater treatment and collection facilities. Collectively, this infrastructure connects communities, facilitates trade, provides clean drinking water, and protects public health, among other things. The nation’s infrastructure is primarily owned and operated by state and local governments and the private sector. For example, state and local governments own about 98 percent of the nation’s bridges and the private sector owns almost all freight railroad infrastructure. The federal government owns a limited amount of infrastructure—for instance, the federal government owns and operates the nation’s air traffic control infrastructure. In addition, through its oversight role, the federal government plays an important role in ensuring the safety, security, and reliability of the nation’s infrastructure. Table 1 provides information on infrastructure ownership. Funding for the nation’s infrastructure comes from a variety of federal, state, local, and private sources. For example, the private and local public owners of water infrastructure as well as multiple federal agencies fund drinking water and wastewater capital improvements. As owners of the infrastructure, state and local governments and the private sector generally account for a larger share of funding for infrastructure than the federal government. However, the federal government has played and continues to play an important role in funding infrastructure. For example: From 1954 through 2001, the federal government invested over $370 billion (in 2001 dollars) in the Interstate Highway System. Federal Airport Improvement Program grants provided an average of $3.6 billion annually (in 2006 dollars) for airport capital improvements between 2001 and 2005. From fiscal year 1991 through fiscal year 2000, nine federal agencies provided about $44 billion (in 2000 dollars) for drinking water and wastewater capital improvements. Through the New Starts program, the federal government provided over $10 billion in capital funds for new fixed-guideway transit (e.g., commuter rail and subway) projects between fiscal year 1998 and fiscal year 2007. To increase the nation’s long-term productivity and growth, the federal government invests in various activities and sectors, including infrastructure.While providing long-term benefits to the nation as a whole, much of this spending does not result in federal ownership of the infrastructure assets. For the most part, the federal government supports infrastructure investments through federal subsidies to other levels of government or the private sector. To address concerns about the state of the nation’s infrastructure, Members of Congress have introduced several bills that are intended to increase investment in the nation’s infrastructure by, for example, issuing bonds and providing tax credits for infrastructure investments. (See table 2.) Congress previously established two commissions to study the condition and future needs of the surface transportation system, including financing options. It created the National Surface Transportation Policy and Revenue Study Commission (Policy Commission) to examine the condition and future needs of the nation’s surface transportation system and short- and long-term alternatives to replace or supplement the fuel tax as the principal revenue source supporting the Highway Trust Fund. In January 2008, the Policy Commission released its final report. Congress also created the National Surface Transportation Infrastructure Financing Commission and charged it with analyzing future highway and transit needs and the finances of the Highway Trust Fund and with recommending alternative approaches to financing transportation infrastructure. This commission issued its interim report in February 2008, and its final report is expected in November 2008. We have previously reported that the nation’s surface transportation, aviation, water, and dam systems face numerous challenges related to their infrastructure. Increasing congestion has strained the capacity of our nation’s surface transportation and aviation systems, decreasing their overall performance in meeting the nation’s mobility needs. Furthermore, significant investments are needed in our nation’s drinking and wastewater systems to address deteriorating infrastructure and deferred maintenance. In light of these and other challenges, we have called for a fundamental reexamination of government programs and developed a set of principles that could help guide such a reexamination. Despite increases in transportation spending at all levels of government and improvements to the physical condition of highways and transit facilities over the past 10 years, congestion has worsened and safety gains have leveled off. For example, according to DOT, highway spending by all levels of government has increased 100 percent in real dollar terms since 1980, but the hours of delay during peak travel periods have increased almost 200 percent during the same period. In addition, demand has outpaced the capacity of the system, and projected population growth, technological changes, and increased globalization are expected to further strain the system. We have previously reported that federal surface transportation programs are not effectively addressing these key challenges because federal goals and roles are unclear, many programs lack links to needs or performance, and the programs may not employ the best tools and approaches.In addition, federal transportation funding is generally not linked to specific performance-related goals or outcomes, resulting in limited assurance that federal funding is being channeled to the nation’s most critical mobility needs. Federal funding is also often tied to a single transportation mode, which may limit the use of federal funds to finance the greatest improvements in mobility. To address these surface transportation challenges, various stakeholders have called for increasing significantly the level of investment by all levels of government in surface transportation. For example, in its January 2008 report, the Policy Commission recommended that all levels of government and the private sector collectively invest at least $225 billion each year to maintain and improve the surface transportation system, which would be about $140 billion more than is currently invested. However, without significant changes in funding, planned spending, or both, the balance of the Highway Account of the Highway Trust Fund—the major source of federal highway funds—is projected to be exhausted at some point during fiscal year 2009. To address this gap between revenues and spending, in its fiscal year 2009 budget request, the administration proposed granting the Secretary of the Treasury, in consultation with the Secretary of Transportation, the flexibility to transfer funds between the Highway and Transit Accounts of the Highway Trust Fund. However, this solution, if enacted, would provide only a short-term reprieve—both the administration and the Congressional Budget Office project that the balances of the Highway and Transit Accounts would be exhausted by the end of fiscal year 2010. The Federal Aviation Administration (FAA) faces significant challenges in keeping the nation’s current airspace system running as efficiently as possible as the demand for air travel increases and the air traffic control system ages. System congestion, and the resulting flight delays and cancellations, are serious problems that have worsened in recent years. For example, according to DOT, 2007 was the second-worst year for delays since 1995. To accommodate current and expected demand for air travel, FAA and aviation stakeholders are developing the Next Generation Air Transportation System (NextGen) to modernize the nation’s air traffic control infrastructure and increase capacity. This effort is complex and costly. Although there is considerable uncertainty about how much NextGen will cost, FAA estimates that NextGen infrastructure will cost the federal government between $15 billion and $22 billion through 2025. Other key challenges for FAA include managing a timely acquisition and implementation of NextGen and dealing effectively with the environmental concerns of communities that are adjacent to airports or under the flight paths of arriving and departing aircraft. For example, as we have previously testified, if not adequately addressed, these concerns, particularly about the noise that affects local communities and the emissions that contribute to global warming, may constrain efforts to build or expand the runways and airports needed to handle the added capacity envisioned for NextGen. In addition, airports face similar funding challenges in attempting to expand their capacity. For example, planned airport development costs total at least $14 billion annually (in 2006 dollars) through 2011—exceeding historical funding levels by about $1 billion per year. We have previously testified that FAA’s current funding mechanisms—the Airport and Airway Trust Fund (Trust Fund) and the U.S. Treasury’s general fund—can potentially provide sufficient resources to support FAA activities, including NextGen.However, there are a number of uncertainties—including the future cost of NextGen investment, the volume of air traffic, the future costs of operating the National Airspace System, and the levels of future appropriations for the Airport Improvement Program—that may influence the funding necessary to support FAA’s activities. In addition, uncertainties surrounding the status of FAA’s reauthorization could have adverse effects on FAA’s ability to carry out its mission unless other revenue sources and spending authority are provided. Without legislative action, both the excise taxes that fund the Trust Fund and FAA’s authority to spend from the Trust Fund will expire on June 30, 2008. Failing to meet these infrastructure challenges in aviation may have significant economic consequences, since aviation is an integral part of the economy. Water utilities nationwide are under increasing pressure to make significant investments to upgrade aging and deteriorating infrastructures, improve security, serve a growing population, and meet new regulatory requirements.Water infrastructure needs across the country are estimated to range from $485 billion to nearly $1.2 trillion over the next 20 years. According to the Environmental Protection Agency’s (EPA) June 2005 Drinking Water Infrastructure Needs Survey, the largest category of need is the installation and maintenance of transmission and distribution systems—accounting for $183.6 billion, or about 66 percent of the needs projected through 2022. For wastewater systems, EPA’s 2004 Clean Watersheds Needs Survey projected infrastructure-related needs for publicly owned wastewater systems of $202.5 billion through 2024.Many drinking water and wastewater utilities have had difficulty raising funds to repair, replace, or upgrade aging capital assets; comply with regulatory requirements; and expand capacity to meet increased demand. For example, based on a nationwide survey of several thousand drinking water and wastewater utilities, we reported in 2002 that about one-third of the utilities (1) deferred maintenance because of insufficient funds, (2) had 20 percent or more of their pipelines nearing the end of their useful life, and (3) lacked basic plans for managing their capital assets.Other GAO work suggests that the nation’s water utilities could more effectively manage their infrastructure at a time when significant investments are needed. Several factors have contributed to the nation’s deteriorating water infrastructure over the years. The adequacy of available funds, in particular, has been a key determinant of how well utility infrastructure has been maintained. However, according to our nationwide survey, a significant percentage of the utilities serving populations of 10,000 or more—29 percent of the drinking water utilities and 41 percent of the wastewater utilities—were not generating enough revenue from user charges and other local sources to cover their full costs of service. In addition, when asked about the frequency of rate increases during the period from 1992 to 2001, more than half the utilities reported raising their rates infrequently: once, twice, or not at all over the 10-year period. Citing communities’ funding difficulties, many have looked to the federal government for financial assistance. However, if budgetary trends over the past few years serve as any indication, federal funding will not close the gap. For example, the trends and overall funding levels associated with the Clean Water and Drinking Water State Revolving Funds, the key federal programs supporting water infrastructure financing, suggest that they will have only a marginal impact in closing the long-term water infrastructure funding gap. We have previously reported that comprehensive asset management, a technique whereby water systems systematically identify their needs, set priorities, and better target their investments, can help utilities make better us of available funds. Additional funds, however, will ultimately be needed to narrow the funding gap. Our nation’s dam infrastructure is an important component of the nation’s water control infrastructure, supplying such benefits as water for drinking, irrigation, and industrial uses; flood control; hydroelectric power; recreation; and navigation. However, as evidenced by the events of Hurricanes Katrina and Rita, the failure of dam infrastructure, which includes levees, also represents a risk to public safety, local and regional economies, and the environment. In particular, the aging of dam infrastructure in the United States continues to be a critical issue for dam safety because the age of dams is a leading indicator of potential dam failure.According to the American Society of Civil Engineers, the number of unsafe dams has risen by more than 33 percent since 1998, to more than 3,500 in 2005.In addition, the number of dams identified as unsafe is increasing faster than the number of dams that are being repaired. To address the challenges facing our nation’s dams, the Federal Emergency Management Agency and the National Dam Safety Review Board identified both short- and long-term goals and priorities for the National Dam Safety Program over the next 5 to 10 years. They include identifying and remedying deficient dams, increasing dam inspections, increasing the number of and updating of Emergency Action Plans, achieving the participation of all states in the National Dam Safety Program, increasing research products disseminated to the dam safety community, and achieving cost efficiencies. However, according to the Congressional Research Service, most federal agencies do not have funding available to immediately undertake all nonurgent repairs, and at some agencies, dam rehabilitation projects must compete for funding with other construction projects. The Association of State Dam Safety Officials reported similar funding constraints on dam investment at the state level. Given the nation’s infrastructure challenges and the federal government’s fiscal outlook, we have called for a fundamental reexamination of government programs. Addressing these challenges requires strategic approaches, effective tools and programs, and coordinated solutions involving all levels of government and the private sector. Yet in many cases, the government is still trying to do business in ways that are based on conditions, priorities, and approaches that were established decades ago and are not well suited to addressing 21st century challenges. A reexamination offers an opportunity to address emerging concerns by eliminating outdated or ineffective programs, more sharply defining the federal role in relation to state and local roles, and modernizing those programs and policies that remain relevant. Through our prior analyses of existing programs, we identified a number of principles that could help drive an assessment for restructuring and financing the federal surface transportation program. While these principles are designed specifically to reexamine the surface transportation programs, most, if not all of these principles could be informative as policymakers consider how to address challenges facing other federal infrastructure programs. These principles include creating well-defined goals based on identified areas of national interest, which involves examining the relevance and relative priority of existing programs in light of 21st century challenges and identifying emerging areas of national importance; establishing and clearly defining the federal role in achieving each goal in relation to the roles of state and local governments, regional entities, and the private sector; incorporating performance and accountability into funding decisions to ensure resources are targeted to programs that best achieve intended outcomes and national priorities; employing the best tools, such as benefit-cost analysis, and approaches to emphasize return on investment at a time of constrained federal resources; and ensuring fiscal sustainability through targeted investments of federal, state, local, and private resources. Various options exist or have been proposed to fund investments in the nation’s infrastructure. These options include altering existing or introducing new funding approaches and employing various financing mechanisms. In addition, some have suggested including an infrastructure component in a future economic stimulus bill, which could provide a one- time infusion of funds for infrastructure. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Furthermore, the suitability of any of these options depends on the level of federal involvement or control that policymakers desire for a given area of policy. However, as we have reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. To help policymakers make explicit decisions about how much overall federal spending should be devoted to infrastructure investment, we have previously proposed establishing an investment component within the unified budget. Various existing funding approaches could be altered or new funding approaches could be developed to help fund investments in the nation’s infrastructure. These various approaches can be grouped into two categories: taxes and user fees. A variety of taxes have been and could be used to fund the nation’s infrastructure, including excise, sales, property, and income taxes. For example, federal excise taxes on motor fuels are the primary source of funding for the federal surface transportation program. Fuel taxes are attractive because they have provided a relatively stable stream of revenues and their collection and enforcement costs are relatively low. However, fuel taxes do not currently convey to drivers the full costs of their use of the road—such as the costs of wear and tear, congestion, and pollution. Moreover, federal motor fuel taxes have not been increased since 1993—and thus the purchasing power of fuel taxes revenues has eroded with inflation. As Congressional Budget Office (CBO) has previously reported, the existing fuel taxes could be altered in a variety of ways to address this erosion, including increasing the per-gallon tax rate and indexing the rates to inflation. Some transportation stakeholders have suggested exploring the potential of using a carbon tax, or other carbon pricing strategies, to help fund infrastructure. In a system of carbon taxes, fossil fuel emissions would be taxed, with the tax proportional to the amount of carbon dioxide released in the fuel’s combustion. Because a carbon tax could have a broad effect on consumer decisions, we have previously reported that it could be used to complement Corporate Average Fuel Economy standards, which require manufacturers meet fuel economy standards for passenger cars and light trucks to reduce oil consumption. A carbon tax would create incentives that could affect a broader range of consumer choices as well as provide revenue for infrastructure. Another funding source for infrastructure is user fees. The concept underlying user fees—that is, users pay directly for the infrastructure they use—is a long-standing aspect of many infrastructure programs. Examples of user fees that could be altered or introduced include airport passenger facility charges; fees for use of air traffic control services; fees based on vehicle miles traveled (VMT) on roadways; freight fees, such as a per- container charge; highway tolls; and congestion pricing of roads and aviation infrastructure. Aviation user fees. Many commercial airports currently impose a user fee on passengers—referred to as a passenger facility charge—to fund airport capital projects. Over $2 billion in passenger facility charge revenues are collected by airports each year, representing an important source of funding for airport capital projects. In contrast, FAA’s activities, including the transition to NextGen, are largely funded by excise taxes through the Airport and Airway Trust Fund. To better connect FAA’s revenues with the cost of air traffic control services that FAA provides, the administration has proposed, in its FAA reauthorization bill, to replace this excise tax funding system with a cost-based user fee system. This new system would aim to recover the costs of providing air traffic control services through user fees for commercial operators and aviation fuel taxes for general aviation. According to the administration, cost-based user charges would link revenues more closely to costs and could create incentives for more efficient use of the system by aircraft operators. We have previously testified that a better alignment of FAA’s revenues and costs can address concerns about long-term revenue adequacy, equity, and efficiency as intended, but the ability of the proposed funding structure to link revenues and costs depends critically on the soundness of FAA’s cost allocation system in allocating costs to users. We found that the support for some of FAA’s cost allocation methodology’s underlying assumptions and methods is insufficient, leaving FAA unable to conclusively demonstrate the reasonableness of the resulting cost assignments. VMT fees. To more directly reflect the amount a vehicle uses particular roads, users could be charged a fee based on the number of vehicle miles traveled. In 2006, the Oregon Department of Transportation conducted a pilot program designed to test the technological and administrative feasibility of a VMT fee. The pilot program evaluated whether a VMT fee could be implemented to replace motor fuel taxes as the principal source of transportation revenue by utilizing a Global Positioning System (GPS) to track miles driven and collecting the VMT fee ($0.012 per mile traveled) at fuel pumps that can read information from the GPS. As we have previously reported, using a GPS could also be used to track mileage in high-congestion zones, and the fee could be adjusted upward for miles driven in these areas or during more congested times of day such as rush hour—a strategy that might reduce congestion and save fuel.In addition, the system could be designed to apply different fees to vehicles, depending on their fuel economy. On the federal level, a VMT fee could be based on odometer readings, which would likely be a simpler and less costly way to implement such a program. A VMT fee—unless it is adjusted based on the fuel economy of the vehicle—does not provide incentives for customers to buy vehicles with higher fuel economy ratings because the fee depends only on mileage. Also, because the fee would likely be collected from individual drivers, a VMT fee could be expensive for the government to implement, potentially making it a less cost-effective approach than a motor fuel or carbon tax. The Oregon study also identified other challenges including concerns about privacy and technical difficulties in retrofitting vehicles with the necessary technology. Freight fees. Given the importance of freight movement to the economy, the Policy Commission recently recommended a new federal freight fee to support the development of a national program aimed at strategically expanding capacity for freight transportation. While the volume of domestic and international freight moving through the country has increased dramatically and is expected to continue growing, the capacity of the nation’s freight transportation infrastructure has not increased at the same rate as demand. To support the development of a national program for freight transportation, the Policy Commission recently recommended the introduction of a federal freight fee. The Policy Commission notes that a freight fee, such as a per-container charge, could help fund projects that remedy chokepoints and increase throughput. The Policy Commission also recommended that a portion of the customs duties, which are assessed on imported goods, be used to fund capacity improvements for freight transportation. The majority of customs duties currently collected, however, are deposited in the U.S. Treasury’s general fund for the general support of federal activities.Therefore, designating a portion of customs duties for surface transportation financing would not create a new source of revenue, but rather transfer funds from the general fund. Tolling. We have previously reported that roadway tolling has the potential to provide new revenues, promote more effective and rational investment strategies, and better target spending for new and expanded capacity for surface transportation infrastructure. For example, the construction of toll projects is typically financed by bonds; therefore, projects must pass the test of market viability and meet goals demanded by investors, although even with this test, there is no guarantee that projects will always be viable. Tolling potentially can also leverage existing revenue sources by increasing private-sector participation and investment through such arrangements as public-private partnerships. However, securing public and political support for tolling can prove difficult when the public and political leaders perceive tolling (1) as a form of double taxation, (2) unreasonable because tolls do not usually cover the full costs of projects, or (3) unfair to certain groups. Other challenges include obtaining sufficient statutory authority to toll, adequately addressing the traffic diversion that might result when motorists seek to avoid toll facilities, limitations on the types of roads that can be tolled, and coordinating with other states or jurisdictions on a tolling project. Congestion pricing. As we have previously reported, congestion pricing, or road pricing, attempts to influence driver behavior by charging fees during peak hours to encourage users to shift to off-peak periods, use less congested routes, or use alternative modes. Congestion pricing can also help guide capital investment decisions for new transportation infrastructure. In particular, as congestion increases, tolls also increase, and such increases (sometimes referred to as “congestion surcharges”) signal increased demand for physical capacity, indicating where capital investments to increase capacity would be most valuable. Furthermore, these congestion surcharges can potentially enhance mobility by reducing congestion and the demand for roads when the surcharges vary according to congestion to maintain a predetermined level of service. The most common form of congestion pricing in the United States is high- occupancy-toll lanes, which are priced lanes that offer drivers of vehicles that do not meet the occupancy requirements the option of paying a toll to use lanes that are otherwise restricted for high-occupancy vehicles. In its FAA reauthorization proposal, the administration proposed extending congestion pricing to the aviation sector as a means of managing air traffic congestion. Specifically, the administration proposed that FAA establish a fee based on time of day or day of the week for aircraft using the nation’s most congested airports to discourage peak-period traffic. Under such a fee, cargo carriers could pay lower fees by operating at night than they would pay by operating at peak periods of the day, creating an incentive for some cargo carriers to switch daytime operations to nighttime. Like tolling, congestion pricing proposals often arouse political and public opposition, raise equity concerns, and face statutory restrictions. Financing strategies can provide flexibility for all levels of government when funding additional infrastructure projects, particularly when traditional pay-as-you-go funding approaches, such as taxes or fees, are not set at high enough levels to meet demands. The federal government currently offers several programs to provide state and local governments with incentives such as bonds, loans, and credit assistance to help finance infrastructure. Financing mechanisms can create potential savings by accelerating projects to offset rapidly increasing construction costs and offer incentives for investment from state and local governments and from the private sector. However, each financing strategy is, in the final analysis, a form of debt that ultimately must be repaid with interest. Furthermore, since the federal government’s cost of capital is lower than that of the private sector, financing mechanisms, such as bonding, may be more expensive than timely, full, and up-front appropriations. Finally, if the federal government chooses to finance infrastructure projects, policy makers must decide how borrowed dollars will be repaid, either by users or by the general population either now or in the future through increases in general fund taxes or reductions in other government services. A number of available mechanisms can be used to help finance infrastructure projects. Examples of these financing mechanisms follow: Bonding. A number of bonding strategies—including tax-exempt bonds, Grant Anticipation Revenue Vehicles (GARVEE) bonds, and Grant Anticipation Notes (GAN)—offer flexibility to bridge funding gaps when traditional revenue sources are scarce. For example, state-issued GARVEE bonds or GANs provide capital in advance of expected federal funds, allowing states to accelerate highway and transit project construction and thus potentially reduce construction costs. Through April 2008, 20 states and two territories issued approximately $8.2 billion of GARVEE-type debt financing and 20 other states are actively considering bonding or seeking legislative authority to issue GARVEEs. Further, SAFETEA-LU authorized the Secretary of Transportation to allocate $15 billion in private activity bonds for qualified highway and surface freight transfer facilities. To date, $5.3 billion has been allocated for six projects. In aviation, most commercial airports issue a variety of bonds for airport capital improvements, most notably general revenue bonds that are backed by general revenues from the airport—including aircraft landing fees, concessions, and parking fees—and passenger facility charges. Several bills introduced in this Congress would increase investment in the nation’s infrastructure through bonding. For example, the Build America Bonds Act would provide $50 billion in new infrastructure funding through bonding. Although bonds can provide up-front capital for infrastructure projects, they can be more expensive for the federal government than traditional federal grants. This higher expense results, in part, because the government must compensate the investors for risks they assumed through an adequate return on their investment. Loans, loan guarantees, and credit assistance. The federal government currently has two programs designed to offer credit assistance to states for surface transportation projects. The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorized FHWA to provide credit assistance, in the form of direct loans, loan guarantees, and standby lines of credit for projects of national significance. A similar program, Railroad Rehabilitation and Improvement Financing (RRIF) offers loans to acquire, improve, develop, or rehabilitate intermodal or rail equipment or facilities. To date, 15 TIFIA projects have been approved for a total of about $4.8 billion in credit assistance and the RRIF program has approved 21 loan agreements worth more than $747 million. These programs are designed to leverage federal funds by attracting substantial nonfederal investments in infrastructure projects. However, the federal government assumes a level of risk when it makes or guarantees loans for projects financed with private investment. Revolving funds. Revolving funds can be used to dedicate capital to be loaned for qualified infrastructure projects. In general, loaned dollars are repaid, recycled back into the revolving fund, and subsequently reinvested in the infrastructure through additional loans. Such funds exist at both the federal and the state levels and are used to finance various infrastructure projects ranging from highways to water mains. For example, two federal funds support water infrastructure financing, the Clean Water State Revolving Fund (CWSRF) for wastewater facilities, and the Drinking Water State Revolving Fund (DWSRF) for drinking water facilities. Under each of these programs, the federal government provides seed money to states, which they supplement with their own funds. These funds are then loaned to local governments and other entities for water infrastructure construction and upgrades and various water quality projects. In addition, State Infrastructure Banks (SIB)—capitalized with federal and state matching funds—are state-run revolving funds, make loans and provide credit enhancements and other forms of nongrant assistance to infrastructure projects. Through June 2007, 33 SIBs have made approximately 596 loan agreements worth about $6.2 billion to leverage other available funds for transportation projects across the nation. Furthermore, other funds—such as a dedicated national infrastructure bank—have been proposed to increase investment in infrastructure with a national or regional significance. A challenge for revolving funds in general is maintaining their capitalized value. Defaults on loans and inflation can reduce the capitalized value of the fund—necessitating an infusion of capital to continue the fund’s operations. Another option proposed for temporarily increasing investment in the nation’s infrastructure is including an investment component in a future economic stimulus bill. According to supporters, including funding for “ready to build” infrastructure projects in a stimulus bill would serve to both boost the economy and improve the nation’s infrastructure through a one-time infusion of funds. For example, the American Association of State Highway and Transportation Officials estimates 42,000 jobs are created for every $1 billion dollars invested in transportation projects. We have previously identified important design criteria for any economic stimulus package. Specifically: Economic stimulus package should be timely. An economic stimulus should not be enacted prematurely, delayed too long, or consist of programs that would take too long to be implemented to lessen any economic downturn. For example, if fiscal stimulus is undertaken when it is not needed, it could result in higher inflation or if fiscal stimulus is enacted too slowly, it could take effect after the economy has already started to recover. Economic stimulus package should be temporary. An economic stimulus should be designed to raise output in the short run, but should not increase the budget deficit in the long-run. If a stimulus program is not temporary and continues after the economy recovers, it could lead to higher inflation. Economic stimulus package should be targeted. An economic stimulus should be targeted to areas that are most vulnerable in a weakening economy and should generate the largest possible increase in short-run gross domestic product. Designing and implementing an economic stimulus package with an infrastructure investment component that is timely, temporary, and targeted would be difficult. First, while an effective stimulus package should be timely, practically speaking, infrastructure projects require lengthy planning and design periods. According to CBO, even those projects that are “on the shelf” generally cannot be undertaken quickly enough to provide a timely stimulus to the economy.Second, spending on infrastructure is generally not temporary because of the extended time frames needed to complete projects. For example, initial outlays for major infrastructure projects supported by the federal government, such as highway construction, often total less than 25 percent of the total funding provided for the project. Furthermore, the initial rate of spending can be significantly lower than 25 percent for large projects. Third, because of differences among states, it is challenging to target stimulus funding to areas with the greatest economic and infrastructure needs. For example, two possible indicators for targeting infrastructure aid to states, gross state product and lane miles per capita, are not correlated. Furthermore, as we have previously reported, states tend to substitute federal funds for funds they would have otherwise spent—making it difficult to target a stimulus package so that it results in a dollar-for-dollar increase in infrastructure investment. We have previously reported that the budget process can favor consumption over investment because the initial cost of an infrastructure project looks high in comparison to consumption spending.Thus, adopting a capital budget is suggested as a way to eliminate a perceived bias against investments requiring large up-front spending when they compete with other programs in a unified budget. However, proposals to adopt a capital budget at the federal level often start with certain concepts and models extended from state and local governments and the private sector, which are not appropriate because of fundamental differences in the role of the federal government. Specifically, when state and local governments and the private sector make investments, they typically own the resulting assets, while this is frequently not the case for the federal government. For example, although the federal government invests in surface transportation, aviation, water, and dam infrastructure, a significant portion of this infrastructure is owned by state and local governments. This makes it difficult to fully apply traditional capital budgeting approaches, such as depreciation, which might be considered when assets are fully owned. Moreover, there are fundamental differences between the roles of the state and local governments and the federal government. In an inclusive, unified budget, it is important to disclose up front the full commitments of the government. Federal fiscal policy, as broadly conceived, plays a key role in managing the short-term economy as well as promoting the savings needed for long-term growth. Rather than recommend adopting a capital budget, we have previously proposed establishing an investment component within the unified budget to address federal spending intended to promote the nation’s long-term economic growth.By recognizing the different effects of various types of federal spending, an investment focus within the budget would provide a valuable supplement to the unified budget’s concentration on macroeconomic issues. Moreover, it would direct attention to the consequences of choices within the budget under existing budget limitations—a level which is now not determined explicitly by policymakers but is simply the result of numerous individual decisions. If an investment component within the unified budget was adopted, Congress could decide on an overall level of investment in a budget resolution or other macro framework, which would be tracked and enforced through the authorizing and appropriations process to ensure that individual appropriations actions supported the overall level. This approach has the advantage of focusing budget decision makers on the overall level of investment supported in the budget without losing sight of the unified budget’s effect on the economy. It also has the advantage of building on the current congressional budget process. Finally, it does not raise the problems posed by capital budgeting proposals that use depreciation and deficit financing. Although the investment component would be subject to budget controls, the existence of a separate component could create an incentive to categorize many proposals as investment. If an investment component within the budget is to be implemented in a meaningful fashion, it will be important to identify what to include. Any changes in the budgetary treatment of investment need to consider broader federal responsibilities. While well-chosen investments may contribute to long-term growth, financing such programs through deficits would undermine their own goal by reducing savings available to fund private investment.Accordingly, reforms in the federal government’s budget for investment should be considered within the overall constraints of fiscal policy based on unified budget principles. The nation’s physical infrastructure is under strain, raising a host of safety, security, and economic concerns. Given these concerns, various investment options have been, and likely will continue to be, identified to help repair, upgrade, and expand our nation’s infrastructure. Ultimately, Congress and other federal policymakers will have to determine which option—or, more likely, which combination of funding and financing options—best meets the needs of the nation. There is no silver bullet. Moreover, although financing mechanisms allow state and local governments to advance projects when traditional pay-as-you-go funding approaches, such as taxes and fees, are insufficient, ultimately these borrowed dollars must be repaid by the users or the general population. Consequently, prudent decisions are needed to determine the appropriate level of infrastructure investment and to maximize each dollar invested. We will continue to assist the Congress as it works to evaluate various investment options and develop infrastructure policies for the 21st century. Messrs. Chairmen, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information on this statement, please contact Patricia Dalton at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony were Kyle Browning, Nikki Clowers, Steve Elstein, JayEtta Hecker, Carol Henn, Bert Japikse, Barbara Lancaster, Matthew LaTour, Nancy Lueke, and Katherine Siggerud. Drinking Water: The District of Columbia and Communities Nationwide Face Serious Challenges in Their Efforts to Safeguard Water Supplies. GAO-08-687T. Washington, D.C.: April 15, 2008. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs. GAO-08-400. Washington, D.C.: March 6, 2008. Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest. GAO-08-44. Washington, D.C.: February 8, 2008. Federal Aviation Administration: Challenges Facing the Agency in Fiscal Year 2009 and Beyond. GAO-08-460T. Washington, D.C.: February 7, 2008. Surface Transportation: Preliminary Observations on Efforts to Restructure Current Program. GAO-08-478T. Washington, D.C.: February 6, 2008. Long-Term Fiscal Outlook: Action Is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future. GAO-08-411T. Washington, D.C.: January 29, 2008. Freight Transportation: National Policy and Strategies Can Help Improve Freight Mobility. GAO-08-287. Washington, D.C.: January 7, 2008. A Call For Stewardship: Enhancing the Federal Government’s Ability to Address Key Fiscal and Other 21st Century Challenges. GAO-08-93SP. Washington, D.C.: December 17, 2007. Transforming Transportation Policy for the 21st Century: Highlights of a Forum. GAO-07-1210SP. Washington, D.C.: September 19, 2007. Railroad Bridges and Tunnels: Federal Role in Providing Safety Oversight and Freight Infrastructure Investment Could Be Better Targeted. GAO-07-770. Washington, D.C.: August 6, 2007. Vehicle Fuel Economy: Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards. GAO-07-921. Washington, D.C.: August 2, 2007. Public Transportation: Future Demand Is Likely for New Starts and Small Starts Programs, but Improvements Needed to the Small Starts Application Process. GAO-07-917. Washington, D.C.: July 27, 2007. Surface Transportation: Strategies Are Available for Making Existing Road Infrastructure Perform Better. GAO-07-920. Washington, D.C.: July 26, 2007. Highway and Transit Investments: Flexible Funding Supports State and Local Transportation Priorities and Multimodal Planning. GAO-07-772. Washington, D.C.: July 26, 2007. Intermodal Transportation: DOT Could Take Further Actions to Address Intermodal Barriers. GAO-07-718. Washington, D.C.: June 20, 2007. Federal Aviation Administration: Observations on Selected Changes to FAA’s Funding and Budget Structure in the Administration’s Reauthorization Proposal. GAO-07-625T. Washington, D.C.: March 21, 2007. Performance and Accountability: Transportation Challenges Facing Congress and the Department of Transportation. GAO-07-545T. Washington, D.C.: March 6, 2007. U.S. Infrastructure: Funding Trends and Opportunities to Improve Investment Decisions. GAO/RCED/AIMD-00-35. Washington, D.C.: February 7, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Fiscal Stewardship: A Critical Challenge Facing Our Nation, GAO-07- 362SP. Washington, D.C.: January 2007. Intercity Passenger Rail: National Policy and Strategies Needed to Maximize Public Benefits from Federal Expenditures. GAO-07-15. Washington, D.C.: November 13, 2006. Freight Railroads: Industry Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed. GAO-07-94. Washington, D.C.: October 6, 2006. Aviation Finance: Observations on Potential FAA Funding Options. GAO-06-973. Washington, D.C.: September 29, 2006. National Airspace System Modernization: Observations on Potential Funding Options for FAA and the Next Generation Airspace System. GAO-06-1114T. Washington, D.C.: September 27, 2006. Highway Finance: States’ Expanding Use of Tolling Illustrates Diverse Challenges and Strategies. GAO-06-554. Washington, D.C.: June 28, 2006. Highway Trust Fund: Overview of Highway Trust Fund Estimates. GAO-06-572T. Washington, D.C.: April 4, 2006. Highway Congestion: Intelligent Transportation Systems’ Promise for Managing Congestion Falls Short, and DOT Could Better Facilitate Their Strategic Use. GAO-05-943. Washington, D.C.: September 14, 2005. Freight Transportation: Short Sea Shipping Option Shows Importance of Systematic Approach to Public Investment Decisions. GAO-05-768. Washington, D.C.: July 29, 2005. Highlights of an Expert Panel: The Benefits and Costs of Highway and Transit Investments. GAO-05-423SP. Washington, D.C.: May 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. Washington, D.C.: February 2005. Highway and Transit Investments: Options for Improving Information on Projects’ Benefits and Costs and Increasing Accountability for Results. GAO-05-172. Washington, D.C.: January 24, 2005. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design. GAO-04-802. Washington, D.C.: August 31, 2004. Surface Transportation: Many Factors Affect Investment Decisions. GAO-04-744. Washington, D.C.: June 30, 2004. Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has Been Limited. GAO-04-419. Washington, D.C.: March 25, 2004. Water Infrastructure: Comprehensive Asset Management Has Potential to Help Utilities Better Identify Needs and Plan Future Investments. GAO-04-461. Washington, D.C.: March 19, 2004. Freight Transportation: Strategies Needed to Address Planning and Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003. Marine Transportation: Federal Financing and a Framework for Infrastructure Investments. GAO-02-1033. Washington, D.C.: September 9, 2002. Water Infrastructure: Information on Financing, Capital Planning, and Privatization. GAO-02-764. Washington, D.C.: August 16, 2002. Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2003. GAO/AIMD-98-184. Washington, D.C.: June 15, 1998. Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002, GAO/AIMD-97-88. Washington, D.C.: May 21, 1997. Budget Structure: Providing an Investment Focus in the Federal Budget. GAO/T-AIMD-95-178. Washington, D.C.: June 29, 1995. Budget Issues: Incorporating an Investment Component in the Federal Budget. GAO/AIMD-94-40. Washington, D.C.: November 9, 1993. 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Physical infrastructure is critical to the nation's economy and affects the daily life of virtually all Americans--from facilitating the movement of goods and people within and beyond U.S. borders to providing clean drinking water. However, this infrastructure--including aviation, highway, transit, rail, water, and dam infrastructure--is under strain. Estimates to repair, replace, or upgrade aging infrastructure as well as expand capacity to meet increased demand top hundreds of billions of dollars. Calls for increased investment in infrastructure come at a time when traditional funding for infrastructure projects is increasingly strained, and the federal government's fiscal outlook is worse than many may understand. This testimony discusses (1) challenges associated with the nation's surface transportation, aviation, water, and dam infrastructure, and the principles GAO has identified to help guide efforts to address these challenges and (2) existing and proposed options to fund investments in the nation's infrastructure. This statement is primarily based on a body of work GAO has completed for the Congress over the last several years. To supplement this existing work, GAO also interviewed Department of Transportation officials to obtain up-to-date information on the status of the Highway Trust Fund and various funding and financing options and reviewed published literature to obtain information on dam infrastructure issues. The nation faces a host of serious infrastructure challenges. Demand has outpaced the capacity of our nation's surface transportation and aviation systems, resulting in decreased performance and reliability. In addition, water utilities are facing pressure to upgrade the nation's aging and deteriorating water infrastructure to improve security, serve growing demands, and meet new regulatory requirements. Given these types of challenges and the federal government's fiscal outlook, it is clear that the federal government cannot continue with business as usual. Rather, a fundamental reexamination of government programs, policies, and activities is needed. Through prior analyses of existing programs, GAO identified a number of principles that could guide a reexamination of federal infrastructure programs. These principles include: (1) creating well-defined goals based on identified areas of national interest, (2) establishing and clearly defining the federal role in achieving each goal, (3) incorporating performance and accountability into funding decisions, (4) employing the best tools and approaches to emphasize return on investment, and (5) ensuring fiscal sustainability. Various options are available to fund infrastructure investments. These options include altering existing or introducing new funding approaches and employing various financing mechanisms, such as bonds and loans. For example, a variety of taxes and user fees, such as tolling, can be used to help fund infrastructure projects. In addition, some have suggested including an infrastructure component in a future economic stimulus bill, which could provide a one-time infusion of funds for infrastructure projects. Each of these options has different merits and challenges, and choosing among them will likely involve trade-offs among different policy goals. Furthermore, the suitability of the various options depends on the level of federal involvement or control that policymakers desire. However, as GAO has reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. To help policymakers make explicit decisions about how much overall federal spending should be devoted to investment, GAO has previously proposed establishing an investment component within the unified budget.
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North Korea has several nuclear facilities that, collectively, have the potential to produce nuclear fuel for weapons. Most are located at Yongbyon, 60 miles north of Pyongyang. The major installations include (1) a 5-megawatt electric (MW(e)) research reactor, (2) two larger reactors that were under construction—a 50-MW(e) reactor in Yongbyon and a 200-MW(e) reactor at Taechon, and (3) a plutonium reprocessing facility. The 5-MW(e) research reactor was constructed in the 1980s and is thought to be capable of producing about 7 kilograms of plutonium annually. The two reactors under construction were expected to yield another 200 kilograms of plutonium annually—enough plutonium for about 50 atomic bombs per year. The reprocessing facility separates weapons-grade plutonium-239 from the reactor’s spent fuel. The reactor facilities reportedly were not attached to a power grid, increasing concern that the facilities were intended to produce material for making nuclear weapons rather than for producing electricity. Under the Agreed Framework, North Korea made a commitment to, among other things, (1) remain a party to the Nuclear Non-Proliferation Treaty—a treaty aimed at preventing the spread of nuclear weapons; (2) freeze the operation and construction of its graphite-moderated reactors and related facilities, including the reprocessing plant, and eventually dismantle them; and (3) cooperate with the United States to safely store and dispose of the spent fuel in its possession. In return for these concessions, the United States agreed to, among other things, create an international consortium of member countries to (1) replace North Korea’s graphite-moderated reactors with a light-water reactor project by a target date of 2003 and (2) supply North Korea with energy—heavy oil for heating and electricity production—pending the completion of the first light-water reactor. (App. I provides additional information about the contents of the agreement.) According to State and other administration sources, the agreement to replace North Korea’s 5-MW(e) reactor and the two larger reactors under construction was needed because, unlike light-water reactors, the North Korean reactors and related nuclear facilities were particularly well suited to produce nuclear materials. In addition, if the two nuclear reactors had been completed, North Korea would have vastly increased the amount of nuclear material in its possession. Finally, North Korea was believed to be doubling its plutonium separation capacity. (App. II provides a chronology of events preceding the Agreed Framework, including information on North Korea’s suspected reprocessing activities.) On March 9, 1995, the United States, Japan, and the Republic of Korea (South Korea) founded KEDO to finance and supply the reactors (the “light-water reactor project”) and interim energy. On December 15, 1995, KEDO and North Korea concluded negotiations on an agreement for supplying the project (supply agreement). The supply agreement obligates KEDO to provide two light-water reactors—each with a generating capacity of about 1,000 MW(e)—to North Korea. The reactors will be an advanced version of a design of U.S. origin and technology currently under construction in South Korea. The agreement specifies that KEDO will finance the cost of the project—expected to exceed $4 billion—and that North Korea will repay the interest-free loan over an extended period. The supply agreement authorizes KEDO to select a prime contractor to carry out the project. KEDO selected the Korea Electric Power Corporation—the South Korean, partially state-owned utility with experience in the construction, operation, and maintenance of nuclear power plants. Preliminary construction at the reactor site is expected to begin in the fall of 1996 at Sinpo, North Korea. See figure 1 for a map identifying Sinpo and other relevant North Korean sites. The Agreed Framework can be properly described as a nonbinding political agreement. The Agreed Framework’s broad pledges—as later implemented in more defined, binding agreements—and the subsequent actions of the parties suggest that both the United States and North Korea regarded the Agreed Framework as a nonbinding, preliminary arrangement. Officials at State said that the United States executed a nonbinding political document because it would not have been in the United States’ interest to accept an internationally binding legal obligation to provide the reactors and interim energy to North Korea. Instead, they said that the United States wanted the flexibility to respond to North Korea’s policies and actions in implementing the Agreed Framework—flexibility that binding international agreements, such as a treaty, would not have provided. According to State, its position that the agreement is nonbinding is supported by (1) the agreement’s language and form, which are not typical of binding international agreements, and (2) the fact that neither side has since acted in a manner that is inconsistent with such an understanding. In connection with the language used in the Agreed Framework, State maintains that the most important indicator of the parties’ intent is the absence of the word “agreed” and the use, instead, of the word “decided” in the agreement’s preamble. In our view, the language of the Agreed Framework is not entirely clear about the intent of the United States and North Korea to establish a nonbinding political agreement. Nevertheless, the agreement’s tone and form and, particularly, the subsequent actions of the United States and North Korea suggest that the Agreed Framework was intended to be a nonbinding international agreement. The agreement consists of four general pledges, all of which are consistent with the kind of broad declaration of goals and principles that characterize nonbinding international agreements. Furthermore, the agreement omits provisions—such as provisions on the process for amending the agreement and for resolving disputes—that would normally be included in a binding agreement. The subsequent actions by the United States and North Korea also suggest that the Agreed Framework was intended to be a nonbinding, preliminary arrangement. In a joint press statement on June 13, 1995, at Kuala Lumpur, Malaysia, the two countries reaffirmed their “political commitments to implement the . . . Agreed Framework.” Of greater significance was the conclusion of both the KEDO and supply agreements—two binding international agreements that implement the Agreed Framework’s provisions for supplying the reactors and interim energy to North Korea. Executing nonbinding international agreements like the Agreed Framework does not require prior congressional involvement or approval and, as we have suggested in the past, can have the effect of pressuring the Congress to appropriate moneys to implement an agreement with which it had little involvement. For the North Korean project, this issue is complicated by the political importance of the agreement and the existence of the KEDO and supply agreements—neither of which received formal congressional approval. Taken together, these binding international agreements—described in very concrete and specific terms—effectively incorporate the Agreed Framework’s provisions for supplying the reactors and energy to North Korea. If the Agreed Framework had been structured as a treaty or some other form of binding international agreement, its pledges would have established legally binding commitments, under both international law and the domestic law of the United States. It would also have been subjected to greater formal congressional oversight. (App. III provides our full analysis on the structure of the Agreed Framework, including our analysis of the structure’s impact on (1) the legal enforceability of the agreement and (2) congressional oversight.) According to KEDO, it places a high priority on protecting the present and future members of KEDO against the risk of nuclear liability that may arise from North Korea’s light-water reactor project. As a result, KEDO developed a “comprehensive risk management program” to protect itself and its member countries. The foundation of the risk management program is contained in the KEDO and supply agreements. Over time, KEDO plans to negotiate additional protections to fully shield itself and its members from the risk of nuclear liability. Without knowing the contents of these future protections, it is not possible to fully assess the adequacy of the liability protection that will be provided to KEDO and its members. Nevertheless, the provisions already negotiated and KEDO’s plan to secure additional protections, suggest that KEDO and its members will be adequately protected. Moreover, according to KEDO, it will not ship any fuel assemblies to North Korea or allow the reactors to be commissioned unless and until KEDO and its members consider that all aspects of the risk management program are in place. The supply and KEDO agreements contain a number of protections that are intended to preclude North Korea from making claims against KEDO or KEDO members for damages from a nuclear incident. The principal protection requires North Korea to set up a legal mechanism for satisfying all claims brought within North Korea. The supply agreement also contains a provision precluding North Korea from bringing claims against KEDO for any nuclear damage or loss, and both the supply and KEDO agreements contain a general limitation-of-liability provision that appears to cover nuclear damage. The principal protection in the supply agreement requires North Korea to “ensure that a legal and financial mechanism is available for satisfying claims brought within North Korea for damages from a nuclear incident.”Consistent with international practice, the agreement specifies that “he legal mechanism shall include the channeling of liability in the event of a nuclear incident to the operator on the basis of absolute liability.” North Korea must also ensure that the operator—a North Korean entity—is able to satisfy potential claims for nuclear damage. North Korea has not yet enacted legislation—referred to as channeling legislation—satisfying its responsibilities under the Agreed Framework. In the next few years, KEDO intends to help North Korea draft the required legislation and to monitor North Korea’s efforts to establish the financial mechanism for paying possible nuclear damage claims. The supply agreement also contains a second provision that precludes North Korea from bringing any nuclear damage or loss claims against KEDO and its contractors and subcontractors. The scope of this provision is broad and, according to KEDO, covers claims for nuclear damage caused both before and after the reactors have been turned over to North Korea. A third provision explicitly states that North Korea shall seek recovery solely from the property and assets of KEDO for any claims arising (1) under the supply agreement or (2) from any actions of KEDO and its contractors and subcontractors. Correspondingly, the KEDO agreement contains a general limitation-of-liability provision which specifies that the members of KEDO are not liable for the actions or obligations of KEDO. Taken together, the described provisions appear to bar North Korea from making any nuclear claims against KEDO’s member countries—including the United States—in North Korean courts. However, none of the existing provisions explicitly precludes claims by North Korean nationals or North Korean nongovernmental entities. According to KEDO, it intends to ensure that the channelling legislation, to be enacted by North Korea, protects KEDO and its members from possible claims from these sources. The largest concern of KEDO and its members may be the nuclear damage claims brought by third parties in courts and tribunals outside of North Korea. Unlike the Paris and Vienna Conventions—the principal international conventions on third party nuclear liability—which include provisions limiting the jurisdiction for hearing claims to the courts in the country where the nuclear incident occurs, the supply agreement does not preclude claims from being brought in jurisdictions outside of North Korea. It is generally recognized that a country is liable for damage caused to the environment of another country. Thus, once North Korea assumes control over the reactors, North Korea and the operator of the reactors would likely become the primary targets of claims for nuclear damage incurred outside of the country. Nevertheless, lawsuits could also be brought against KEDO and its members. To address this possibility, the supply agreement requires North Korea to (1) enter into an agreement for indemnifying KEDO and (2) secure nuclear liability insurance or other financial security to protect KEDO and its contractors and subcontractors from any claims by third parties resulting from a nuclear incident at the North Korean reactors. Also, as discussed earlier, the KEDO agreement contains a general limitation-of-liability provision that appears to cover nuclear damage liability for lawsuits brought outside of North Korea. The provision requiring indemnification and insurance protections is intended to provide KEDO with adequate protection against suits brought in courts outside of North Korea. Even so, as the provision is written, the indemnity and insurance protections extend only to KEDO and its contractors and subcontractors and not, specifically, to KEDO’s members. Thus, it is not clear that these protections would cover possible awards by foreign courts against individual KEDO members, including the United States. Furthermore, the supply agreement does not address the extent of the indemnity and insurance protections that North Korea must provide, leaving questions about whether North Korea will be required to indemnify KEDO (1) for the entire amount of any damage awards obtained in foreign courts or for some fixed, lesser amount and (2) if North Korea’s insurance and other financial security do not cover all claims. KEDO is aware of these issues and, as a result, plans to build upon the foundation of the existing coverage to fully shield KEDO and its members from possible nuclear liability claims by third parties. For example, in a future agreement—termed a “protocol”—KEDO intends to ensure that the specific indemnity and insurance protections that it negotiates also extend to KEDO’s members. In addition, according to KEDO, the protocol will establish the level of indemnity protection to be provided—an amount which, at a minimum, will be consistent with international norms. KEDO also plans to negotiate additional liability, indemnification, and insurance protections in its future contracts with contractors and subcontractors. According to KEDO, it will neither ship any fuel assemblies to the North Korea nor allow the reactors to be commissioned “nless and until KEDO and its members consider that all aspects of the risk management program are in place.” KEDO also plans to address potential liabilities that could arise from the operation of the reactors during the test period—before North Korea assumes control of them. KEDO contends that the radiological effects of any discharges or omissions would be minimal, unlikely to give rise to substantial claims, and, in all likelihood, limited to North Korea. While KEDO views its potential liability as minimal, it still wants to ensure that it is never the “operator” of the reactors because it lacks the technological capability to perform the tests and because it wants to avoid the potential liabilities that could flow to the “operator” under the channeling legislation. Thus, KEDO plans to structure the arrangements for testing the reactors so that another party—such as North Korea or a KEDO contractor—will operate the reactors during the test period. While the respective views of these entities is not known, it seems unlikely that another party would assume the responsibility for testing the reactors without being compensated by KEDO. (App. IV provides our full analysis of the nuclear liability issue.) North Korea’s existing electricity transmission and distribution system is inadequate to handle the electricity that would be generated by two new 1,000-MW(e) light-water reactors. As a result, much of North Korea’s existing equipment will need to be replaced or modernized before the reactors can be used. According to State, the upgrade could include the replacement or modernization of substations and transformers, transmission towers, and high-voltage cables. State estimates that the cost of the upgrade could reach $750 million. None of the agreements concluded to date creates a legal obligation to pay for the grid upgrade. The State Department and KEDO maintain that North Korea is responsible; however, North Korea has not yet legally obligated itself to pay. State and KEDO point to a December 15, 1995, letter from KEDO to North Korea as evidence of their view that North Korea is responsible. The letter—attached to the supply agreement—pledges KEDO’s nonfinancial assistance to North Korea “in its own efforts to obtain through commercial contracts . . . such power transmission lines and substation equipment as may be needed to upgrade the DPRK [North Korean] electric power grid.” According to State, the letter was (1) requested by North Korea, (2) drafted in consultation with North Korea, and (3) accepted in conjunction with the signing ceremony for the supply agreement—factors that, in State’s view, constitute North Korea’s acknowledgement of its responsibility for paying for the grid upgrade. Nevertheless, State agrees that North Korea did not sign the letter and that North Korea has not legally obligated itself to pay for the upgrade. This leaves open the possibility that, in the future, North Korea could exert pressure on others to pay for the grid upgrade. The Atomic Energy Act of 1954, as amended (the act), specifies the requirements for the peaceful transfer of U.S. nuclear equipment, materials, and technology abroad. Thus far, both State and the Department of Energy (DOE) have complied with their statutory obligations under the act. In fact, the five authorizations granted by DOE so far contain additional safeguards to address the concerns about the technology transfers to North Korea. The act requires the United States to execute an agreement for peaceful nuclear cooperation with a recipient nation or group of nations before exporting major reactor components or nuclear materials. It is too early to say whether an agreement for cooperation between the United States and North Korea will be required because decisions about what, if anything, the United States will supply for the reactors have not yet been made. These uncertainties are likely to exist until at least the spring of 1997, when arrangements for supplying some of the equipment may be negotiated. Nevertheless, an agreement appears likely because a U.S. firm, Combustion Engineering, Inc., supplies the coolant pumps—a major reactor component—for the light-water reactors. State is prepared for the possibility that an agreement will be needed and, as part of the Agreed Framework, has already secured a commitment from North Korea to execute one if it becomes necessary. (App. V provides information about the (1) reactors expected to be supplied to North Korea, including information about possible U.S. transfers of major reactor components, and (2) statutory requirements governing such transfers.) The act precludes any U.S. person from directly or indirectly producing special nuclear material outside of the United States unless authorized by either an agreement for cooperation or the Secretary of Energy. According to DOE officials, DOE considers all transfers of nuclear technology, including training, as having the potential to result in the production of special nuclear materials, thus triggering the act’s requirements. Because the United States does not have an agreement for cooperation with North Korea, transfers of technology must be authorized by the Secretary of Energy. DOE’s regulations provide for two types of authorizations—general and specific. DOE permits U.S. nuclear power reactor technology to be transferred to most countries under a general authorization. Similar technology transfers to North Korea and 47 other countries, however, must be specifically authorized. Under DOE’s regulations for a specific authorization, the Secretary of Energy will approve an application if the Secretary determines—with the concurrence of State and after consulting the Arms Control and Disarmament Agency, the Nuclear Regulatory Commission (NRC), the Department of Commerce, and the Department of Defense—that the proposed activity would not be “inimical” to the interests of the United States. In making the determination, the Secretary must evaluate whether (1) the United States has an agreement for nuclear cooperation with the recipient country; (2) the country is a party to the Nuclear Non-Proliferation Treaty; (3) the country has a full-scope safeguards agreement with the International Atomic Energy Agency (IAEA) and, if not, whether the country has accepted IAEA’s safeguards on the proposed activity; (4) other nonproliferation controls or conditions may be applicable to the proposed activity; (5) the proposed U.S. activity is relatively significant; (6) comparable assistance is available from other sources; and (7) other factors exist that may bear upon the political, economic, or security interests of the United States, including U.S. obligations under international agreements or treaties. Through August 1996, five U.S. companies, including Combustion Engineering, Inc., had requested DOE’s authorization to work on the North Korean project. Combustion Engineering, Inc.’s August 9, 1995, request to DOE indicated that because the North Korean reactors would be based on the company’s technology, the company expected to be involved in most phases of the project’s management, design, manufacture, supply, training, and plant construction. The four other U.S. companies requested DOE’s authorization to perform a wide range of architectural and engineering services and overall management support on behalf of KEDO, its contractors, and subcontractors. DOE evaluated each of the requests, as required by its regulations, and subsequently forwarded the analyses, together with its recommendations on the proposed conditions for the transfers, to the applicable U.S. agencies. State concurred with DOE’s recommendations—the only concurrence required. The Secretary approved each of the authorizations, subject to numerous conditions. Specifically, before any transfer, the United States must receive North Korea’s assurances that (1) any technology transferred by the U.S. company would be used only for peaceful nuclear power generation purposes and not for any military or explosive purpose; (2) neither the transferred technology nor the equipment based on it will be retransferred to another country without the prior consent of the U.S. government; and (3) North Korea will place the light-water reactors under IAEA’s safeguards. DOE also specified a number of conditions applicable to the U.S. companies. Specifically, they must (1) ensure that the technology transferred by the companies is limited to that necessary for the licensing and safe operation of the reactors (and not technology that would enable North Korea to design or manufacture either reactor components or fuel) and (2) provide written quarterly reports to DOE on their activities in support of the project and, whenever requested by DOE, brief DOE and other U.S. government agencies on their activities. DOE limited each of the authorizations to a period of 5 years, renewable by DOE in the light of experience and the circumstances at that time. Thus far, DOE has complied with its statutory and regulatory requirements for granting the authorizations. In addition, the conditions imposed on the authorizations indicate that DOE has sought additional safeguards to address the concerns about possible transfers of U.S. nuclear technology to North Korea. For example, the five authorizations granted so far specify that DOE will suspend the authorizations if either the United States or North Korea “abrogates” the Agreed Framework or related agreements. The authorizations also specify additional reporting requirements for the transfers. Finally, DOE’s caution about the scope of any technology that may be transferred by the companies is intended to provide an additional safeguard for the proposed transfers. It is essential that KEDO not commission the reactors until full and adequate liability protections are in place for KEDO and its members. If these protections are not in place and an accident occurs at the North Korean reactor site, the United States—as the leading proponent of the project—and, perhaps, to a lesser extent, Japan and South Korea, could be subjected to strong political and humanitarian pressure to pay nuclear damage claims. KEDO recognizes the importance of securing full and adequate protection and has committed not to deliver the fuel and commission the reactors until KEDO and its members are fully protected. We believe that it is vital for the Congress to monitor KEDO’s future efforts in this area, including KEDO’s (1) assistance to North Korea in developing the channeling legislation and (2) efforts to secure full and adequate indemnity and insurance to protect against claims in countries other than North Korea. We provided copies of this report to State, DOE, and KEDO for their review and comment. We met with State Department officials, including an attorney from the Office of the Legal Advisor and the Chief of the Agreed Framework Division, Office of Korean Affairs. While State generally agreed with the report’s conclusions, the officials provided detailed comments on the presentation and content of the report. DOE agreed with our findings and conclusions related to its authorizations of technology transfers to North Korea. We incorporated the agencies’ comments, as well as suggestions for improving clarity, as appropriate. We sought KEDO’s views. However, a spokesperson for KEDO indicated that KEDO could not provide comments in the time available. To obtain information for this report, we reviewed and analyzed the Agreed Framework; the KEDO and supply agreements; applicable U.S. laws, regulations, and federal cases; and relevant international agreements and cases. We also interviewed cognizant officials from State, DOE, NRC, KEDO, and Combustion Engineering, Inc. (A detailed description of our work is provided in app. VI.) We conducted our work from April through September 1996 in accordance with generally accepted government auditing standards. As agreed with your office, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the appropriate congressional committees, the Secretaries of State and Energy, the Executive Director of KEDO, and other interested parties. We will also make copies available to others upon request. If you have any questions, please call me at (202) 512-6543. Major contributors to this report are listed in appendix VII. The Agreed Framework between the United States and the Democratic People’s Republic of Korea (North Korea), dated October 21, 1994, sets forth a number of actions intended to address the nuclear issue on the Korean Peninsula. The actions are expressed in the form of four broad pledges. Specifically, the countries agreed to “cooperate to replace the DPRK’s graphite-moderated reactors and related facilities with light-water reactor (LWR) power plants,” “move toward full normalization of political and economic relations,” “work together for peace and security on a nuclear-free Korean peninsula,” “work together to strengthen the international nuclear non-proliferation regime.” The agreement describes each of the broad pledges in further detail. The first broad pledge describes (1) the United States’ agreement to organize, under its leadership, an international consortium to finance and supply the reactors and alternative energy to North Korea and (2) North Korea’s reciprocal pledges to, among other things, freeze its nuclear program. As specified in the agreement, the arrangements for the reactors and energy will be in accordance with President Clinton’s October 20, 1994, letter to the Supreme Leader of North Korea. The letter states that the President will use the “full powers” of his office to facilitate the arrangements for (1) financing and constructing the reactors and (2) funding and implementing the supply of interim energy. If the reactors are not completed or the energy is not provided—for reasons beyond the control of North Korea—the President agreed to use the “full powers” of his office, to the extent necessary, to provide both, subject to the approval of the U.S. Congress. The President conditioned all of the assurances on North Korea’s continued implementation of the policies described in the Agreed Framework. In connection with the countries’ second broad pledge, the United States and North Korea agreed to (l) reduce barriers on trade and investment by January 21, 1995; (2) open liaison offices in each other’s capital following the resolution of consular and other technical issues; and (3) upgrade bilateral relations to the ambassadorial level once progress was made on (unspecified) issues of concern to each side. For the third pledge, the United States agreed to provide formal assurances to North Korea against the threat or use of nuclear weapons by the United States. In return, North Korea agreed to consistently take steps to implement the North-South Joint Declaration on the Denuclearization of the Korean Peninsula and to engage in a dialogue with South Korea. Finally, under the last pledge, North Korea agreed to remain a party to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) and to allow the implementation of its agreement with the International Atomic Energy Agency (IAEA) for safeguarding its nuclear materials (nuclear safeguards agreement), as required by the treaty. Specifically, North Korea agreed—pending the conclusion of the contract for supplying the reactors and energy—to allow IAEA to continue the inspections needed for IAEA’s continuity of safeguards at the facilities not subject to the freeze. Once the contract is concluded, North Korea agreed to allow IAEA to make additional inspections at these facilities. North Korea also agreed to comply fully with its IAEA safeguards agreement when a significant portion of the reactor project is completed but before it receives delivery of key nuclear reactor components. North Korea began developing its nuclear program. The rationale for the program was scientific research and the production of radioactive isotopes for medical and industrial uses. North Korea joined IAEA. North Korea began operating a 5-MW(e) research reactor and a “radiochemical laboratory”—North Korea’s term for its plutonium reprocessing plant—in Yongbyon. North Korea also began constructing two larger reactors—a 50-MW(e) reactor in Yongbyon and a 200-MW(e) reactor at Taechon. North Korea signed the NPT, which, among other things, obligated North Korea to negotiate an agreement with the IAEA for safeguarding the nuclear materials in its possession. North Korea shut down its 5-MW(e) reactor for between 70 to 100 days. Sources believe that North Korea removed and later reprocessed the fuel, separating up to 13 kilograms of weapons-grade plutonium usable for producing nuclear bombs. (The suspected diversion was, among other things, inferred from a subsequent laboratory analysis of materials collected during IAEA’s inspections that began in 1992.) North Korea ran the 5-MW(e) reactor at low levels for about 30 days in 1990 and about 50 days in 1991. Such low levels of operation create the technical possibility that fuel could have been removed and subsequently reprocessed. However, U.S. experts consider this unlikely. The Defense Minister for the Republic of Korea (South Korea) stated that South Korea might launch a commando attack on Yongbyon if North Korea continued with the construction of the 50-MW(e) reactor there. The United States withdrew all nuclear weapons from South Korea, thereby removing one rationale that North Korea had used to delay signing its safeguards agreement with IAEA. North Korea and South Korea signed a “Joint Declaration on the Denuclearization of the Korean Peninsula.” They pledged, among other things, not to (1) test, produce, receive, possess, deploy or use nuclear weapons or (2) possess nuclear reprocessing and uranium enrichment facilities. The parties also agreed to allow mutual inspections subject to procedures to be negotiated between them. High-level officials from the United States and North Korea met to discuss the range of issues affecting the countries’ relations, including the nuclear issue. North Korea signed a safeguards agreement with IAEA. The agreement called for IAEA to inspect the nation’s nuclear facilities after ratification by North Korea’s legislative body. The IAEA/North Korea safeguards agreement became effective. North Korea submitted its declaration of nuclear materials to IAEA, as required by IAEA’s safeguards agreements. According to the declaration, North Korea had seven sites and about 90 grams of plutonium in its possession that were subject to IAEA’s inspections. According to North Korea, the nuclear material resulted from its reprocessing of 89 defective fuel rods in 1989. IAEA began inspections to verify the correctness and completeness of North Korea’s declaration. An IAEA inspection team collected information that subsequently resulted in the disclosure of discrepancies in North Korea’s declaration of nuclear materials. Instead of reprocessing spent fuel from 89 damaged fuel rods on just one occasion, IAEA concluded that North Korea has probably reprocessed spent fuel on three to four occasions since 1989. Additional inspections revealed further inconsistencies in North Korea’s declaration. IAEA informally requested that it be given access to two additional sites—located in the Yongbyon nuclear complex—that it suspected of housing nuclear waste. North Korea allowed IAEA to visually inspect one of the sites but denied any access to the other. IAEA invoked the “special inspections clause” of its safeguards agreement with North Korea, indicating that it wanted to inspect two sites that North Korea had not declared and that IAEA suspected had a bearing on the history of North Korea’s nuclear program. North Korea denied IAEA access to the two undeclared sites. North Korea said that the sites were military installations with no connection to its nuclear program. At a meeting of the IAEA board, the members were shown U.S. aerial surveillance photographs and a chemical analysis of data collected by IAEA inspectors. The evidence reportedly (1) confirmed the existence of a nuclear waste dump—long denied by North Korea—and (2) disclosed discrepancies in North Korea’s declaration of the nuclear materials in its possession. North Korea announced its intention to withdraw from the NPT, effective June 12, 1993. The announcement elevated what was viewed as a serious proliferation threat into a major diplomatic confrontation between the United States and North Korea. IAEA declared that North Korea was not adhering to its safeguards agreement with IAEA and, consequently, that IAEA could no longer guarantee that North Korea’s nuclear material was not being diverted for nonpeaceful purposes. In a statement to the media, the President of the United Nations Security Council welcomed all efforts to resolve the impasse that had arisen between North Korea and IAEA. The President encouraged IAEA to continue, among other things, its consultations with North Korea for a proper settlement of the nuclear verification issue. The United States indicated its readiness to participate in high-level negotiations with North Korea to help resolve the crisis caused by North Korea’s refusal to abide by the NPT. The U.S. objectives for the talks were to get North Korea to (1) remain in the NPT and come into compliance with its NPT obligations, which require full inspections at its nuclear facilities, and (2) carry out its December 1991 denuclearization accord with South Korea. The United Nations Security Council passed a resolution requesting North Korea (1) to allow IAEA inspections and (2) not to withdraw from the NPT. IAEA sent inspectors to (1) verify that there had been no further diversion of nuclear material and (2) maintain monitoring equipment that IAEA had previously installed at North Korea’s declared nuclear facilities. The United States and North Korea held their first round of high-level talks in New York. On June 11, 1993, hours before North Korea’s withdrawal from the NPT would have become effective, the United States and North Korea issued a joint statement in which North Korea agreed to “suspend” its withdrawal from the NPT for as long as it “considers necessary.” North Korea also agreed to the full and impartial application of IAEA’s safeguards. The United States granted assurances against the threat and use of force, including nuclear weapons, and a promise of “non-interference” in North Korea’s internal affairs. The United States subsequently stated that (1) North Korea must accept IAEA inspections to ensure the continuity of the safeguards, (2) forgo reprocessing, and (3) allow IAEA to be present when it refueled its 5-MW(e) reactor. Speaking before U.S. military forces deployed in South Korea, President Clinton reportedly said that if North Korea developed and used nuclear, weapons, “we would quickly and overwhelmingly retaliate. It would mean the end of their country as they know it.” The U.S. and North Korean delegations held a second round of high-level negotiations in Geneva, Switzerland. Both sides reaffirmed the principles of the June 11, 1993, joint statement. As part of the final resolution of the nuclear issue, the United States said that it was willing to explore options for replacing North Korea’s graphite-moderated reactors and related facilities with light-water reactors. North Korea limited the operations of an IAEA inspection team that had been sent to (1) replace film and batteries in cameras and (2) check seals installed by IAEA in 1992. North Korea reportedly required that the team work at night with flashlights. IAEA requested North Korea to allow greater access to its facilities. North Korea denied the request. In reaction to North Korea’s rebuffs of the IAEA, the United States refused to schedule a third negotiating session with North Korea. Instead, North Korean and U.S. officials held low-level meetings at the United Nations in October and November 1993. IAEA’s Director General delivered a report to the United Nations which stated that if IAEA inspectors were not permitted to revisit North Korea’s nuclear facilities, IAEA could no longer verify the IAEA/North Korea safeguards agreement. On November 11, 1993, North Korea proposed that the United States and North Korea negotiate a “package solution” to the nuclear weapons issue. The United States subsequently accepted North Korea’s proposal in principle. However, the United States required that North Korea, among other things, allow IAEA full access to North Korea’s seven declared facilities so that IAEA could maintain its “continuity of safeguards.” In mid-level talks at the United Nations, North Korea offered to restore IAEA’s access to five of its declared sites so that IAEA could change the film and batteries in the cameras monitoring North Korea’s activities at the sites. The U.S. Central Intelligence Agency and the Defense Intelligence Agency estimated that North Korea had separated about 12 kilograms of plutonium—enough for one to two nuclear bombs. IAEA’s Director General warned that safeguards on North Korea’s declared installations and materials could no longer provide a meaningful assurance of peaceful use. However, he said that the integrity of IAEA’s safeguards could be restored if inspections were reinstated. North Korea and the United States reached a tentative understanding about IAEA’s inspections of North Korea’s declared facilities. Sources indicate that the understanding shifted negotiations toward talks between North Korea and the IAEA. North Korea announced that IAEA inspectors would be allowed to visit all seven of its declared nuclear facilities. (The two suspected— undeclared—sites were still off-limits.) North Korea justified the limited inspections on the basis that its action to withdraw from the NPT in June 1993 had exempted it from the inspection requirements applicable to other NPT members. The Director of the Central Intelligence Agency estimated that North Korea may have produced one or two nuclear weapons. North Korea and IAEA conducted negotiations on the details of IAEA’s inspections pursuant to the December 29, 1993, “tentative” U.S./North Korean understanding. The United States announced that it would deploy additional Patriot missile batteries, Apache helicopters, and advanced counter-artillery radar in South Korea. North Korea agreed in writing to a limited inspection of all of its declared nuclear sites in accordance with a checklist of procedures prepared by IAEA. The checklist specified that IAEA would, among other things, take samples from a “glove box” connected to the reprocessing facility and perform gamma ray scans of the facility. According to IAEA, the procedures were needed to restore IAEA’s continuity of knowledge at the declared sites. The United States and North Korea issued a statement, entitled “Agreed Conclusions,” which specified, among other things, that the inspections would proceed consistent with the timing and manner agreed to between North Korea and IAEA on February 15, 1994. The statement also announced U.S./North Korean intentions to begin a third round of negotiations in March 1994. IAEA resumed inspections. The inspectors proceeded without incident at several locations but encountered problems at the reprocessing plant, where they were precluded from (1) entering certain portions of the plant and (2) performing activities—such as taking samples from reprocessing equipment and conducting a gamma ray scan of the reprocessing facility—that North Korea had agreed to on February 15, 1994. IAEA terminated inspections after North Korea barred the inspectors from taking samples at key locations in its plutonium reprocessing plant. The March 1994 inspection reportedly indicated that North Korea had (1) resumed construction on the second reprocessing line in the facility, (2) constructed new connections between the old and new reprocessing lines, and (3) broken seals on previously tagged reprocessing equipment. The United States announced that it would not participate in the third round of U.S./North Korean high-level negotiations scheduled for March 1994. Instead, the United States said it would refer the results of the aborted IAEA inspection to the United Nations Security Council for action. IAEA indicated, once again, that it could no longer ensure that North Korea’s nuclear materials were not being diverted for nonpeaceful purposes. The U.S. Secretary of Defense warned publicly that the United States intended to stop North Korea from developing a substantial arsenal of nuclear weapons, even at the cost of another war on the Korean Peninsula. The United Nations Security Council decided to request that North Korea allow IAEA to complete its inspections. President Clinton ordered the establishment of a Senior Policy Steering Group on Korea to coordinate all aspects of the U.S. policy on the nuclear issue on the Korean Peninsula. President Clinton publicly offered a “hand of friendship” to North Korea if it pledged not to develop nuclear weapons. In a speech to the National Press Club, the U.S. Secretary of Defense outlined the two choices available to North Korea: continue its nuclear program and face the consequences—including the possibility of war—or drop the program and accept economic aid and normal relations with the United States and its allies. Workers began removing the spent fuel from the 5-MW(e) reactor in violation of North Korea’s safeguards agreement with IAEA and IAEA’s previous instructions informing North Korea that IAEA inspectors would need to sample, segregate, and monitor the fuel rods to preserve evidence of past plutonium production. North Korea refused to comply but allowed two inspectors to watch the fuel-removal process. IAEA informed North Korea that the removal of fuel without proper safeguards constituted “a serious violation” of the safeguards agreement. The United States offered to hold the long-deferred third series of high-level talks to consider the entire range of issues related to the Korean peninsula, including the economic, diplomatic, and other benefits that North Korea could receive in return for reversing its decision to withdraw from the NPT. The talks were conditioned on North Korea’s willingness to allow IAEA to monitor the refueling operation and to safeguard the fuel rods already removed. North Korea agreed to meet with IAEA inspectors to discuss ways to preserve the fuel rods that North Korea was removing from its 5-MW(e) reactor in order to permit a future assessment of the reactor’s operating history. North Korea rejected IAEA’s proposal for preserving the fuel rods. South Korea responded by putting its military on a higher state of alert. Following a failure of negotiations aimed at subjecting the refueling operation to international safeguards, IAEA’s Director General reported to the United Nations Secretary General that the agency was quickly losing its ability to verify the amount of North Korea’s past production of plutonium. The President of the United Nations Security Council, on behalf of the Council members, urged North Korea “to proceed with the discharge operations at the five megawatt [5-MW(e)] reactor in a manner which preserves the technical possibility of fuel measurements, in accordance with IAEA’s requirements.” In deference to China, the statement did not include a direct threat of economic sanctions. IAEA’s Director General told the United Nations Security Council that North Korea had removed all but 1,800 of the 8,000 fuel rods in the 5-MW(e) reactor and that by mixing them up, North Korea had made it impossible to reconstruct the operating history of the reactor. IAEA members voted to exempt North Korea from receiving IAEA technical assistance—a benefit accorded IAEA members. North Korea responded by quitting IAEA and threatening to expel the IAEA inspectors. The United States announced that it intended to pursue global economic sanctions against North Korea if it did not allow IAEA inspectors to examine the spent fuel rods removed from the 5-MW(e) reactor in Yongbyon. North Korea responded that it would treat such sanctions as an act of war. The Secretary of Defense confirmed that the United States had built up its troops in South Korea. The U.S. Ambassador to the United Nations announced that the United States would begin consultations with other countries to implement sanctions against North Korea. Former President Carter visited Pyongyang, North Korea. While there, Kim Il Sung—the North Korean leader at that time—offered to freeze North Korea’s nuclear program in return for the resumption of high-level talks between the United States and North Korea. Under the proposal, IAEA would be allowed to (1) monitor the fuel rods in the spent fuel pond and (2) engage in some routine monitoring of North Korea’s other nuclear facilities to maintain IAEA’s continuity of safeguards at the sites. However, the issue of North Korea’s past production of plutonium would be deferred. The United States offered to (1) resume high-level talks with North Korea and (2) suspend its efforts to have the United Nations impose sanctions on North Korea once the talks were under way. At about the same time, North Korea took steps to follow up on pledges it had made to former President Carter. Specifically, North Korea extended the visas for IAEA inspectors and proposed a date for a summit with South Korea. The United States and North Korea announced that their negotiations would resume on July 8, 1994. The United States and North Korea began a third round of negotiations to discuss, among other things, a proposal by the North Korean leader to freeze North Korea’s nuclear program. The negotiations—held in Geneva—terminated prematurely because of the death of North Korea’s leader on July 8, 1994. The United States and North Korea resumed the Geneva negotiations interrupted by the death of Kim Il Sung. The negotiations reportedly explored North Korea’s willingness to abandon its graphite-moderated reactors in return for a U.S. commitment to, among other things, make arrangements for supplying North Korea with light-water reactors. The United States and North Korea issued an “Agreed Statement” describing “elements should be part of a final resolution of the nuclear issue” in North Korea, including (1) a freeze on North Korea’s nuclear program in exchange for light-water reactors and interim energy supplies and (2) movement toward the full normalization of political and economic relations. The United States and North Korea held simultaneous working-level meetings in Berlin and Pyongyang to discuss plans for replacing North Korea’s reactors with light-water reactors and establishing liaison offices in each other’s capitals. The third round of high-level negotiations between the United States and North Korea resumed in Geneva. The United States and North Korea concluded the “Agreed Framework,” an agreement intended to produce an overall settlement of the nuclear issue on the Korean Peninsula. In conjunction, the United States provided an October 20, 1994, letter from President Clinton to Kim Jong Il—the Supreme Leader of North Korea. The letter stated, among other things, that the President would use “the full powers” of his office to facilitate the arrangements for the financing and construction of the light-water reactor project and for the funding and implementation of interim energy supplies. (See app. I for information about the (1) agreement’s content and (2) President’s letter to the Supreme Leader of North Korea.) The Case-Zablocki Act of 1972 requires the Secretary of State to transmit to the Congress, for notification rather than approval purposes, any international agreement—other than a treaty—to which the United States is a party as soon as practicable after the agreement has entered into force but no later than 60 days thereafter. The act was intended to establish a procedure for regularly informing the Congress about the foreign affairs activities of the executive branch. The act specifically authorizes the Secretary of State to determine if a particular U.S. undertaking constitutes an international agreement. Neither the Case-Zablocki Act nor its legislative history provides concrete guidance about which international agreements must be submitted to the Congress. Not long after the act’s passage, Senator Case requested the Department of State to clarify the types of agreements covered by the act. The State Department replied that the act “is intended to include every international agreement other than a treaty brought into force with respect to the United States . . . regardless of its form, name or designation, or subject matter.” In 1981, the State Department issued regulations describing, among other things, its criteria for assessing whether a U.S. undertaking constitutes an international agreement within the context of the act. According to State’s regulations, an undertaking constitutes an international agreement if (1) the parties to the agreement intend the undertaking to be legally binding; (2) it involves a “significant” arrangement or undertaking; (3) the language describing the undertaking is precise and specific; and (4) it necessitates the involvement of two or more other parties. State’s regulations also provide for the consideration of the agreement’s form—specifically, the extent to which a U.S. agreement follows the structure, or form, customarily used in international agreements. A failure to use the customary form for international agreements constitutes evidence of the parties’ intent not to be bound by the arrangement. However, an agreement’s form may not be relevant if the agreement’s content and context reveal that the parties actually intended to create a binding international agreement. Consistent with State’s regulations, several authorities on international law have suggested that the intent of the countries involved is the critical factor in determining whether a particular arrangement establishes either a nonbinding political agreement or a legally binding international agreement. Because countries are generally reluctant to explicitly state in an international agreement that the agreement is nonbinding or that it lacks legal force, inferences about the parties’ intent must be drawn from, among other things, (1) the language used in the agreement; (2) the subsequent actions or statements of the parties; and (3) the negotiating history, to the extent that an agreement is ambiguous. Agreements containing general goals or broad declarations of principles are usually considered too indefinite to create enforceable obligations. Department of State officials said that both the United States and North Korea intended the Agreed Framework to be a political arrangement that would not create binding legal obligations under international law. State officials said that the United States executed a nonbinding political agreement because it would not have been in the United States’ interest to accept an internationally binding legal obligation to provide nuclear reactors and alternative energy to North Korea. Instead, they said that the United States wanted the flexibility to respond to North Korea’s policies and actions in implementing the Agreed Framework—flexibility that a binding international agreement, such as a treaty, would not have provided. According to State Department officials, the Department provided the text of the Agreed Framework to the Congress informally rather than under the Case-Zablocki Act because it considered the arrangement to be a nonbinding political agreement that did not meet all of the criteria established for notifying the Congress. Specifically, although the Agreed Framework (1) necessitates the involvement of two or more parties and (2) involves a significant undertaking, it does not satisfy State’s three other criteria. According to State, its position that the agreement is nonbinding is supported by (1) the agreement’s language and form, which are not typical of binding international agreements, and (2) the fact that neither side has since acted in a manner that is inconsistent with such an understanding. In connection with the language used in the Agreed Framework, State maintains that the most important indicator of the parties’ intent, concerning the document’s legal status, is the choice of the phrase introducing the document’s operative clauses. Specifically, the parties used the phrase “decided to take the following actions” instead of the word “agreed.” State says that its treaty experts carefully chose this language because the word “decided” is routinely used in connection with nonbinding political agreements (e.g., the Nuclear Suppliers Group Guidelines, the Missile Technology Control Regime), whereas the word “agreed” is used before the operative clauses when the intent is to create a legally binding agreement. State also notes that the language of the operative clauses generally does not create specific commitments, but rather general objectives toward which the two sides are working. Such general language is typical of political agreements. According to State, the language of the Agreed Framework was specifically crafted on the basis of the precedents established in other nonbinding political accords, in a manner that leaves no ambiguity whatsoever as to the intent of the two sides to create a nonbinding political agreement. While we appreciate State’s position, in our view, the language of the Agreed Framework is not entirely clear about the intent of the United States and North Korea to establish a nonbinding political agreement. Although several of the agreement’s provisions contemplate the need for future agreements, others are expressed in more concrete and even directive language. For example, the Agreed Framework specifies that the United States, through a consortium, “will make arrangements to offset the energy foregone due to the freeze of the DPRK’s graphite-moderated reactors and related facilities, pending completion of the first LWR unit.” Furthermore, a subsection describing this responsibility states that “lternative energy will be provided in the form of heavy oil for heating and electricity production” and that “eliveries of heavy oil will begin within three months of the date of and will reach a rate of 500,000 tons annually, in accordance with an agreed schedule of deliveries.” Finally, the agreement does not explicitly discuss the parties’ intentions, and we are not aware of anything in the negotiating history of the agreement that clearly delineates the parties’ intentions. Nevertheless, the Agreed Framework’s tone and form, and particularly the subsequent actions of the United States and North Korea, suggest that the Agreed Framework was not intended to be a binding international agreement. The agreement consists of four general pledges, all of which are consistent with the kind of broad declaration of goals and principles that characterize nonbinding international agreements. Furthermore, as pointed out by the State Department, the agreement omits provisions that would normally be included in a binding agreement. The omitted provisions include a provision on the agreement’s entry into force and the process for amending the agreement and for resolving disputes. The subsequent actions by the United States and North Korea also suggest that the Agreed Framework was intended to be a nonbinding, preliminary arrangement. In a joint press statement on June 13, 1995, at Kuala Lumpur, Malaysia, the two countries reaffirmed their “political commitments to implement the . . . Agreed Framework.” Although this appears to be a clear expression of the parties’ intent, the statement alone may not be of major significance since it was made nearly 8 months after the agreement was signed and communicated informally. Of greater significance was the conclusion of two binding international agreements between (1) the United States, South Korea, and Japan establishing the Korean Peninsula Energy Development Organization (KEDO) and (2) KEDO and North Korea for supplying the reactors and alternative energy. Taken together, these binding international agreements—described in concrete and specific terms—effectively incorporate the Agreed Framework’s provisions on providing the reactors and alternative energy to North Korea. In view of the above, we believe that the Agreed Framework can properly be described as a nonbinding political agreement. We are also mindful of the broad authority accorded the executive branch in the area of foreign affairs and believe that the State Department’s determination that the Agreed Framework is a nonbinding political agreement is a proper exercise of that authority. As noted earlier, the Case-Zablocki Act specifically authorizes the Secretary of State to determine if a particular U.S. undertaking constitutes an international agreement. As a nonbinding political agreement, the Agreed Framework’s pledges and agreements are not legally enforceable. Moreover, the Agreed Framework did not have to be transmitted to the Congress under the Case-Zablocki Act. However, given the agreement’s political importance and the fact that most of its provisions have been incorporated into binding international agreements, the agreement’s broad pledges could have the effect of pressuring the Congress to appropriate moneys to implement an agreement with which the Congress had little involvement.Nevertheless, funding for the Agreed Framework is essentially a congressional matter, and disagreements about any of its particulars can be expressed through conditions and limitations on the activity’s appropriations. Indeed, for fiscal year 1996, the Congress established conditions on the provision of funds for KEDO that require the President to make certain determinations about the light-water reactor project and to certify the determinations in writing to the appropriations committees.The Congress can also enact resolutions or bills expressing its position on the Agreed Framework and, for areas within its authority, enact legislation that would supersede the provisions with which it disagrees. If the Agreed Framework had been structured as a treaty or some other form of binding international agreement, it would have been subjected to greater formal congressional oversight. Under the U.S. Constitution,treaties must be approved by a two-thirds majority of the Senate. Such scrutiny could have led to the rejection of the Agreed Framework,consent with added conditions, or unconditional consent. If the Agreed Framework had been considered another form of binding international agreement, it would have been subject to the Case-Zablocki Act. As a treaty or formal international agreement approved by the United States and North Korea, the Agreed Framework would have been regarded as having established legally binding commitments, under both international and domestic law. Therefore, it could be subject to interpretation by U.S. courts. However, even if the Agreed Framework was considered part of the domestic law of the United States, the Congress could still—within its constitutional authority—enact legislation superseding the agreement’s provisions, including legislation imposing funding restrictions. For example, the Congress could choose not to fund the light-water reactor project, even in the face of a binding international commitment to do so. According to KEDO, it places a high priority on protecting the present and future members of KEDO against the risk of liability for nuclear incidents that may arise from the light-water reactor project in North Korea. As a result, KEDO developed a “comprehensive risk management program” to protect itself and its member countries from such risk. According to KEDO, the foundation of this protective program is contained in the agreement establishing KEDO (KEDO agreement) and the agreement between KEDO and North Korea for supplying the reactors (supply agreement). Over time, KEDO plans to negotiate additional protections which, it believes, will fully shield KEDO and its members from the risk of nuclear liability. Among other things, KEDO plans to (1) ensure that KEDO is not designated the “operator” of the reactors; (2) obtain adequate indemnity protection and the best insurance coverage available for both nuclear and conventional risks;(3) obtain widespread recognition throughout the international community of KEDO’s independent legal status and, consequently, the limited liability of its members; and (4) provide safe and reliable plants. Our analysis of the existing nuclear liability protections confirms that the foundation of KEDO’s protection program is in place. KEDO is aware that additional steps need to be taken and, as a result, plans to build upon the foundation of its existing coverage to fully shield KEDO and its members from possible liability claims. Without knowing the contents of future agreements and contracts between KEDO and other project participants, it is not possible to fully assess the adequacy of the liability protections that will be provided to KEDO and its members. Nevertheless, our assessment of the liability provisions in the KEDO and supply agreements and KEDO’s plan to secure additional protections, suggests that KEDO and its members—including the United States—will be adequately protected against nuclear damage claims from North Korea and third-party countries. Finally, according to KEDO, it will neither ship any fuel assemblies to North Korea nor allow the reactors to be commissioned “nless and until KEDO and its members consider that all aspects of the risk management program are in place.” The supply and KEDO agreements contain a number of protections that are intended to preclude North Korea from making claims against KEDO or KEDO members for damages from a nuclear incident. The principal protection requires North Korea to set up a legal mechanism for satisfying all claims brought within North Korea. The supply agreement also contains a provision precluding North Korea from bringing claims against KEDO for any nuclear damage or loss, and both the supply and KEDO agreements contain a general limitation-of-liability provision that appears to cover nuclear damage. The principal protection in the supply agreement requires North Korea to “ensure that a legal and financial mechanism is available for satisfying claims brought within North Korea for damages from a nuclear incident.”Consistent with international practice, the agreement specifies that “he legal mechanism shall include the channeling of liability in the event of a nuclear incident to the operator on the basis of absolute liability.” In this connection, North Korea must also ensure that the operator—a North Korean entity—is able to satisfy potential claims for nuclear damage. North Korea has not yet enacted legislation, referred to as “channeling legislation,” to establish its legal and financial mechanism for implementing its responsibilities under the Agreed Framework. In the next few years, KEDO intends to help North Korea draft the required legislation and to monitor North Korea’s efforts to establish the financial mechanism for paying possible nuclear damage claims. The supply agreement also contains a second provision that precludes North Korea from bringing any nuclear damage or loss claims against KEDO and its contractors and subcontractors. The scope of this provision is broad and, according to KEDO, covers claims for nuclear damage caused both before and after the reactors have been turned over to North Korea. Third, the supply agreement explicitly states that North Korea shall seek recovery solely from the property and assets of KEDO for any claims arising (1) under the supply agreement or (2) from any actions of KEDO and its contractors and subcontractors. Correspondingly, the KEDO agreement states that “o member shall be liable, by reason of its status or participation as a Member, for acts, omissions, or obligations of the Organization.” Taken together, the described provisions appear to bar North Korea from making any nuclear claims against KEDO’s member countries—including the United States—in North Korean courts. However, none of the existing provisions explicitly precludes claims by North Korean nationals or North Korean nongovernmental entities. According to KEDO, it intends to ensure that the channelling legislation, when enacted by North Korea, will protect KEDO and its members from possible claims from these sources. The largest concern of KEDO and KEDO’s members may be nuclear damage claims brought by third parties in courts and tribunals outside of North Korea. Unlike the Paris and Vienna Conventions—the principal international conventions on third-party nuclear liability—which include provisions limiting the jurisdiction for hearing claims to the courts in the country where the nuclear incident occurs, the supply agreement does not preclude claims from being brought in jurisdictions outside of North Korea. Although there does not appear to be any clear principle of international customary law governing the extent of a country’s liability for nuclear damage, it is generally recognized that a country is liable for damage caused to the environment of another country. Thus, once North Korea assumes control over the reactors, North Korea and the operator of the reactors would likely become the primary targets of claims for nuclear damage incurred outside of the country. Nevertheless, lawsuits could also be brought against KEDO and its members. To help address this possibility, the supply agreement requires North Korea to (1) enter into an agreement for indemnifying KEDO and (2) secure nuclear liability insurance or other financial security to protect KEDO and its contractors and subcontractors from any third-party claims in any court or forum resulting from a nuclear incident from the North Korean reactors. Also, as discussed earlier, the KEDO agreement contains a general limitation-of-liability provision which specifies that KEDO members are not liable for the actions or obligations of KEDO. This provision also appears to cover nuclear damage liability for lawsuits brought outside of North Korea. The provision requiring indemnification and insurance is intended to provide KEDO with adequate protection against suits brought in courts outside of North Korea. Even so, as the provision is written, the indemnity and insurance protections extend only to KEDO and its contractors and subcontractors, not specifically, to KEDO’s members. Thus, it is not clear that these protections would cover possible awards by foreign courts against individual KEDO members, including the United States. Furthermore, the supply agreement does not address the extent of the indemnity and insurance protections that must be obtained, leaving questions about whether North Korea will be required to indemnify KEDO (1) for the entire amount of any damage awards obtained in foreign courts or for some fixed, lesser amount and (2) if North Korea’s insurance and other financial security do not cover all claims. In addition to the indemnity and insurance protections that the United States will have as a member of KEDO, even if a foreign court entertained a nuclear damage claim against the United States, the United States could assert the defense of “sovereign immunity” as a bar to the court’s hearing the claim. Moreover, consistent with choice of law principles, a foreign court could choose to apply North Korean law in nuclear damage claim actions. As discussed earlier, this would be the prospective channeling legislation that, with few exceptions, would make the North Korean operator absolutely liable for nuclear damages. The issue of whether KEDO’s members could be found liable in foreign courts for KEDO’s activities depends, in large part, on whether KEDO would be recognized as (1) a separate international entity with its own “legal personality” or (2) an entity of the United States, the Republic of Korea (South Korea), and Japan—the three original KEDO members. If the former, presumably lawsuits would be directed exclusively against KEDO; but if the latter, lawsuits could be directed against individual KEDO members. According to the International Court of Justice, an international organization is viewed as having a separate legal personality or identity from its creators if the organization (1) is capable of possessing and asserting international rights and duties, (2) has its own organizational structure, and (3) cannot discharge its functions without a separate legal identity. In this connection, one authority on international law has written that when the legal personality of an international organization is questioned, some of the issues that must be addressed are whether the organization (1) was set up by countries for an independent activity related to the functioning of the international community; (2) has specific functions that are consistent with the realization of that purpose; and (3) is independent of the directions of the organization’s member countries. Much of the contents of the KEDO agreement suggest that KEDO was intended to be an international organization with a separate and distinct legal personality. First, the agreement was concluded by the United States, Japan, and South Korea for the purpose of carrying out the light-water reactor project—a project arguably of importance to the international community. Second, each of the original KEDO members has equal representation on KEDO’s Executive Board—the body authorized to carry out KEDO’s functions—and the agreement contemplates that additional countries may become members. Third, the agreement clearly anticipates the involvement of other countries and international entities to carry out the light-water reactor project. For example, the agreement authorizes KEDO to (1) receive funds from other countries; (2) coordinate with public entities—including countries and national and international institutions; and (3) conclude agreements, contracts, and other arrangements with international organizations for the purpose of implementing the project. Finally, the agreement provides that the executive director—KEDO’s chief administrative officer and his staff—shall (1) “not seek or receive instructions from any government or from any other authority external to the Organization” and (2) “refrain from any action that might reflect on their position as international officials responsible only to the Organization;” calls upon “ach Member . . . to respect the exclusively international character of the responsibilities of the Executive Director and the staff . . . .;” and confers on KEDO functions that are characteristic of an entity with a separate legal personality. For example, the agreement states that KEDO “shall possess legal capacity, and, in particular, the capacity to: (1) contract; (2) lease or rent real property; (3) acquire and dispose of personal property; and (4) institute legal proceedings.” Taken together, the provisions in the KEDO agreement provide strong support that KEDO is an international organization with separate legal status. We reach this conclusion notwithstanding that certain aspects of the KEDO agreement suggest the contrary. First, unlike the work of many international organizations, KEDO’s purpose is specific, intended to be relatively short-lived, and, as reflected in the Agreed Framework, substantially initiated by one party—the United States. Moreover, although the supply agreement between KEDO and North Korea specifically recognizes KEDO as an international organization with an identity separate from its members, North Korea—the principal beneficiary of the reactor project—is the only other party to that agreement. Furthermore, while other countries can join KEDO, they cannot become members of KEDO’s Executive Board. And, finally, the KEDO agreement does not state that (1) KEDO is intended to be an international organization with a separate legal personality or (2) the agreement is to be governed by international law. The argument that KEDO could be viewed as essentially a U.S. entity is also supported by KEDO’s personnel structure. The KEDO agreement confers broad authority on KEDO’s executive director to carry out KEDO’s activities.The executive director is currently a United States citizen, and if a replacement is needed, the new executive director would likely be a United States citizen. Furthermore, U.S. citizens occupy almost half of the high-level positions in KEDO’s organizational structure. The supply agreement also specifies that the architectural and engineering firm that KEDO will use to oversee the light-water reactor project will be a U.S. firm. On balance, we believe that the reasons for finding KEDO to be an international organization with separate and distinct legal status from its members outweigh the reasons to the contrary. As a result, we believe that foreign courts should uphold KEDO’s status as an independent entity and, thus, not allow suits against individual KEDO members—including the United States. Nevertheless, we cannot predict how foreign courts would decide—a caveat that also applies to the general limitation-of-liability provision in the KEDO agreement. As discussed earlier, this provision precludes the liability of KEDO’s members for the actions of KEDO. However, foreign courts in those countries that are not bound by the KEDO agreement could choose not to apply the protection for nuclear damage claims. This issue could be significant, for example, in suits brought in the People’s Republic of China and Russia—third-party countries that would appear to be the most likely to suffer damage from a nuclear incident in North Korea. KEDO recognizes that it must build upon the foundation of coverage already provided in the supply and KEDO agreements to fully shield itself and its members from possible third-party nuclear liability claims. As a result, in a future agreement—termed a “protocol”—KEDO intends to ensure that the specific indemnity and insurance protections that it negotiates are also extended to KEDO’s members. In addition, according to KEDO, the protocol will establish the level of indemnity protection to be provided—an amount which, at a minimum, will be consistent with international norms.Finally, KEDO plans to negotiate additional liability, indemnification, and insurance protections in its future contracts with contractors and subcontractors. According to KEDO, “nless and until KEDO and its members consider that all aspects of the risk management program are in place, KEDO will not ship any fuel assemblies to the DPRK or allow commissioning of the LWR plants—without which there can be no possibility of nuclear liability for KEDO, or for its members.” At least two other sources of potential nuclear liability could affect the United States as a KEDO member. These include liability for nuclear damage occurring before the transfer of the reactors to North Korea and from nuclear waste disposal activities in North Korea. First, KEDO is responsible for overseeing the light-water reactor project prior to transferring the completed reactors to North Korea. KEDO’s obligations include (1) ensuring that the design, manufacture, construction, testing, and commissioning of the light-water reactor plants are done safely and (2) testing the reactors before North Korea’s takeover. KEDO recognizes that a nuclear incident could occur during the reactors’ commissioning and testing period. However, it contends that the radiological effects of any discharges or omissions would be minimal, unlikely to give rise to substantial claims, and, in all likelihood, limited to North Korea. The supply agreement does not specifically deal with nuclear liabilities arising before the reactors are transferred to North Korea. However, as discussed earlier, the agreement prohibits North Korea from bringing any nuclear damage or loss claims against KEDO—a prohibition that KEDO and State believe covers such liabilities. KEDO still wants to ensure that it is never the “operator” of the reactors since it lacks the technical capability to perform the testing and because it wants to avoid potential liabilities that could flow to the “operator” under the channeling legislation. Thus, KEDO plans to structure the arrangements for the reactors’ testing so that North Korea, a North Korean entity, or a KEDO contractor is the operator during the testing period. While the respective views of these entities is not known, it seems unlikely that another party would assume the responsibility for testing the reactors without being compensated by KEDO. A second area of potential liability involves the disposal of nuclear waste. As specified in the Agreed Framework, North Korea is primarily responsible for the safe storage and disposal of radioactive wastes and spent fuel—the by-product of the reactors. As a result, in the event of nuclear damage outside of North Korea, North Korea would likely be the primary target for damage claims. However, the agreement also requires KEDO to cooperate with North Korea to ensure the safe storage and disposition of the light-water reactors’ spent fuel—a role that could expose KEDO and its members to liability. According to KEDO, its authority under the supply agreement to require North Korea to relinquish ownership of the nuclear waste from the light-water reactors and to transport the fuel out of North Korea, as well as the future agreement between KEDO and North Korea on the safe disposal of the waste, will allow KEDO to structure the waste disposal arrangements to avoid any liability on the part of KEDO. This protocol is not expected to be negotiated for several years. The following sections provide information on other nuclear liability and safety-related requirements in the supply agreement. To the best of our knowledge, North Korea is not currently a party to any existing international conventions on nuclear liability. Furthermore, although the supply agreement requires North Korea to ensure that a legal and financial mechanism is available for satisfying nuclear claims brought within North Korea, to our knowledge, North Korea has not yet (1) established this mechanism nor (2) enacted domestic legislation on nuclear liability. North Korea is responsible for (1) the safe operation and maintenance of the light-water reactors, (2) ensuring appropriate physical and environmental protections, and (3) cooperating with KEDO for the safe storage and disposal of radioactive waste, including spent fuel, in accordance with a set of codes and standards equivalent to those of the IAEA and the United States. The supply agreement also requires North Korea to implement appropriate nuclear regulatory standards and procedures to ensure the safe operation and maintenance of the light-water reactors. The supply agreement also imposes monitoring and reviewing responsibilities. Specifically, after the completion of the light-water reactors, KEDO and North Korea are required to conduct safety reviews to ensure the reactors’ safe operation and maintenance. North Korea must provide the necessary assistance to enable expeditious reviews and give due consideration to the results of such reviews. In the event of a nuclear emergency or accident, North Korea must permit immediate access to the site and provide information to KEDO personnel so that they can determine the extent of safety concerns and provide safety assistance. KEDO must provide a comprehensive training program, including a full-scope reactor simulator, which is standard nuclear industry practice.The details of the training program are to be specified in a future agreement between KEDO and North Korea. Consistent with standard nuclear industry practice, KEDO must also provide any technical support services that KEDO deems necessary for the operation and maintenance of the light-water reactors for 1 year after each reactor’s completion. North Korea must provide qualified operators trained by KEDO to participate in the commissioning of the reactors. KEDO is responsible for ensuring that the design, manufacture, construction, testing, and commissioning of the light-water reactors are in compliance with nuclear safety and regulatory codes and standards equivalent to those of the IAEA and the United States. A KEDO official told us that KEDO’s contract with the Korea Electric Power Corporation will obligate the contractor to design and construct the reactors in compliance with these codes and standards. KEDO is also responsible for the design and implementation of a quality assurance program in accordance with the codes and standards of the IAEA and the United States. The quality assurance program must include appropriate procedures for the design, materials, manufacture and assembly of equipment and components, and quality of construction.KEDO must also guarantee that the major components provided by the contractors and subcontractors will be new and free from defects in design, workmanship, and material for 2 years after completion, but no longer than 5 years after the date of shipment of the reactors’ major components. Furthermore, KEDO must guarantee that the civil construction work for the reactors will be free of defects in design, workmanship, and material for 2 years after completion. Finally, consistent with the nuclear industry’s standard practice, KEDO must guarantee the fuel for the initial loading for each of the reactors. North Korea also has safety responsibilities. Once KEDO completes the site survey, North Korea must issue a site takeover certificate granting KEDO permission to begin the preliminary work at the site. Following that—and before beginning the site’s excavation—North Korea’s nuclear regulatory authority must issue a construction permit to KEDO. The nuclear regulatory authority must also issue a commissioning permit that is based on its review of the final safety analysis report before KEDO can load the reactors’ fuel. Finally, to support North Korea’s issuance of an operating permit to the operator, KEDO must provide the results of the nuclear commissioning tests and the operator training records to North Korea. Prior to the shipment of any fuel assemblies to North Korea, North Korea must observe the provisions of several international conventions—the Convention on Nuclear Safety, the Convention on Early Notification of a Nuclear Accident, the Convention on Assistance in Case of a Nuclear Accident or Radiological Emergency, and the Convention on the Physical Protection of Nuclear Material. Furthermore, North Korea must (1) apply IAEA’s safeguards to the reactors and any nuclear material transferred, used, or produced pursuant to the supply agreement and (2) provide effective physical protection, in accordance with international standards, for the reactors and these nuclear materials. The Atomic Energy Act of 1954, as amended, (the act) requires the United States to execute an agreement for cooperation with a recipient nation or group of nations before exporting major U.S. reactor components or nuclear materials abroad. It is too early to say whether the United States and North Korea will need to conclude an agreement for nuclear cooperation because the decisions about what, if anything, the United States will supply for the reactors have not yet been made. These uncertainties are likely to exist until at least 1997, when arrangements for supplying some of the equipment may be negotiated. Nevertheless, an agreement appears likely because a U.S. firm currently supplies a major component for the reactors expected to be supplied to North Korea. The supply agreement between KEDO and North Korea specifies that the reactors will be the “advanced version of U.S.-origin design and technology currently under production.” The referenced reactor—known as the Korean standard nuclear power plant—has two coolant loops and a generating capacity of about 1,000 MW(e). Reactors of this type are currently being built at South Korea’s Ulchin 3 and Ulchin 4 nuclear plants for the Korea Electric Power Company, the state-run utility and prime contractor for the light-water reactor project. The Korean standard nuclear power plant is based on a U.S. design that was transferred to South Korea by Combustion Engineering, Inc.—a U.S. company. Beginning in 1987, Combustion Engineering, Inc., transferred its “System 80” reactor design technology, such as its technical documents and computer codes, and has since worked with South Korea in modifying the reactor’s design to meet South Korea’s particular needs, including differences in South Korea’s geology and topography. The resulting reactor combines Combustion Engineering, Inc.’s “System 80” technology with several advanced features of the company’s “System 80 +” reactor technology. South Korea manufactures most of the equipment needed for its reactors. However, it relies on Combustion Engineering, Inc., to manufacture and supply a large portion of the equipment for its reactors’ nuclear steam supply system, including reactor coolant pumps—a major reactor component. The company supplies its reactor equipment and technology under subcontracts with South Korean entities, including the Korea Heavy Industries & Construction Co., Ltd., and the Korea Atomic Energy Research Institute. Section 123 of the act provides that the United States must execute an agreement for peaceful nuclear cooperation before major reactor components or nuclear materials may be exported from the United States.As discussed, Combustion Engineering, Inc., manufactures and supplies coolant pumps—a major component—for the standard South Korean reactor. If South Korea contracts with Combustion Engineering, Inc., for this component for the North Korean reactors, an agreement for nuclear cooperation between the United States and North Korea will be needed. Under the act, agreements for cooperation must include the terms, conditions, duration, nature, and scope of the cooperation. The act sets forth nine requirements that must be met in an agreement for cooperation.Specifically, the cooperating party must agree to safeguard all transferred items as long as the items remain under the control of the cooperating party; apply full-scope IAEA safeguards; use any items transferred solely for peaceful purposes; return any transferred items if requested by the United States (if the recipient detonates a nuclear explosive device or terminates or violates an agreement providing for IAEA’s safeguards); transfer any U.S. nuclear items to a third country only if it obtains the prior approval of the United States; maintain adequate physical security over the transferred items; provide the United States with a right of consent over reprocessing, enrichment, and alteration in form or content; provide the United States with a right of consent over how certain specified nuclear materials will be stored; and provide the United States with guaranties and consents applicable to sensitive nuclear technology. The act requires that any proposed agreement for cooperation be negotiated by the Secretary of State, with the technical assistance and concurrence of the Secretary of Energy and in consultation with the Director of the Arms Control and Disarmament Agency and the NRC. The Secretaries of State and Energy are responsible for jointly submitting the proposed agreement to the President. The proposed agreement is to be accompanied by a Nuclear Nonproliferation Assessment Statement—prepared by the Arms Control and Disarmament Agency—which, among other things, must analyze the consistency of the agreement with the act’s requirements. If the proposed agreement is approved by the President, the act requires him to submit the agreement to the appropriate committees of the Congress, along with a written determination that the proposed agreement will promote, not constitute an unreasonable risk to, the country’s common defense and security. The need for a future agreement between the United States and North Korea has not yet been resolved because of uncertainties about whether the Korea Electric Power Company or other South Korean nuclear entities, such as the Korea Heavy Industries & Construction Co., Ltd., will contract with Combustion Engineering, Inc., for the supply of major reactor components. These uncertainties are likely to remain until at least the spring of 1997, when Combustion Engineering, Inc., officials hope to receive a request to supply the major reactor components for the project.According to these officials, a request is needed soon because of the long lead time—about 3 years—for manufacturing the components. An agreement for cooperation will be required if Combustion Engineering, Inc., exports a major reactor component for the project. The Department of State is prepared for this possibility and, as part of the Agreed Framework, has already secured North Korea’s commitment to execute one if it becomes necessary. Specifically, the Agreed Framework states, “s necessary, the U.S. and the DPRK will conclude a bilateral agreement for cooperation in the field of peaceful uses of nuclear energy.” If an agreement is executed, according to State, it would not seek to waive any of the statutory requirements for an agreement for cooperation.However, State said that it would need to seek a waiver of section 129 of the act if a U.S. company seeks to transfer major equipment for the light-water reactor project pursuant to an agreement for cooperation with North Korea. That section of the act prohibits U.S. exports of major reactor components, nuclear materials, or sensitive nuclear technology to any country—such as North Korea—that has, among other things, materially violated an IAEA safeguards agreement. According to State, it will neither seek to waive section 129 nor bring into force an agreement for cooperation until North Korea has complied fully with its IAEA safeguards agreement, as called for in the Agreed Framework. In connection with an agreement for cooperation, State also noted that since any transfers of major U.S. reactor components would not occur for many years, the United States would have time to assess North Korea’s performance and decide whether an agreement should be concluded. To determine whether the Agreed Framework is a nonbinding political arrangement, we reviewed and analyzed the contents of the Agreed Framework; the agreement establishing KEDO; and the supply agreement between KEDO and North Korea; relevant U.S. laws, including the Case-Zablocki Act and its legislative history; congressional reports on the act; and State’s regulations for assessing when a U.S. undertaking constitutes an international agreement under the act. We also reviewed and analyzed constitutional requirements for treaties; the texts of other U.S. international agreements; reports of international authorities describing, among other things, the factors in assessing whether an agreement is nonbinding; the text and legislative history of the Congress’s fiscal year 1996 appropriation for the North Korean project; and the President’s October 20, 1994, letter of assurance to the Supreme Leader of North Korea. In addition, we interviewed cognizant State Department officials to discuss State’s criteria for determining when to structure international arrangements as treaties, other forms of binding international agreements or nonbinding political arrangements, and State’s rationale for structuring the Agreed Framework as it did. We used information obtained from these sources to evaluate how the Agreed Framework’s structure affects (1) the legal enforceability of the agreement and (2) congressional oversight. We also used this information to assess how these areas would have been affected if the Agreed Framework had been structured as a binding international agreement, such as a treaty. To determine whether the United States could be held financially liable for a nuclear accident involving the North Korean light-water reactors, we reviewed and analyzed the KEDO and supply agreements; congressional hearings; international conventions on nuclear liability, including the Paris Convention of 1960 and the Vienna Convention of 1963; relevant decisions by international, foreign, and U.S. courts as well as the views of authorities on international nuclear liability; documentation describing KEDO’s “comprehensive risk management program;” and evaluations of KEDO and member state liability, including an assessment by an international authority on nuclear liability. We also conducted extensive interviews with cognizant State and KEDO officials to discuss the adequacy of existing nuclear liability protections, future actions that could affect the issue of nuclear liability, and KEDO’s plan to secure additional protections. Finally, we reviewed State’s reply to the Committee’s August 14, 1995, letter to State on this topic and factored State’s responses into our analyses, as appropriate. To determine whether the United States is responsible for the cost of upgrading North Korea’s existing power grid, we reviewed and analyzed the contents of the supply agreement and reports from congressional hearings related to the issue of the grid upgrades. We also interviewed State and KEDO officials about the results of past negotiations with North Korea on the topic and their positions on who is responsible for paying for the upgrades. Finally, to determine whether the Agreed Framework is being implemented consistent with the applicable laws governing the transfer of U.S. nuclear components, materials, and technology, we reviewed and analyzed the Agreed Framework; the supply agreement; applicable U.S. laws—including the Atomic Energy Act of 1954, as amended by the Nuclear Non-Proliferation Act of 1978; the related legislative histories of these acts; relevant regulations governing the transfers; and KEDO’s request for proposals for a technical support contractor. We also reviewed and analyzed the authorizations granted by the Department of Energy (DOE) for transferring U.S. reactor technology for the North Korean project, including the U.S. companies’ requests for the DOE authorization, DOE’s analysis of the requests, and the views of other agencies about the proposed transfers. In addition, we reviewed the contents of DOE’s authorizations for U.S. technology transfers to other countries requiring a special authorization. We also interviewed State and DOE attorneys as well as the official responsible for administering DOE’s process for authorizing U.S. technology transfers. Furthermore, we contacted officials at the Nuclear Regulatory Commission, KEDO, and Combustion Engineering, Inc., to obtain their views on possible U.S. exports for the project. Finally, we reviewed responses to the Committee’s August 14, 1995, and February 1, 1996, letters to State and DOE, respectively, on this topic and incorporated the agencies’ responses into our analyses, as appropriate. As agreed with the office of the Chairman of the Senate Committee on Energy and Natural Resources, in a subsequent review we will address, among other things, (1) the status of the implementation of the Agreed Framework’s various provisions, including progress on bilateral issues of concern between the United States and North Korea; (2) the costs associated with the agreement; and (3) how procurements will be handled. Jackie A. Goff, Senior Attorney Richard Seldin, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO reviewed the agreement between the United States and North Korea that addresses the threat of North Korean nuclear proliferation, focusing on whether: (1) the agreement is a non-binding political agreement; (2) the United States could be held financially liable for a nuclear accident at a North Korean reactor site; (3) North Korea is obligated to pay to upgrade its existing electric power distribution system; and (4) the agreement is being implemented consistent with the applicable laws governing the transfer of U.S. nuclear components, materials, and technology. GAO found that: (1) the Agreed Framework can be properly described as a nonbinding political agreement; (2) therefore, its pledges, including those involving financial outlays, are not legally enforceable; (3) agreements of this type do not require the Congress's prior involvement or approval and can have the effect of pressuring the Congress to appropriate money to implement an agreement with which it had little involvement; (4) according to the Department of State, the United States executed a nonbinding agreement because it would not have been in the country's interest to legally obligate itself to provide the reactors and interim energy to North Korea; (5) GAO's analysis of the existing nuclear liability protections confirms that the foundation of the Korean Peninsula Energy Development Organization's (KEDO) risk protection program is in place; (6) KEDO plans to obtain additional protections to ensure that KEDO and its members are fully shielded from possible liability claims; (7) without knowing the contents of these future protections, it is not possible to fully assess the adequacy of the liability protection that will be provided to KEDO and its members; (8) nevertheless, GAO's assessment of the liability provisions in the KEDO and supply agreements and KEDO's intention to secure additional protections, suggests that KEDO and its members will be adequately protected against nuclear damage claims from North Korea and third-party countries; (9) according to KEDO, it will not ship any fuel assemblies to North Korea or allow the reactors to be commissioned unless and until KEDO and its members consider that all aspects of the risk protection program are in place; (10) North Korea's existing electricity transmission and distribution system will need to be modernized to distribute the electricity generated by the two light-water reactors being provided; (11) upgrading the power grid could cost as much as $750 million; and thus far, no party has obligated itself to pay for the upgrade; (12) the United States and KEDO maintain that North Korea is responsible; however, North Korea has not yet legally obligated itself to pay; (13) this leaves open the possibility that, in the future, North Korea could exert pressure on others to pay for upgrading the grid; (14) it is too early to say whether the United States and North Korea will need to conclude an agreement for cooperation because decisions have not yet been made about what, if anything, the United States will supply for the reactors; and (15) nevertheless, an agreement appears likely because a U.S. firm currently supplies a major component for the reactors that are to be delivered.
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Transporting cargo by air involves many participants, including manufacturers and shippers who make routine or occasional shipments, freight forwarders who consolidate shipments and deliver them to air carriers, and cargo facilities of passenger and all-cargo air carriers that store cargo until it is placed aboard an aircraft. Figure 1 depicts these participants and the two primary ways in which a shipper can send cargo by air. A shipper may take its packages to a freight forwarder, which consolidates cargo from many shippers and delivers it to air carriers, as illustrated in the top portion of figure 1. The freight forwarder usually has cargo facilities in or near airports and uses trucks to deliver bulk freight to commercial air carriers—either to a cargo facility or to a small-package receiving area at the ticket counter. Freight forwarders operate about 10,000 facilities nationwide. According to TSA, about 80 percent of shippers use freight forwarders. Another way for a shipper to send freight is to directly package and deliver it to an air carrier’s airport sorting center, as pictured in the bottom half of figure 1. Many large companies, including some that produce and distribute perishable goods, have direct accounts with either all-cargo or passenger air carriers. During fiscal year 2000, about 12.2 billion revenue ton miles of freight were shipped in the United States by air. About 22 percent of that total was carried on passenger aircraft; the remainder was carried on all-cargo aircraft. Freight is a significant source of income to airlines, accounting for about 10 percent of scheduled passenger airlines’ revenue and bringing in about $13 billion in 2001. DOT’s projections indicate, moreover, that the amount of freight transported by air will increase faster than the number of passengers in the coming years, thus adding to its importance. Figure 2 shows the amount of air cargo actually transported from fiscal years 1996 through 2001 and the amount that DOT projects will be transported from fiscal years 2002 through 2012. In addition to freight, air carriers also transport mail. In fiscal year 2000, about 2.5 billion revenue ton miles of mail were shipped in the United States by air and transported predominantly on passenger aircraft (about 70 percent of the total). In September 2001, the amount of domestic mail transported by air decreased significantly—down about 68 percent from the revenue ton miles of mail transported in September 2000. DOT’s forecast through 2013 indicates that the amount of domestic mail will resume growth in fiscal year 2004. However, the amount of mail transported by air is not expected to return to 2001 levels during the entire forecast period, in part because of security directives issued by TSA in the aftermath of the September 11th attacks. Figure 3 shows the amount of U.S. mail actually transported by air from fiscal years 1996 through 2001 and the amount that DOT projects will be transported from fiscal years 2002 through 2012. The December 1988 bombing of Pan Am flight 103, along with the crashes in 1996 of ValuJet flight 592 and TWA flight 800, led to increased national concerns about air cargo security. The federal government responded to these incidents with studies of the vulnerabilities in the civil aviation system and recommendations to enhance many aspects of the system, including air cargo security. (See app. I for a chronology of the incidents and the federal response.) For example, the Pan Am bombing led to the passage of the Aviation Security Improvement Act of 1990, which required FAA to begin an accelerated 18-month research and development effort to find an effective explosives detection system to screen baggage and cargo. Following the 1996 crashes, the White House Commission on Aviation Safety and Security (known as the Gore Commission) was created. The Commission recommended, among other things, that FAA implement a comprehensive plan to address the threat of explosives and other threat objects in cargo and work with industry to develop new initiatives in this area. After the 1996 crashes, FAA established the Baseline Working Group and, later, the Cargo Working Group—federal-industry partnerships—to find ways to enhance air cargo security. The terrorist attacks of September 11, 2001, renewed national concern with cargo security. The Aviation and Transportation Security Act, enacted in November 2001, requires the screening of all passengers and property, including cargo, U.S. mail, and carry-on and checked baggage, that is carried aboard commercial passenger aircraft. It also requires having a system in place as soon as practicable to screen, inspect, or otherwise ensure the security of cargo on all-cargo aircraft. The act transferred responsibility for aviation security from FAA to the newly established TSA. In November 2002, the Senate passed proposed legislation on air cargo security. Vulnerabilities have been identified in the air cargo system by the 1996 Gore Commission, DOT’s OIG, TSA, experts with whom we spoke, and other government and industry studies. Specifically, vulnerabilities have been identified in the security procedures of some air carriers and freight forwarders, including the adequacy of background investigations for all persons handling cargo. For example, TSA inspectors have found numerous security violations made by freight forwarders and air carriers during routine inspections of their facilities. Freight forwarders and air carriers are required to have TSA-approved cargo-security programs, and only freight forwarders with an approved security program are permitted to ship freight on passenger aircraft. In addition, DOT’s OIG has reviewed TSA’s known shipper program—which allows shippers that have established business histories with air carriers or freight forwarders to ship cargo on planes—and TSA’s procedures for approving freight forwarders, checking for possible security weaknesses. The known shipper program is TSA’s primary approach for ensuring air cargo security and complying with the cargo-screening requirements of the Aviation and Transportation Security Act. Other security vulnerabilities include possible tampering with cargo during land transport to the airport or at the cargo-handling facilities of air carriers and freight forwarders. The amount of cargo theft that occurs in these locations indicates the security problem. The National Cargo Security Council, a coalition of public and private transportation organizations, estimates that cargo theft among all modes of transportation accounts for more than $10 billion in merchandise losses each year. Furthermore, the Federal Bureau of Investigation estimates that the majority of cargo theft in the United States occurs in cargo terminals, transfer facilities, and cargo-consolidation areas. This type of theft also occurs in other parts of the world. For example, during a series of robberies that took place at the Brussels airport in 2001, robbers stole $160 million in diamonds from the holds of Lufthansa jets. DOT has reported that thefts are often committed by employees or with employee cooperation, and provided examples of thefts perpetrated at the Port of New York/New Jersey (which includes Kennedy International Airport) and the Port of Boston (which includes Logan International Airport). FAA or TSA has implemented a number of key recommendations or mandates to improve air cargo security made over the past 12 years by the Aviation Security Improvement Act of 1990, the Gore Commission, the Cargo Working Group, and DOT’s OIG. (See fig. 4.) For example, in 1999, FAA, in cooperation with the air cargo industry, developed security training guides for air carriers and ground personnel who handle air cargo. However, other recommendations by those groups, such as conducting research and operational tests of technology to screen cargo for explosives, are ongoing and not yet completed by TSA or have not been implemented. According to TSA officials, in 1999 FAA requested funds to conduct a feasibility study on a system of third-party inspections, but the study was not funded by the Congress. Additional information on the key recommendations is provided in appendix III and in the subsequent section of this report. Our research identified numerous actions that would enhance air cargo security in the near-term. These actions include and expand upon some of the key recommendations made since 1990, as well as best practices identified for cargo security in government reports. These actions include using existing technologies, such as explosives detection devices, which are currently used to screen baggage, and conducting further research and development of new technologies, such as blast-hardened cargo containers, that have the potential to improve air cargo security. These actions also include instituting additional security procedures and best practices, such as developing an industrywide cargo profiling system and conducting background checks on all individuals who convey and handle air cargo. Our research identified a number of technologies, such as electronic seals, that have the potential to strengthen air cargo security by making it more difficult for freight to be tampered with during transport by truck from the shipper to the aircraft and in cargo-handling facilities. Other technologies, such as x-ray machines and explosives detection equipment, could be used to screen cargo before it is loaded on aircraft. While each technology has security-enhancing benefits, each one also has potential limitations to implementation that need to be weighed. Table 1 describes these technologies as well as the potential cost, benefits, and drawbacks associated with each. Some of the technologies are discussed in greater detail after the table. Screening Technologies. Both the Gore Commission and the Cargo Working Group recommended using existing technology to screen cargo for explosives and developing new technologies to screen cargo for explosives. Trace explosives detection devices and bulk explosives detection systems, which are currently used to screen passenger baggage for explosive material, could also be used to screen cargo containers. According to TSA, the use of trace devices to screen cargo has shown few problems. Canines have been identified as one of the most effective ways to screen cargo and their use has expanded significantly in recent years, based upon recommendations from the Gore Commission and others. In addition to screening cargo, canine teams are used at airports to respond to suspicious events, such as bomb threats. According to TSA, security experts, and industry officials, canine teams have proven successful at detecting explosives and are the most promising method for screening cargo. As a result, TSA has requested additional funding in its fiscal year 2003 budget to expand the use of canine screening for certain classes of U.S. mail. FAA and the National Academy of Sciences have examined another method for screening cargo for explosives. Pulsed fast neutron analysis uses gamma rays to identify the chemical composition of items in the container by measuring their density. This analysis, however, takes 1 hour per container, and each machine costs about $10 million. As a result, according to an FAA official and an aviation security expert, the financial cost and the time needed to screen a container make this option not viable for current use. Additionally, decompression chambers are used in some countries to screen cargo for bombs. Items to be loaded on a plane are placed in a chamber that simulates the pressures acting on aircraft during takeoff, normal flight, and landing. These conditions will cause explosives that are attached to barometric fuses to detonate. Intrusion-detection technology. Several technologies, including electronic seals and tamper evident tape, could be used to help indicate whether cargo has been tampered with during its chain-of-custody from the point at which a package is sealed by a known shipper to its placement on an aircraft. For example, an electronic seal (also known as a radio seal) is a radio frequency device that transmits shipment information as it passes reader devices and indicates whether a container has been compromised. Once security staff are alerted to a possible problem, they can physically inspect the cargo. Seals range in cost from less than $1 per unit for tamper- evident tape to $2,500 per unit for electronic seals. Within the industry, it is recognized that seals can easily be tampered with, either by entering the cargo without breaking the seal or by removing and replacing the seal. As a result, security experts recommend that seals be used in conjunction with other security procedures as part of a more comprehensive security plan. Additionally, in tests conducted during the fall of 2001, FAA found that electronic seals have limited signal strength and must be read at relatively short, line-of-sight distances. Finally, industry officials have indicated their concern about the use of electronic seals on aircraft because of their potential to interfere with aircraft electronics. Blast-hardened cargo containers. Hardening cargo containers that are loaded onto aircraft has the potential to reduce damage from explosions, according to experts with whom we spoke. These containers are designed to protect aircraft from catastrophic structural damage or critical system failure caused by an in-flight explosion. TSA continues to conduct research in this area, which FAA began in 1991 based on requirements in the Aviation Security Improvement Act of 1990. TSA has tested and approved containers made by two manufacturers for use on aircraft. According to industry representatives, air carriers have resisted using the containers because they are significantly more expensive than standard containers. Specifically, a blast-hardened container costs approximately $15,000, as compared with about $1,000 for a standard container, according to air carrier representatives. Blast-hardened containers also weigh approximately 150 pounds more than standard containers, which adds to the airplane’s fuel costs, according to air carrier representatives. For example, if a Boeing 747 aircraft traveling from New York to Tokyo had blast-hardened containers, the extra weight would result in $5,000 in additional fuel costs, according to an industry official. Furthermore, as blast-hardened containers are bumped and scratched during shipping, their blast-resistant capabilities are reduced and their lifespan may be shortened to less than 1 year, according to an industry official. By comparison, a standard container lasts as long as 8 years, according to industry officials. Industry officials said that the containers have been used by very few air carriers. TSA has also conducted research on hardened hulls—that is, placing blast-resistant liners in the cargo hold to protect the aircraft if an explosion occurs—but liners did not successfully resist explosions in initial testing, according to a TSA official. FAA continues to conduct testing on aircraft hardening (both containers and hulls) at a cost of approximately $3 million per year. Industry and government officials, security experts, and studies we reviewed also identified procedures and best practices to strengthen air cargo security. Some of these activities, such as developing an industrywide cargo profiling system, were recommendations to FAA by the Gore Commission and others; other activities were identified as best practices for companies that transport and handle cargo. (See table 2.) Some of the practices are discussed in greater detail after the table. Cargo profiling. The Gore Commission recommended that FAA work with industry to develop a computer-assisted cargo profiling system that could be integrated into airlines’ and freight forwarders’ reservations and operating systems. Since 1997, FAA and now TSA have been working to develop a cargo profiling system that is similar to the Computer Assisted Passenger Prescreening System. The first phase of developing the cargo profiling system is the nationwide deployment of a database of known shippers. TSA began field-testing a computerized known shipper database in October 2002. About 250 air carriers and freight forwarders have provided information on their known shippers for TSA’s database, which contains about 165,000 shipping companies, according to TSA officials. In addition, the database includes the names of restricted entities from the Department of the Treasury’s Office of Foreign Assets Control. Participants in the field test have the opportunity to query a TSA Internet site to ascertain the status of shippers unknown to them. An electronic message is provided, indicating whether the shipper is known or unknown. If the shipper is known, a unique identification number is electronically provided to the participant and the cargo can be accepted from that shipper as “known shipper cargo.” If the shipper is a restricted entity, the participant receives a warning against receiving shipments from that entity. According to security experts and industry association officials, this system would enhance air cargo security by allowing freight forwarders to quickly determine whether a company is a known shipper. In addition, this system would allow a shipper that is known to one freight forwarder to become known to all freight forwarders. However, during the pilot phase the use of this system is voluntary, and its success will depend, in part, upon widespread participation. According to TSA officials, the agency has made no decision about whether participation will be voluntary after the pilot is completed, at the end of December 2002. According to industry representatives, some freight forwarders are reluctant to participate because of concerns about placing themselves at a competitive disadvantage by including their customers in the database. Oversight and enforcement. To enhance its oversight of freight forwarders and air carriers, TSA conducts routine inspections. According to TSA officials, the agency is considering increasing the frequency of these inspections. To achieve targeted increases in the number of inspections, TSA estimates that it needs to hire several hundred additional cargo inspectors in fiscal year 2003, especially since some of its current inspector workforce will remain with FAA when TSA is transferred to the Department of Homeland Security. Identification checks. Identification checks of individuals making deliveries to freight forwarders and airline cargo facilities would help to ensure the identities of employees of known shippers and has been recommended as a best practice for cargo security by DOT. Freight forwarders and air carriers are not required to check and record identification information for employees of known shippers. TSA regulations require identification checks of individuals who enter restricted areas of airports, which include cargo-handling areas. That information is usually recorded manually, according to industry officials. However, the use of technology such as smart cards can make this process more efficient and reliable, according to security experts. For example, Chicago’s O’Hare Airport, with a $1.5 million research grant provided by FAA in 1997, developed and operationally tested a smart card/biometric- based security access system. This system uses fingerprint biometrics to verify the identity of truck drivers delivering cargo to the airport and information encoded on a smart card to match the driver with the cargo being delivered. The results of the operational tests, completed in July 1999, indicated that fingerprints provide a highly reliable means of confirming driver identity, and that having the cargo manifests and related information on the smart card dramatically reduces the time required to process cargo deliveries. According to TSA officials, the agency does not have plans to further deploy such identification verification technology to airports. Threat information. Dissemination of security-related information, including threat information, to carriers and freight forwarders has been recommended by DOT as a best practice for cargo security across the transportation modes. According to TSA, it provides such information to the aviation industry by means of security directives and information circulars. Since September 2001, TSA has issued three directives related to air cargo. However, industry officials told us that the threat information provided is usually not sufficiently specific to be acted upon by the workers who handle the cargo. Air carrier officials stated that more specific information about threats would allow them to conduct targeted inspections of cargo, which they believe would be more effective than the random inspections that have been proposed in legislation and suggested by some, including DOT’s OIG. However, according to TSA officials, the agency provides the best threat information that is generally available. The Gore Commission and aviation industry representatives have suggested that FAA implement a comprehensive plan to address the threat of explosives and other dangerous objects in cargo. In addition, we have recommended that the federal government adopt a risk management approach to combat terrorism. Without a comprehensive plan for air cargo security that incorporates a risk management approach, TSA and other federal decisionmakers cannot know whether resources are being deployed as effectively and efficiently as possible to reduce the risk and mitigate the consequences of a terrorist attack. Moreover, as air cargo security is viewed in the larger context of transportation and homeland security, the lack of a risk management approach hinders efforts to set strategic priorities. Neither FAA nor TSA has developed a comprehensive plan for air cargo security as recommended by the Gore Commission, which would provide a first step toward meeting the requirement of the Aviation and Transportation Security Act to have a system in place to ensure the security of cargo. TSA officials have told us that the agency intends to issue a long-term plan for cargo security, but they were unsure when that would occur. Meanwhile, according to agency officials, TSA is in the early stages of developing an agencywide strategic plan that is to include the air cargo security program. As of April 2002, the draft strategic plan had identified one performance measure concerning air cargo security. Our analysis indicated that this measure—the progress of federalization of the cargo-screening process—focused more on process than on results. However, TSA has stated that it intends to further develop measures in the future. TSA also said that it would include these measures and their associated goals in its fiscal year 2003 performance plan. Over the past year, we have determined that a risk management approach used by the Department of Defense to defend against terrorism also has relevance for other organizations responsible for security. This approach can provide those organizations with a process for enhancing their preparedness to respond to terrorist attacks and to support decisionmaking to manage security risks in a cost-effective manner. Figure 5 describes this approach. TSA has partially developed a risk management approach. In the fall of 2001, FAA completed an assessment of the threats to and vulnerabilities of air cargo. The assessment examined a single scenario—a terrorist attempting to place a bomb on a commercial passenger aircraft. The assessment did not examine the vulnerabilities associated with the pathways by which shipments are transported by truck or other means from the shipper to the aircraft (see fig. 1 above). According to TSA officials, the agency does not have plans to conduct further threat assessments for air cargo. TSA has not undertaken a criticality assessment—the third element we identified in a risk management approach—and therefore has no explicit criteria for determining the priority of actions to enhance air cargo security. However, according to TSA officials, passenger aircraft security is a higher priority than all-cargo aircraft security. According to TSA officials, their priorities are spelled out in the Aviation and Transportation Security Act, which has laid out specific deadlines dealing primarily with passenger and baggage screening for TSA to address over the past year. As we have reported, TSA has faced an extraordinary challenge in meeting some of those deadlines, such as hiring and training 33,000 employees to conduct passenger security screening by November 19, 2002. The act provides no specific deadlines for enhancing air cargo security but requires having a system in place as soon as practicable to screen cargo on all-cargo aircraft or otherwise ensure its security. Over the past year, with the passage of the Aviation and Transportation Security Act, our nation has placed new emphasis on aviation security. However, few changes have been made to air cargo security, as TSA has focused its efforts on improving passenger and baggage security to meet specific legislative deadlines. The act requires the screening of all cargo aboard commercial passenger aircraft and requires TSA to have a system in place as soon as practicable to screen or otherwise ensure the security of cargo on all-cargo aircraft. The large volume of air cargo and the fact that its delivery is generally considered time-critical result in a limited amount of cargo being screened. Other means to ensure air cargo security include technological and operational improvements that have been identified or recommended by various government and industry groups over the past decade. While TSA has been developing some of these measures, such as blast-hardened containers and a cargo profiling system, it has not implemented other identified improvements. Moreover, TSA lacks a comprehensive plan with long-term goals and performance targets for cargo security, time frames for completing security improvements, and risk-based criteria for prioritizing actions to achieve those goals. A comprehensive plan for air cargo security that incorporates a risk management approach could provide a framework for systematically evaluating and prioritizing the various technological and operational improvements that have already been identified, and for identifying and implementing additional improvements. Such a plan would also provide a framework for developing a system to ensure air cargo security, as required by the act. We recommend that the Under Secretary of Transportation for Security develop a comprehensive plan for air cargo security that includes priority actions identified on the basis of risk, costs of these actions, deadlines for completing those actions, and performance targets. We provided DOT with a draft of this report for review and comment. DOT provided oral comments. FAA’s Deputy Director, Office of Security and Investigations, and agency officials from TSA with responsibility for cargo- security issues generally agreed with the information presented in the report. TSA officials stated that the recommendation was reasonable and that they will consider implementing it as the agency moves forward with its cargo-security program. These officials provided a number of clarifying comments, which we have incorporated where appropriate. As agreed with your offices, unless you 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 Under Secretary of Transportation for Security. Copies will also be made available to others upon request and this report will be available for no charge on GAO’s Web site at www.gao.gov. If you or your staff have any questions, please call me at (202) 512-2834. Individuals making key contributions to this report included Wayne A. Ekblad, Elizabeth Eisenstadt, Colin J. Fallon, Bert Japikse, Maren McAvoy, John W. Shumann, Teresa F. Spisak, and Cindy M. Steinfink. In addition, we would like to acknowledge, in memoriam, the contributions to this report made by Angela Davis. Agency actions and the introduction of new legislation to improve security and safety have often come in reaction to aviation tragedies. The following time line (fig. 6) reflects key changes in air cargo security following the bombing of Pan Am flight 103 over Lockerbie, Scotland; the crashes of ValuJet flight 592 in the Florida Everglades and TWA flight 800 over Long Island; and the terrorist attacks in the United States involving four jet airliners on September 11, 2001. In November 2002, the Senate approved S. 2949. The bill, comprising seven sections, includes clauses affecting air cargo security under Title II. Title II of S. 2949 would instruct TSA to develop a strategic plan to establish systems to screen, inspect, or otherwise ensure the security of all cargo transported through the nation's air transportation system. It also imposes measures that would require TSA to increase inspections of air cargo shippers and their facilities and to work with foreign countries to conduct regular inspections at facilities transporting air cargo to the United States. Title II would require the creation of an industrywide pilot database of known shippers of cargo in passenger aircraft. TSA would also be required to conduct random inspections of freight forwarder facilities, perform an assessment of the current Indirect Air Carrier Program, and report to Congress on the random audit system. Upon the recommendation of the Under Secretary of Transportation for Security, the Secretary of Transportation would be required to suspend or revoke the certificate of a noncompliant freight forwarder. Title II would direct TSA to develop a training program for air cargo handlers. TSA would also be required to create a program for all-cargo air carriers to develop an approved plan for the security of their facilities, operations, cargo, and personnel. Any plan would need to address the security of the carrier’s property at each airport it serves, the background checks for all employees with access to operations, the training for all employees and contractors with security responsibilities, the screening of all flight crews and others aboard flights, the security procedures for cargo, and other necessary measures. Since 1990, recommendations have been made or mandates issued to improve air cargo security by the Aviation Security Improvement Act of 1990, the White House Commission on Aviation Safety and Security (also called the Gore Commission), the Cargo Working Group (an FAA-industry partnership), and DOT’s Office of Inspector General (OIG). Table 3 summarizes key recommendations. The left column describes the recommendation, the group(s) that made the recommendation, and the date it was made; the right column shows the status of the recommendation.
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U.S. air carriers transport billions of tons of cargo each year in both passenger planes and all-cargo planes. Typically, about one-half of the hull of each passenger aircraft is filled with cargo. As a result, any vulnerabilities in the air cargo security system potentially threaten the entire air transport system. GAO agreed to determine the security vulnerabilities that have been identified in the air cargo system, the status of key recommendations that have been made since 1990 to improve air cargo security, and ways in which air cargo security can be improved in the near-and long-term. Numerous government and industry studies have identified vulnerabilities in the air cargo system. These vulnerabilities occur in the security procedures of some air carriers and freight forwarders and in possible tampering with freight at various handoffs that occur from the point when cargo leaves a shipper to the point when it is loaded onto an aircraft. As a result, any weaknesses in this program could create security risks. FAA or the Transportation Security Administration (TSA), which now has responsibility for ensuring air cargo security, has implemented a number of key recommendations and mandates to improve air cargo security made since 1990 by numerous government organizations. For example, FAA and the air cargo industry developed security training guides for air carriers and ground personnel who handle air cargo. However, a few recommendations by those groups, such as conducting research and operational tests of technology to screen cargo for explosives, are ongoing and not yet completed by TSA, or have not been implemented. Federal reports, industry groups, and security experts have identified operational and technological measures that have the potential to improve air cargo security in the near-term. Examples of the measures include checking the identity of individuals making cargo deliveries and implementing a computerized cargo profiling system. In addition, long-term improvements, such as developing a comprehensive cargo-security plan, have been recommended by the above sources, but not implemented by TSA. Each potential improvement measure, however, needs to be weighed against other issues, such as costs and the effects on the flow of cargo. Without a comprehensive plan that incorporates a risk management approach and sets deadlines and performance targets, TSA and other federal decisionmakers cannot know whether resources are being deployed as effectively and efficiently as possible in implementing measures to reduce the risk and mitigate the consequences of a terrorist attack.
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The child welfare system is designed to promote the well being of children by ensuring their safety and permanency and by strengthening families to enable them to successfully care for their children. Families become involved with the child welfare system after a report of abuse or neglect has been made and confirmed. When agency officials determine that a child may be further harmed or mistreated if left in the home, the child may be placed in foster care. The federal government has allocated about $7 billion each year to investigate abuse and neglect of children in this country, provide placements to children outside their homes, and deliver services to help keep families together. The federal Department of Health and Human Services (HHS) is responsible for the administration and oversight of federal funding to states to support the child welfare system. Title IV-E of the Social Security Act, as amended, is a major source of federal funding and is primarily used to pay for the room and board of children in foster care. While HHS is responsible for setting standards and monitoring the nation’s child welfare system, state child welfare agencies are responsible for administering the programs and monitoring the children and their families. Child welfare caseworkers, assisted by their supervisors, are at the core of the child welfare system. They are responsible for the management of individual cases and for performing many critical tasks. For example, child welfare caseworkers investigate reports of abuse and neglect; arrange placements when children must be removed from their homes; develop plans for the care of individual children; conduct visits with the children and foster families; attend court hearings; maintain records on each case; and coordinate with other agencies to obtain services for the children, including mental health care. The primary role of supervisors is to help caseworkers perform these functions, thereby meeting the needs of families and carrying out the agency’s mission. Child welfare agencies face a number of challenges in recruiting and retaining caseworkers and supervisors. We previously reported that low salaries hindered agencies’ abilities to attract and retain child welfare workers and their supervisors. Furthermore, we found that high caseloads, administrative burdens, a lack of supervisory support, and insufficient time to take training were issues that impacted caseworkers’ abilities to work effectively and their decisions about staying in the child welfare profession. CFSA manages the child welfare system for the District. CFSA receives Title IV-E funding as well as other funds to support its programs. In fiscal year 2003, CFSA’s budget included $65 million primarily from two federal sources—Medicaid and Title IV-E. The Medicaid funds are used to cover various expenses related to services for children in foster care, such as specific therapeutic and medically necessary care. Other sources of funding for CFSA include the District government and private grants. In fiscal year 2003, CFSA’s operating budget was $208 million. CFSA’s strategic goals for 2002-2004 are to (1) recruit and retain caseworkers, (2) investigate abuse and neglect reports, (3) expedite permanency for children, (4) recruit and retain foster homes, (5) promote agency and neighborhood-based resources, (6) enhance agency information system, and (7) complete court requirements. Like CFSA, the District’s mental health service agency was placed in receivership in the 1990s. When DMH was established in 2001, the mental health system lacked the infrastructure to meet the needs of children, youth, and their families. Among other problems, DMH lacked a sufficient number of providers to accommodate the needs of the District’s foster care children. To better link foster care children to mental health services, CFSA began to contract directly with mental health providers for services. Consequently, the mental health service delivery system for foster care children was fragmented with no single system of providers or service standards and no centralized information system to track the provision of services to foster care children. Further, the courts had no aggregate information on court-ordered mental health services for foster care children. Mental health services are considered critical for children who have suffered abuse or neglect. For children in the District, assessment and treatment are among the mental health services available through DMH. Assessments are evaluations conducted by mental health professionals to determine the mental health status and treatment needs of an individual. For children in foster care, assessments are generally requested or ordered on a case-by-case basis. Treatment, such as individual or family counseling and group therapy, can be initiated when the result of an assessment indicates that it is needed. Over the years, the Congress has enacted laws and provided funds to help improve the District’s child welfare system. The D.C. Family Court Act of 2001 established the D.C. Family Court and, among other things, established procedures intended to improve interactions between the court and social service agencies in the District. Also, the Congress authorized funds to the District in fiscal year 2002 for the completion of a plan to integrate the District’s computer systems with those of the Family Court and for CFSA’s caseworks to help implement family court reform. On January 23, 2004, the Congress passed the District of Columbia Appropriations Act, 2004, (the act), which included an appropriation of $14 million for foster care improvements in the District. Funds were appropriated for fiscal year 2004 only, to CFSA, DMH, and COG for specific programs. The act appropriated the funds as follows $9 million for CFSA, of which $2 million would be to establish an early intervention program to provide intensive and immediate services to foster children; $1 million would be to establish an emergency support fund to purchase necessary items to allow children to remain in the care of a licensed, approved family member; $3 million would be to establish a student loan repayment program for caseworkers; and $3 million would be to upgrade CFSA’s automated case management system, known as FACES, to a Web-based system and to provide computer technology to caseworkers; $3.9 million for DMH to provide all court-ordered or agency-required mental health screenings, assessments, and treatment to children in the care of CFSA; and $1.1 million for COG to develop a program in conjunction with the Foster and Adoptive Parents Advocacy Center to provide respite care for and recruitment of foster parents. The act also stipulates a timeframe for DMH to provide mental health services to foster care children. The law requires the DMH Director to (1) initiate court–ordered or agency-required mental health services within 3 days of notification, (2) complete court–ordered or agency–required assessments within 15 days of the request, and (3) provide the court with all assessments within 5 days of completion. CFSA has implemented various caseworker recruitment and retention strategies; however, caseworkers told us about several management practices that adversely affected their ability to perform their duties and lowered their morale. The recruitment strategies included posting announcements on the Internet, visiting schools of social work across the country, developing relationships with local schools of social work, and offering monetary incentives. CFSA successfully hired 147 new caseworkers, which enabled the agency to exceed most of its staffing goals and lower caseworkers’ caseloads. Additionally, CFSA has held discussions with staff, established partnerships to allow caseworkers to pursue graduate degrees, and offered monetary incentives to help recruit and retain caseworkers. However, caseworkers and supervisors reported some human capital management issues that were not contributing to a positive work environment. CFSA caseworkers and their supervisors told us about a lack of resources and poor communication and supervision, and that the agency did not have a program to reward good performance. We heard these concerns consistently from caseworkers with varying lengths of service and found these same concerns in agency records of exit interviews. In fiscal year 2003, CFSA conducted several recruitment activities, some of which were new. These recruitment activities followed the recommendations of the court monitor and included several of the strategies endorsed by public and private child welfare organizations. The recruitment activities CFSA used include the following: Recruiting on the Internet. CFSA posted job announcements on the agency’s Web site, and used Internet job sites such as “monster.com”, “ihiresocialworkers.com”, and the Web site for the National Association of Social Workers to recruit caseworkers. Recruiting at schools of social work across the country. CFSA targeted a number of schools across the country by sending recruitment teams, mailing announcements to the schools, and using schools’ internal Web sites to generate employment interest. According to agency officials, targeted schools were located in Delaware, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia. Advertising in media publications. CFSA advertised in media publications such as the Washington Post, Social Work Today—a national magazine for social workers seeking jobs and wanting to connect with others in the social work profession—and the Employment Guide—a national weekly employment magazine. Developing ongoing relationships with local schools of social work. CFSA developed relationships with Howard University, the Catholic University of America, the University of the District of Columbia, George Mason University, Virginia Commonwealth University, and Bowie State University—universities located in the Washington, D.C., metropolitan area. Attending regional and local career fairs. CFSA attended career fairs in New Orleans, New York, and Pennsylvania, and local job fairs in Washington, D.C., and Maryland. Targeting universities and colleges for bilingual and/or bicultural staff. CFSA conducted outreach activities directed to students at colleges focused on producing licensed caseworkers that speak Spanish and are well acquainted with the Latino/Hispanic culture. CFSA recruited at San Diego State University and New Mexico State University—universities with large Hispanic populations. Using monetary incentives. CFSA introduced a number of monetary incentives to attract new caseworkers. CFSA awarded bonuses to newly recruited caseworkers that had achieved a high academic grade point average, needed to relocate, or had bilingual skills. CFSA also established an employee referral program. CFSA employees can receive a $1,000 or 2 days off, if they refer a licensed caseworker to CFSA who joins the agency and completes 6 months of continuous service. Table 1 lists the monetary recruitment incentives CFSA offered and paid in fiscal year 2003. CFSA’s recruitment activities and the resulting new hires enabled the agency to meet or exceed its staffing goals. CFSA hired 147 caseworkers in fiscal year 2003 and by doing so was able to exceed its staffing goals of 300 caseworkers and 60 supervisors. At the end of fiscal year 2003, the agency employed 309 caseworkers of which 285 had masters of social work degrees (MSWs) and 24 had bachelors of social work degrees (BSWs). Additionally, CFSA met its goal to double the agency’s bilingual staff by hiring 5 caseworkers that can communicate in English and other languages such as Spanish and sign language. CFSA’s staffing goals and achievements are summarized in figure 1. Furthermore, according to CFSA managers, the new hires have facilitated reduction of each caseworker’s caseload, as required by the court monitor. As of December 26, 2003, CFSA reported that the average caseload was 17 cases, down from the average of 27 in 2002. However, the court monitor reported that some caseworkers had caseloads that exceeded the September 30, 2003, benchmark for caseload standards set forth in CFSA’s implementation plan. For example, while caseworkers responsible for investigations should carry no more than 16 cases, the caseload ranged from 1 to 39 cases, and 15 workers had caseloads higher than the benchmark. CFSA analyzed its caseworker recruitment effort and identified areas for improvement. CFSA’s June 2004 recruitment and retention plan identified several fruitful recruitment efforts such as its efforts to advance relationships with local schools of social work and its use of the Internet to identify candidates. Also, the plan states that the agency will revise its recruitment efforts based on further analysis of the results. Retaining caseworkers is a challenge that CFSA as well as other child welfare agencies face. In fiscal year 2003, CFSA’s attrition rate for caseworkers was about 15 percent. We could not determine if this was an improvement because CFSA did not have data for 2002. As of June 2004, about 45 caseworkers had left CFSA in fiscal year 2004—just over 15 percent of the staff. Our previous work on child welfare caseworker retention identified several causes of caseworker turnover and identified practices to help improve retention, such as university training partnerships and bonuses. In 2003, CFSA developed a work plan that included strategies to help retain well-qualified caseworkers by improving the agency’s work environment. Experts in the child welfare community endorsed several of these strategies. The plan’s goals are to create a supportive and professionally stimulating environment and promote continuing education for its supervisors. To help meet these goals, the agency has done the following: Sought employee feedback to identify good practices as well as areas in need of improvement. CFSA officials conducted surveys, held discussions with staff, and reviewed data from exit interviews to identify good practices as well as areas for improvement. CFSA began conducting exit interviews and issued an exit interview analysis report in fiscal year 2003. The report contained data on the employee’s position, program division, and the reasons given for leaving the agency. Agency officials told us they used this information to improve recruitment and retention efforts. Required supervisory training. Supervisors of caseworkers are required to attend training classes for 12 days, over a 5-month period. The classes cover topics such as leadership effectiveness, case consultation, and other topics designed to improve supervisors’ skills. Established partnerships to allow caseworkers to pursue graduate degrees. CFSA has agreements with Howard University and the Catholic University of America, two universities in the District of Columbia, to allow its caseworkers to pursue master’s level degrees in social work. CFSA, in partnership with these universities, will provide scholarships, stipends, and other sources of financial support. Employees who receive this benefit must agree to remain with the agency for a period of time or repay any financial support provided. A pilot program is scheduled to begin in September 2004. Developed financial incentives. To encourage workers to remain at the agency, CFSA offered service agreement bonuses, reimbursement for first-time licensure fees, and additional income allowances. Table 2 describes the financial retention incentives and the number awarded in fiscal year 2003. In addition to these retention strategies, caseworkers told us that CFSA’s training program for new caseworkers and the higher than average salary paid by CFSA were important factors that contributed to their decisions to remain with the agency. CFSA’s pre-service training for new caseworkers was cited as a positive experience by several caseworkers that participated in our discussion groups and several who completed exit surveys. This training lasts 8-½ weeks and greatly exceeds the average training time of about 3-½ weeks offered by most child welfare agencies. CFSA’s training program involves both classroom study and on-the-job training, and gradual assumption of case responsibilities under close supervision. Caseworkers also cited CFSA’s high salaries as a key incentive for continuing to work with the agency. CFSA’s current average salary for a master’s level caseworker is $41,440 compared with the national average of $37,097 at other public agencies. The student loan repayment program funded by the Congress in fiscal year 2004 may further help CFSA’s retention and recruitment efforts, once the program has been implemented. Caseworkers who have worked or will work full-time for CFSA in a nonsupervisory capacity are eligible to apply for CFSA’s loan repayment program. In addition, CFSA states that it determined caseworkers in a private agency under contract to CFSA will also be eligible for the loan repayment program. According to agency officials, the program offers up to $18,000 to caseworkers with MSWs and $10,000 for those with BSWs toward repayment of student loans. The exact amount will depend on the size of the loan and the number of qualified program applicants. Caseworkers must complete 2 years of service before any loan payments are made. CFSA pays one-half the total payment at the end of the caseworkers third year and the remaining half at the end of the fourth year. Initially, applications for the program were due August 16, 2004, and candidates had to sign a continuing service agreement to work for CFSA by September 3, 2004. According to agency officials, CFSA extended its application deadline to September 16, 2004. During discussion sessions and in exit interviews, caseworkers said that they did not have adequate support in terms of resources to do their jobs. The caseworkers said that they did not have cell phones needed to maintain contact with foster families or with the office, and they did not have enough cars to make needed visits to monitor children under their care. Also, they reported not having adequate office space to hold confidential discussions with families and others involved with their cases. Supervisors also cited the lack of resources as a problem that hindered caseworkers’ abilities to perform their duties. According to CFSA managers, in May the agency bought a fleet of new cars, and in June of 2004, the agency bought new cell phones for every caseworker. Additionally, CFSA is planning on adding shuttles to drop and pick up caseworkers from regularly traveled destinations to help reduce the need for cars. CFSA caseworkers also told us that management did not consistently communicate with them about issues affecting the agency and its operations. We also reported on this concern in our December 2000 report. During our recent meetings with caseworkers and supervisors, they said, for example, that changes in policy and procedures were not always communicated effectively or consistently throughout the agency. Many caseworkers said that they were not aware of such changes until they were in the process of completing an essential task, such as requesting a clothing voucher for a foster care family, and that caseworkers often heard of policy changes from each other. In exit interviews from January 2003 through May 2004, some employees suggested that communication be improved between all levels of management and staff, especially related to policy changes. For example, one employee filling out the exit interview form said that, “What is policy on Monday may not be policy on Friday…. CFSA must improve the way it communicates policy to its caseworkers. E-mails do not appear to be effective. The trickle down method of providing information to supervisors is also ineffective.” National child welfare organizations and other human capital experts suggest that management should maintain clear lines of communication and involve employees in the decision making process of changing policies. CFSA managers explained that while they have a formal procedure for communicating policy changes and routinely include caseworkers in the decision making process, changes to practice standards that affect day-to-day operational matters are communicated through less formal methods. According to agency officials, these changes are communicated during staff meetings, via e-mail messages, and newsletters. In addition, caseworkers said that many supervisors had not fulfilled their responsibilities. They cited examples of supervisors not being available to help them during a crisis to provide guidance and support and not providing answers to questions affecting their work. One caseworker said in an exit interview, “My supervisor seldom kept our supervisory conferences or team meetings scheduled. She pushed tasks down that were managerial duties and failed to state priorities when assigning multiple tasks.” Several caseworkers said that their supervisors had not provided them feedback about their performance. We reviewed a random sample of caseworkers’ personnel files and analyzed those for 31 caseworkers who were hired on or before December 31, 2000. According to a CFSA official, these caseworkers should have had performance appraisals in their files for 2001, 2002, and 2003. While nearly all of the performance appraisals for 2003 were in the files, only 1 of the 31 files included an appraisal for all 3 years. The primary role of child welfare supervisors is to help caseworkers perform their duties. In addition to assigning cases, supervisors should monitor caseworkers’ progress in achieving desired outcomes, provide feedback to caseworkers in order to develop their skills, support the emotional needs of caseworkers, and help make decisions about cases. The quality of supervision of caseworkers at CFSA is not a new issue. We also reported that social workers cited the quality of supervision as a reason for their decisions to resign in December 2000. Subsequently, to help improve the quality of supervision, CFSA required its supervisors to complete several training courses. However, as of August 2004, 12 of CFSA’s 59 case- carrying supervisors have completed the training, as required. Furthermore, according to agency officials, CFSA’s supervisors were not held accountable for performing their supervisory duties. CFSA officials indicated in 2000 that they planned to take steps to help enhance accountability for management and supervisory employees, including developing a new agency performance appraisal system. CFSA’s managers acknowledged in 2004 that the performance of some of its supervisors still needed to improve. The agency’s 2004-2005 recruitment and retention plan includes a new goal that focuses on providing supervisors and managers with more training and support to help increase the quality of supervision. Also, agency officials said that CFSA is developing new performance measures to better hold caseworkers and supervisors accountable for performing their duties. Furthermore, caseworkers said and CFSA managers confirmed that the agency does not have a program to reward or recognize individuals who perform well, make outstanding contributions, or achieve exceptional results. The agency honors all of its caseworkers annually during the month of May for Social Worker Appreciation Month with a Social Worker Appreciation Day celebration. Human capital experts have said that an individual recognition program is an important element and that workers who are recognized and rewarded for hard work are more likely to achieve maximum performance. Some caseworkers said in discussion groups with us and during exit interviews that a formal rewards and recognition program would enhance their morale, help create a positive work environment, and improve staff retention. Agency officials said that they are planning to develop policies and procedures for a formal rewards and recognition program. CFSA has taken several steps to recruit and license an adequate supply of safe foster and adoptive homes. The agency developed a recruitment plan and intends to establish a second recruitment unit devoted to recruiting new foster families and finding homes for children who are difficult to place, including teens and children with special needs. Also, CFSA has established new licensing requirements for congregate care and kinship homes. While CFSA has placed new emphasis on recruitment of foster and adoptive families, as of May 30, 2004, more foster families stopped serving than expected. Further, CFSA does not have a process for evaluating its recruitment strategies or the attrition of families from the foster care program. In addition, according to CFSA data, about 22 percent of foster children in CFSA’s care were residing in unlicensed homes as of May 2004. Agency officials said that they were attempting to license these homes on a case-by-case basis. In January 2004, the CFSA created a recruitment plan that includes strategies and goals for recruiting foster and adoptive homes. According to agency officials, this is the first such plan. The recruitment plan identifies specific strategies for recruiting new families. For example, the agency plans to invite current foster parents to hold social gatherings to interest others in becoming foster families and to continue the “Wednesday’s Child” program which uses television commercials to feature individual District children who are available for adoption. In addition, the plan calls for increasing the roster of licensed foster families by 50 at the close of fiscal year 2004. For 2005, the agency plans to increase its supply of foster families by another 100 homes. In order to have an additional 50 families licensed, CFSA estimated that it must bring approximately 1,000 interested families to its orientation sessions since about one-tenth of the families who have attended past sessions became licensed, and an average of 50 families have left the program each year. Figure 2 summarizes the foster family recruitment and attrition patterns. In addition to CFSA’s own recruitment plan, COG prepared a report for CFSA in 2003 that identifies specific, targeted recruitment strategies. This report identifies strategies designed to attract potential foster and adoptive parents with certain demographic characteristics from different neighborhoods in the District. For example, the COG report suggests that CFSA should partner with a local women’s professional sports team to host a “Foster Care Day” and conduct a presentation on foster parenting during halftime. The report states that this recruitment strategy would reach families from various District neighborhoods who would work well with children who have special needs. In commenting on a draft of this report, agency officials said that they have incorporated some of the suggestions in the COG report, such as involving coaches and others working with children in sports by partnering with the District’s Department of Parks and Recreation. CFSA also plans to establish a second unit dedicated to recruiting new foster and adoptive parents. The agency currently has one recruitment unit that includes a seven-person team—a supervisor, a social services assistant, and five recruiters, each of whom carries a caseload of 20-30 hard-to-place children targeted for adoption. The team plans to recruit new foster and adoptive parents through community outreach activities and child-specific recruiting, a strategy used to find permanent homes for children who are traditionally the most difficult to place. CFSA plans to launch a second recruitment unit in October 2004. The new unit will also have seven staff members and will focus on community outreach activities and child-specific recruiting. Although CFSA’s plan calls for the evaluation of its foster parent recruitment efforts, we found that CFSA had not developed a process to measure the effectiveness of its recruitment strategies and to learn why prospective families do not complete the licensing process. CFSA’s recruitment plan alludes to the agency’s FACES database as a potential tool for collecting such data, but agency officials told us that the system does not capture the information. Such evaluation is commonly considered good practice. In April 2004, CFSA established a process for issuing temporary licenses for kinship foster homes in the District. Kinship homes house about 30 percent of the children in CFSA’s care. Requirements for the temporary license include a home study, criminal background check via the National Crime Information Center (NCIC), and a health history of primary caregivers. Once a child is placed, the family must apply for a nontemporary foster family license. Temporary licenses are good for 120 days and may be renewed once for 90 days as long as the family has made a good faith effort to comply with the nontemporary licensing process. According to agency officials, CFSA’s goal is to be able to issue a temporary license in 3 days. As of May 2004, two temporary licenses had been issued and both took 2 weeks to process. Agency officials reported that they are currently working with Maryland officials to develop a temporary license for Maryland kinship placements—a step designed to further expand safety checks and decrease the length of time some children spend in emergency placements. In August 2001, CFSA instituted new licensing standards for congregate care homes, and in 2003 CFSA closed those that did not meet these standards. Prior to these new standards, congregate care facilities received a facility inspection but were not licensed. The standards cover the physical safety of the facility, staff credentials, staffing ratios, and required background checks for staff. In 2002, just after the publication of the new licensing standards, most of these facilities—25 of the 28 facilities—were issued provisional licenses in order to allow them time to make physical upgrades required in the new standards. However, as of June 2003, 4 of the 25 congregate care homes had been closed because they could not meet these licensing requirements. Like traditional foster homes, congregate homes are monitored regularly and licenses must be renewed each year. Agency officials reported that although some challenges remain—for example, facilities have had difficulty finding staff with the credentials needed to meet CFSA’s requirements—the new licensing requirements have greatly improved the quality of congregate care. CFSA broadened its oversight of out-of-state and private agency placements in order to help ensure a consistent level of safety. In 2003, the agency added staff to a unit that reviews the licenses of out-of-state homes and manages contracts with private agencies that help place CFSA’s children in neighboring states. This oversight process gives CFSA the opportunity to remove a child from a home if it finds a serious problem with a family’s license and, in the case of a less significant licensing issue, the agency can work with the private agency to help correct the problem. Because of previous problems, CFSA began requiring out-of-state private agencies to provide foster families with support workers—caseworkers who make monthly visits and act as a liaison between the agency and the foster parent. Foster parents who live in Maryland and participated in our discussion groups told us that in the past they experienced many problems obtaining a support worker but for the most part these problems had been resolved. Additionally, CFSA has taken steps to establish performance-based contracts with congregate care providers and private agencies. Agency officials expect performance-based contracting to further improve the quality of foster care homes by requiring contractors to achieve specific, measurable outcomes on the level of safety and quality of care they provide to foster children. As a first major step in moving toward performance-based contracting, CFSA issued two requests for proposals (RFPs). The first RFP, which closed in September 2003, sought contracts for congregate care facilities that provide emergency care, group homes, homes for teen parents and their children, and/or independent living services. CFSA received 30 viable proposals for congregate care providers, and agency officials planned to make awards for congregate care in August 2004. The second RFP closed in February 2004 and sought contracts to help place children in traditional foster homes. As of August 2004, CFSA was in the process of evaluating the proposals it received. The implementation plan requires all CFSA contracts to be performance-based by September 2005, and officials said that CFSA plans to meet this requirement. While fewer families than expected have participated in CFSA’s orientation programs, more families than expected have been licensed but more stopped serving. As of June 30, 2004, the agency reported having processed 448 families through orientation, just under 50 percent of its goal to have 1,000 interested families participate in an orientation session. CFSA also reported that about 170 new families were licensed—exceeding its goal of 100 new families. However, agency officials also reported that as of May 30, 2004, 77 families stopped serving—significantly more than the agency’s projected loss of 50 families for fiscal year 2004. Nonetheless, as of June 30, 2004, there was a net gain of about 90 families. If in the last quarter of fiscal year 2004, the number of newly licensed families continues to exceed or at least equals the number of families who stop serving, CFSA should be able to exceed its goal to have a net increase of 50 newly licensed families. With respect to adoption, CFSA finalized 288 adoptions as of June 30, 2004, a number that exceeds the 208 adoptions finalized as of June 2003. If CFSA continues to find adoptive homes for children at its current rate, the agency should exceed the 315 adoptions it finalized at the close of 2003. However, CFSA has not determined why foster families stop serving each year. Child welfare experts recommend that agencies conduct exit interviews with foster families and use these data to help improve the program. Agency officials said that they believe the main reasons families stop serving as foster parents are that they become adoptive families, have served for many years, and are “retiring” from service, or cannot meet licensing requirements because of issues such as a change in employment status. However, agency officials could not provide documented support for these statements and, therefore, cannot be certain that foster parents do not stop serving for other reasons. In addition to systematically identifying the reasons families leave the foster program, agency officials can learn about ways to improve the program from exit interviews. Foster parents we met with identified several ways that CFSA could improve the program. For example, foster parents suggested that CFSA change some of its training requirements and that CFSA improve the way information about a foster child is maintained because information has been lost when a child’s caseworker changed. We previously reported that CFSA’s automated case management system, FACES, lacked data on many foster care cases and noted that information missing from the automated systems can be lost and that such missing information requires caseworkers to spend more time to become familiar with children’s cases that are transferred. By increasing the net supply of foster homes available, the agency reports that it expects to achieve other important benefits. If there are more traditional foster homes, CFSA can reduce the number of children placed in congregate homes as required by the implementation plan. Further, with more traditional foster homes, CFSA reports that it will likely be able to facilitate more adoptions, given that foster parents often decide to adopt once they live with a child. For example, as of March 2004, 614 foster children (about 62 percent of children under CFSA’s care with a goal of adoption) were living with a family who intended to adopt them. Furthermore, the respite care program being developed by COG with the foster care improvement funds may also help increase the net supply of homes. Foster parents said during congressional hearings and group interviews that a respite program would, in the long run, reduce attrition because it would reduce stress and burn-out. COG has designed a respite program that will recruit families from the District and other surrounding jurisdictions who will voluntarily provide respite care. COG’s goal is to make 700 respite care placements by March 2005; however, the organization does not yet know how many respite families will be required to provide this number of placements. As of August 9, 2004, COG officials reported that 6 families already licensed as foster care providers had verbally committed to serving as respite families. In addition, 10 families had completed training but were not yet licensed. COG officials also reported that on August 6, 2004, they began soliciting respite requests from foster families and that they plan to begin offering respite services on August 30, 2004. In commenting on a draft of this report, COG officials said that they were assessing the number of foster families that need respite and will use that information to gauge the number of respite families required to meet the need. CFSA has taken a number of steps to ensure that children are placed in licensed foster care homes, yet as of May 2004, 495 children—about 22 percent of children in CFSA’s care—were in unlicensed homes. It is the agency’s policy not to place children in unlicensed homes, and measures such as the temporary license for kinship homes and greater oversight of out-of-state placements have been taken to prevent children from being placed in unlicensed homes. CFSA officials told us that the majority of the 308 unlicensed homes that remained as of May 2004 entered the foster care program before the new licensing standards were issued and that many are kinship homes and homes located in Maryland. CFSA is working to correct this situation by examining these homes on a case-by-case basis to identify the specific barrier each home faces in becoming licensed and, if possible, to resolve that issue. The emergency support fund made possible by Congress’s 2004 appropriation may help by providing money to help families make improvements—such as, installing a ramp for a disabled child or splitting a larger bedroom into two for greater privacy for siblings—that will help them become licensed. CFSA has begun implementing a centralized mental health referral process in collaboration with DMH and the Family Court and has developed a database to track service delivery; however, challenges remain in meeting the statutory timeframes for initiating services and for completing and reporting on assessments. To increase the continuity of care between the foster care and mental health systems, CFSA and DMH designed a standard process for referring foster care children to DMH for mental health assessment and treatment and for tracking service delivery. In addition, officials from each agency have met routinely with Family Court judges to discuss the referral process and other issues that may affect efforts to link foster care children to mental health services. CFSA and DMH began using the referral process in March 2004, and CFSA began using its newly developed database for tracking service delivery in August 2004. In conjunction with CFSA’s efforts to centralize and track mental health services, DMH has started expanding its capacity to provide services to foster care children. Efforts include recruiting additional evaluators to perform assessments, certifying additional mental health providers to deliver treatment, and contracting with providers for new types of treatment. While progress has been made to better link foster care children to mental health services, several challenges remain for CFSA and DMH in order to meet the statutory timeframes, such as completing complex and time-intensive assessments and integrating caseworkers and judges into the new referral process. In March 2004, CFSA—in concert with DMH—began implementing a standard process for referring foster care children to mental health services. CFSA and DMH staff developed the new referral process to increase continuity of care between systems and to ultimately improve the effectiveness of mental health services for foster care children. In an effort to collaborate on the new referral process, CFSA and DMH officials have held regular meetings and workgroups to plan, make decisions, and share information regarding mental health services for foster care children. For example, the agencies have made hiring and contracting decisions together and have begun efforts to co-locate staff. These strategies are consistent with those cited by a national expert as indicators of a state’s commitment to coordinate care for children across multiple public systems. In addition to working together, both CFSA and DMH have been meeting with Family Court judges to present information on the new referral process and to discuss ways to ensure that judges are ordering the most appropriate services and that services are delivered on a timely basis. Under the new referral process, CFSA’s newly established Behavioral Services Unit (BSU) coordinates referrals for mental health assessments or treatment, which are then delivered primarily by DMH through its network of evaluators and providers. A child’s case is forwarded to BSU when a Family Court judge issues an order for mental health services or when a caseworker makes a request for services. In the case of assessments, a BSU specialist determines whether the type of assessment requested or ordered is clinically appropriate for the child. When the assessment request or order is deemed appropriate, the caseworker submits a referral package to BSU. After reviewing the package for quality and completeness, BSU forwards it to DMH’s Assessment Center, which is responsible for coordinating assessments of foster care children for the Family Court and CFSA. Unless an evaluator is specified in a court order, the Assessment Center assigns the child to the first available evaluator to conduct the assessment. Upon completion of the assessment, DMH sends the report to BSU and to the Family Court. When a child is referred for treatment, BSU contacts DMH’s Access Helpline—a telephone hotline providing crisis emergency services, enrollment assistance and information, and referral 24 hours a day and 7 days a week—to enroll the child in the mental health system. Enrollment, which the Access Helpline is to complete within 24 hours of referral, includes assigning the child to a core services agency. The core services agency is notified of the enrollment and is required to contact the child’s caseworker within 7 days of enrollment to set the first appointment for treatment. Figure 3 summarizes the referral process. To electronically track mental health service delivery, CFSA created a database to capture data on new referrals for services for foster care children and, began entering service delivery information in August 2004. Prior to the implementation of the database, BSU was using paper referral forms to manually collect information on foster care children being referred for mental health services. According to CFSA officials, preliminary data showed that as of July 2004, BSU was receiving between 80 and 100 referrals for mental health services a week, 40 percent of which were for assessments and 60 percent for treatment. CFSA and DMH also reported that, from mid-March 2004 through May 2004, CFSA completed 141 assessments and DMH’s Assessment Center completed 111 assessments. With regard to treatment, from mid-March 2004 through May 2004, DMH enrolled 286 foster care children to begin treatment in a certified core services agency, of which there are 13. According to CFSA officials, DMH’s core services agencies were able to accept 95 percent of the referrals of foster care children for treatment. CFSA treatment providers accepted the remaining 5 percent, which were for specialized services that a DMH provider did not offer, such as attachment therapy. While officials were able to report some of the data collected manually, CFSA had not analyzed the information to determine whether foster care children were receiving mental health services within the statutory timeframes. However, Family Court judges and a CFSA report noted that completed assessments could take from 30 to 60 days. BSU officials indicated that once CFSA’s database is fully operational, every child’s electronic file would include information from caseworkers, court orders, and DMH. For example, the file will capture demographic data, the assigned caseworker, the child’s mental health diagnosis, and, where applicable, the judge assigned to the case. Additionally, the database will allow BSU to establish an electronic record for each service referral. According to CFSA officials, these electronic records would reflect when the service was requested or court-ordered, the mental health evaluator or treatment provider that accepted the referral, and the date the service was delivered. To collect data on the first treatment appointment, BSU staff plan to call the child’s core services agency to ensure that treatment was delivered. This approach may be burdensome for BSU, since approximately 50 to 60 children are being referred to the core services agencies on a weekly basis. CFSA officials anticipate that the database will capture information on all referrals made after the initial date of implementation. CFSA officials also said that temporary staff were hired to enter the data for the referrals made since March 17, 2004. It was also noted that the agency intends to link this database to FACES, the District’s automated case management system. As of September 2004, CFSA officials said that revisions to FACES to allow the linkage was being planned. Timely delivery of mental health services will largely depend on DMH’s ability to expand and sustain its existing capacity to provide services. DMH plans to increase the number of evaluators available to conduct assessments, certify and train additional providers to deliver treatment, and contract for new types of treatment. The new types of treatment for foster care children will add to the variety of services previously available to foster care children in DMH’s system. Table 3 identifies examples of key existing and planned services for foster care children. According to DMH officials, expanding its capacity to provide services to foster care children is a formidable task. For example, recruiting qualified evaluators is difficult due to the level of education needed to perform assessments, as well as competition with neighboring jurisdictions for qualified staff. DMH has made some progress in expanding its capacity to meet the assessment and treatment needs of foster care children. DMH officials noted that efforts are underway to recruit additional evaluators and transition CFSA evaluators to DMH’s Assessment Center. For example, CFSA officials meet with their evaluators to encourage them to contract with DMH. Regarding treatment providers, as of June 2004, 10 organizations specializing in serving children and families had applied for DMH certification to be a core services agency, specialty provider, or subprovider. In addition to new evaluators and treatment providers, DMH has begun a competitive grant process to make several new types of treatment available to foster care children. As of August 2004, DMH had approved grants for providers to deliver multisystemic therapy, intensive home and community-based services, and mobile crisis services and was awaiting proposals to deliver trauma treatment. DMH estimated that 300 to 500 foster care children would be served under these grant programs within 1 year of the grant contracts being signed. DMH officials noted that providers would not be able to begin delivering services before the end of fiscal year 2004. Initially funded by the $3.9 million in federal foster care improvement funds, DMH has strategies in place aimed at sustaining the additional assessment and treatment capacity. In terms of financing the increased capacity for assessments, DMH's director said that the department would continue to fund evaluators to provide assessments, which represents approximately $1.1 million of the federal funds; however, the volume of assessments presents a challenge to meeting the statutory timeframes after fiscal year 2005. As for treatment, which represents approximately $2.5 million of the federal funds, DMH expects that Medicaid will largely cover the cost of the new types of treatment under the mental health rehabilitation services option. While significant steps have been taken to better link foster care children to mental health services, CFSA and DMH face challenges to ensuring the timely delivery of these services due to the complex working environment in which they operate. For example, before assessments can be conducted, caseworkers must prepare referral packages, which include extensive amounts of information on a child. The caseworkers’ ability to prepare and submit referral packages to BSU quickly can depend in part on how well they know the child or can obtain access to information about the child’s demographics; previous school, police or health reports; and developmental history. A CFSA official estimated that it could take caseworkers from 2 days to several weeks to prepare a referral package. Further, the need for more intensive, complex assessments for some foster care children can affect the extent to which services are provided on a timely basis. In particular, DMH officials noted that meeting the statutory timeframes for completing and reporting on assessments could be problematic, because some complex assessments such as bonding studies, which determine the extent to which a child has bonded with his or her caregiver, require multiple appointments, and may take longer to complete than other assessments. (See table 4 for a list of the types and purposes of assessments for children in foster care.) Additionally, some types of assessments have prerequisites that can lengthen the time needed for completion. For example, to complete a neuropsychological assessment, the child must first undergo a psychological assessment. To the extent that some foster care children may require more complex, time-consuming assessments than others, it may be difficult for DMH to meet the statutory timeframes of completing the assessment within 15 days of the request or court order and providing the results to the Family Court within 5 days of its completion. According to one national expert in mental health system reform, other jurisdictions generally have not legislated timeframes for mental health systems to provide services, in part because different assessments vary in the length of time required for completion. In addition to operating in a working environment that has extensive information requirements and variations regarding individual need, CFSA and DMH are working to better integrate caseworkers and judges into the new referral system. While BSU is in place to provide clinical expertise in making mental health service referrals, caseworkers and judges may not be aware of or understand how to use the office. For example, one Family Court official said that some judges have ordered that a specific DMH evaluator perform an assessment, which may delay its completion due to the evaluator’s availability. A CFSA official working as a liaison to the Family Court also indicated that caseworkers continue to contact DMH directly to link children to mental health services, which may delay the court order going through BSU for processing. To help educate caseworkers about the new referral process, officials from BSU created a fact sheet providing caseworkers guidance on how to link children to mental health services. In addition, in May 2004, a BSU official began meeting with caseworkers to formally present the new process and answer questions. As mentioned previously, CFSA has also presented the referral process to Family Court judges, and DMH is exploring ways to have its staff available during Family Court hearings to answer questions related to mental health services. In February 2004, CFSA, DMH, and COG submitted spending plans to the Congress outlining how they intended to use the foster care improvement funds, and in March 2004, they received the funds. As of June 30, 2004, they reported obligations of about $1.5 million of their appropriated funds, with about $419,000 of that total having been expended. Most of the planned expenditures outlined in the spending plans are for operating costs that would continue in the future once the programs are established. How the District and COG plan to fund some of these initiatives in the long term is uncertain. Following the passage of the act on January 23, 2004, the organizations could not receive funding until 30 days after they submitted a plan. The District submitted a spending plan for CFSA and DMH on February 9, 2004, and COG submitted its spending plan on February 13, 2004. The expenditures included in the plans are consistent with the stated purposes in the legislation. Table 5 summarizes the purposes for the funds as designated in the law and the planned expenditures listed in the spending plans. CFSA’s spending plan outlined a strategy for accomplishing the objectives of each of its programs as established under the act. According to the plan, CFSA would establish an early intervention program through the implementation of Facilitated Family Team Meetings that would focus on permanency options for foster children; create an emergency support fund for kinship caregivers to pay for necessary expenses such as lead abatement, home repairs and renovation, and child care, in order to help these caregivers become or remain licensed foster homes; establish a student loan repayment program for caseworkers; and enhance CFSA’s ability to share information within and outside the agency by upgrading the agency’s child welfare tracking database, FACES, to a Web-enabled system, providing laptop computers for caseworkers and enhancing CFSA’s networking capabilities to enable this Web-based initiative. The budgets from the three organizations provided details about the planned expenses. The major expenses detailed in CFSA’s budget are related to the hiring of new personnel for Facilitated Family Team Meetings, student loan repayments to caseworkers, equipment and labor for technology upgrades, and direct support services to children and families. DMH’s spending plan identified funding for expanded psychiatrist and psychologist hours for assessment and mental health treatment, such as that provided by mobile crisis intervention teams and specialized therapy. DMH’s budget confirmed these as the major portions of the federal funds. COG’s spending plan outlined programs for providing respite care for and the recruitment of foster parents, but it did not provide a monetary breakdown of how the funds would be spent. However, COG’s budget identified the expenditures for the respite care and recruitment programs, and the major expenses budgeted were for personnel costs and funds that would be passed through to contractors and community organizations to provide respite, recruitment, and related training services. Furthermore, COG officials indicated that they have until March 2005 to expend all of its funds. While the expenditures proposed in the District and COG spending plans appear to be in line with the intentions of the act, it is unclear how the District and COG plan to support all of the programs and initiatives outlined in the spending plan in the long-term. Although the District’s fiscal year 2005 proposed budget for CFSA reflects realignment of agency funds as a means to continue the early intervention program that was funded in fiscal year 2004 with federal funds, it does not address funding for continuing the other CFSA programs. Also, CFSA has reported that the student loan repayment program would be made available only to staff currently on board due to the expiration of the funds on September 30, 2004, although these funds are intended to support a multiyear strategy that would allow CFSA to retain highly qualified caseworkers over time. The District’s proposed budget for fiscal year 2005 for DMH includes a realignment of funds to support some mental health treatment services. For fiscal year 2005, the budget includes funds to support programs designed to help foster care children, such as Multi-Systemic Therapy services. Also, DMH officials said that they are working to include the new types of treatment in the services reimbursed under the District’s Medicaid program as a longer-term mechanism to fund additional services. With regard to assessment, it is unclear how the District plans to sustain the funding necessary for the additional evaluators. According to the DMH director, DMH would continue to fund evaluators to provide assessments. In addition, COG officials told us that they would likely need an additional $500,000 from the federal government to continue their respite care initiative through the end of fiscal year 2005 and hope that private sources would support the respite program in the future. In commenting on a draft of this report, COG officials said that they had received a partnership commitment from a private source and would seek further funding as needed. The District and COG did not receive authority over their funding until 6 months into fiscal year 2004. Following passage of the act on January 23, 2004, the District and COG could not receive funding until 30 days after they submitted a spending plan. On March 17, 2004, the District received the $14 million payment, less a 0.59 percent rescission, for a total of $13,917,400. The District’s Office of Budget and Planning granted CFSA budget authority for its share of funds, $8,946,900 on March 22, 2004, and granted DMH budget authority for its funds totaling $3,876,990 on March 17, 2004. The District sent COG its payment of $1,093,510 on March 25, 2004. As of June 30, 2004, CFSA, DMH, and COG reported a small portion of the funds appropriated for foster care improvements were obligated or spent. CFSA reported that it had outstanding contractual obligations of $183,105 and had expended $31,998, resulting in 2.4 percent of its funding under the act being expended or obligated. DMH reported that it had $704,527 in outstanding contractual obligations of the funds and had expended $190,538, totaling 23.1 percent of its funding under the act. COG reported that it had expended $196,307 of its funds, and that it had incurred $145,043 in outstanding contractual obligations, representing 31.2 percent of its funding under the act. In all, over $12.4 million of the foster care improvement funds, appropriated for fiscal year 2004 only, remained available 9 months into fiscal year 2004. Table 6 provides details on the organizations’ expenditures and obligations as of June 30, 2004. Many steps have been taken to help improve the District’s foster care system, but most of the programs and initiatives will need sustained attention and ongoing support. CFSA has implemented effective recruitment strategies and established retention incentives to help recruit and retain skilled caseworkers. CFSA has also developed a plan to recruit foster and adoptive families and instituted practices to better ensure the safety of foster and adoptive homes. While these efforts are promising, CFSA will need to continue to support these initiatives and monitor their effectiveness. Several other initiatives have just begun and will need sustained attention to ensure they are fully implemented. COG has not yet licensed families to provide respite or offered respite placements and is not certain about the number of families that will be needed to support the program. CFSA’s and DMH’s process for providing mental health services for foster care children was recently initiated, and it is uncertain whether these services are being provided in a timely fashion. In addition, there are several challenges remaining to ensuring the timely delivery of mental health services, including DMH’s ability to expand its capacity to provide services. Furthermore, while the expenditures proposed in the District and COG spending plans appear to be in line with the intentions of the act, it is unclear how the District and COG plan to support some of the programs and initiatives outlined in the spending plan in the long-term. However, some of CFSA’s management practices have not created a positive work environment for its caseworkers. Caseworkers play a critical role in the District’s child welfare system, and CFSA needs its caseworkers to be productive, motivated, and committed in order to make further improvements to the District’s child welfare system. Without making further changes in its management practices, CFSA may experience decreases in productivity and increases in attrition of its caseworkers. Further, low morale may affect caseworkers efforts to fulfill their duties and provide adequate care to the children they manage. Without consistent and effective communication strategies, caseworkers may not be aware of what services they can provide to foster care children and their families or the processes for obtaining such services. Without supervisors fulfilling their responsibilities, CFSA caseworkers are left without guidance and direction on how to improve on their performance and fulfill their case management duties. Additionally, caseworkers may not be making the best decisions about their cases, which in turn can affect the care and services provided to children and their families. In addition to having a cadre of highly skilled and motivated caseworkers, an adequate number of safe, foster, and adoptive homes is a critical factor to improving foster care in the District. Despite CFSA’s new efforts and attention to recruiting foster and adoptive families, the agency does not have a process for assessing the effectiveness of its recruitment efforts. Therefore, the agency does not know which efforts are most productive and which strategies should be continued or abandoned. Additionally, CFSA does not have sufficient information about the reasons foster families stop serving and leave the foster care system because it does not have a process to solicit feedback from them. Such information could help the agency improve its program and help reduce the attrition of foster families. To build upon the improvements underway, we recommend that the director of CFSA take the following three actions: Address human capital management issues that affect caseworkers by establishing processes to consistently and effectively communicate information about agency operations and developing strategies to help ensure that supervisors fulfill their responsibilities. Develop a systematic method to evaluate its foster parent recruitment efforts to help identify the most effective strategies. Conduct exit interviews with foster parents who stop serving to identify the factors affecting their decisions and develop an action plan to address those factors that relate to systematic issues. We received written comments from CFSA on a draft of this report. These comments are reprinted in appendix II. CFSA agreed with each of our recommendations and said that it plans to implement them. CFSA provided additional information to clarify the issues in the report, and we made changes to the report to reflect several of these comments. Specifically, we (1) revised the maximum student loan repayment amounts and the application deadline, (2) updated the number of finalized adoptions, (3) changed the new recruitment unit operational date from August to October, (4) noted that CFSA has implemented some suggestions from the COG report, (5) corrected the information on licensing for kinship homes, and (6) noted that CFSA has begun entering data on mental health referrals made since March 2004. CFSA provided other information and data that we did not incorporate because the data could not be corroborated in time for this report. We also received written comments on a draft of this report from DMH. These comments are reprinted in appendix III. DMH provided information to clarify and provide context for three areas in the report: sustainability, building provider capacity, and improving the timeliness of evaluations and assessments. We made changes to recognize DMH’s plan to sustain the programs begun with federal funding. Specifically, we note a realignment of funds to support various mental health services that could help the District’s foster care children. Also, we added information on DMH’s plans to include new types of treatment in the services reimbursed under the District’s Medicaid program. With regard to DMH’s efforts to meet the timeliness requirements for completing evaluations and assessments, we did not change the report to reflect the new information provided. DMH did not include supporting documentation for the timeframes reported, and we could not verify the data on the timelines for completing assessments. Additionally, we received written comments on a draft of this report from COG. These comments are reprinted in appendix IV. COG provided us with information on its plans to obtain long-term funding for its program and to assess the number of respite providers it will need. We modified the report to reflect these comments. We will send copies of this report to the Acting Director of CFSA, the Director of DMH, the Executive Director of COG, appropriate congressional committees, and other interested parties. We will also make copies of this report 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 have any questions about this report, please contact me on (202) 512-8403. Other contacts and staff acknowledgments are listed in appendix V. To identify Child and Family Services Agency’s (CFSA) strategies for recruiting, retaining, and managing its caseworkers, we reviewed key CFSA documents, analyzed data, and interviewed several experts and agency officials. Specifically, we reviewed CFSA’s strategic and annual plans for fiscal years 2003 and 2004 and CFSA’s recruiting and retention plans for fiscal years 2003, 2004, and 2005. We reviewed CFSA data, such as worker caseload counts, attrition data, and exit interviews. To check the frequency with which performance appraisals were being held, we reviewed personnel folders for a random sample of 80 caseworkers, of which we excluded 49 caseworker files to include only those hired on or before December 31, 2000. We reviewed national standards for child welfare agencies set by the Child Welfare League of America and the Council on Accreditation. Additionally, we met with several CFSA program officials and the court-appointed monitor, the Center for the Study of Social Policy (CSSP). We also interviewed national child welfare experts from the Child Welfare League of America, Council on Accreditation, the Department of Health and Human Services (HHS) Children’s Bureau, Institute for Social Welfare Research, Council on Social Work Education, National Association of Social Workers, and Casey Family Services. We also used discussion groups to obtain the opinions and insights of CFSA supervisors and caseworkers regarding their opinions of CFSA’s recruiting, retention, and management support of caseworkers. Discussion groups are a form of qualitative research in which a specially trained leader, the moderator, meets with a small group of people who have similar characteristics and are knowledgeable about the specific issue. The results from the discussion groups are descriptive, showing the range of opinions and ideas among participants. However, the results cannot serve as a basis for statistical inference because discussion groups are not designed to (1) demonstrate the extent of a problem or to generalize results to a larger population, (2) develop a consensus for an agreed-upon plan of action, or (3) provide statistically representative samples with reliable quantitative estimates. The opinions of many group participants showed a great deal of consensus, and the recurring themes provide some amount of validation. After an initial group interview with supervisors selected by CFSA officials, we conducted four discussion groups—one with supervisors and three with caseworkers. We randomly selected participants to help ensure that they represented a cross section of the organization. Attendance on the part of invited participants was voluntary. For the three discussion groups that were held with caseworkers, we had one with employees who had been at CFSA for 1 year or less, one discussion group with employees who had been at CFSA 1-6 years, and one with employees who had been at CFSA more than 6 years. A trained discussion group moderator led the discussions while our analysts took notes. We developed a discussion group guide to assist the moderator in leading the discussions. To assess CFSA’s efforts to license an adequate number of safe homes for foster care placements and adoptions, we reviewed CFSA documents, analyzed related data, interviewed agency officials, and held group interviews with foster and adoptive parents. Specifically, we examined CFSA’s plan for foster and adoptive parent recruitment and retention and its resource development plan. We also reviewed CFSA’s licensing policies for traditional foster, kinship, and congregate care placements. We analyzed CFSA data on the number of children in unlicensed foster homes, people attending orientation sessions, foster homes issued a license from October 2003 through June 2004, and the attrition rates for foster families from October 2003 to May 2004. We also evaluated the number of foster families with the intent to adopt their foster children as of March 2004, and the number of children in CFSA’s care waiting to be adopted as of March 2004. We reviewed HHS’ Child and Family Services Review (CFSR) on CFSA, the Implementation Plan issued by CFSA’s court-appointed monitor, and other national studies on recruiting foster parents. We met with CFSA program officials and the court-appointed monitor to discuss CFSA’s processes and goals for licensing foster parents. We coordinated with D.C.-based organizations, the Foster Parent Advocacy Center (FAPAC) and the Foster Parent Association, to hold group interviews with foster parents. Additionally, we interviewed officials from the Adoption Resource Center in Washington, D.C. and the Metropolitan Washington Council of Governments (COG). To determine how CFSA has collaborated with the Department of Mental Health (DMH) and the D.C. Family Court to provide mental health services to foster care children and what challenges remain, we analyzed CFSA and DMH planning documents, notices of available funding, provider contracts, and documentation of internal procedures for referring foster care children to mental health services. Prior to its implementation, we previewed CFSA’s database for tracking mental health referrals and reviewed the documents used to collect and log the data. We also reviewed preliminary data on the number of assessments completed and the number of children enrolled with DMH treatment providers from mid- March 2004 through May 2004. We interviewed CFSA and DMH program officials and D.C. Family Court judges. In addition, we interviewed national experts in coordinating care for children across public systems, including the court monitors for the District’s child welfare and mental health systems, respectively. To report on CFSA’s, DMH’s, and COG’s plans and use of their fiscal year 2004 federal funds for foster care improvements, we reviewed the agencies’ spending plans, budget data, and unaudited reports of obligations and expenditures. We interviewed financial and program personnel from all three organizations and from within the District’s central Chief Financial Officer’s office. The following individuals also made important contributions to this report: Susan Barnidge, Joah Iannotta, JoAnn Martinez, Deborah Peay, James Rebbe, Lori Ryza, Norma Samuel, Vernette Shaw, Zakia Simpson, Walter Vance, and Carolyn Yocom.
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The District of Columbia's Child and Family Services Agency (CFSA) is responsible for ensuring the safety and well being of about 3,000 children in its care and ensuring that services are provided to them and their families. In fiscal year 2003, CFSA's total budget was about $200 million. Concerns have been raised about CFSA's supply of caseworkers, the foster care and adoptive homes, and the quality and timeliness of mental health services for foster care children. To help address these issues, the Congress appropriated $14 million in fiscal year 2004 to CFSA, the Department of Mental Health (DMH), and the Metropolitan Washington Council of Governments (COG) specifically for foster care improvement. GAO examined CFSA's (1) strategies for recruiting, retaining, and managing its caseworkers; (2) efforts to license an adequate supply of safe foster and adoptive homes; and (3) efforts to collaborate with DMH and the Family Court to provide timely mental health services to foster care children. GAO also reviewed plans for and use of the federal foster care improvement funds. CFSA actively recruited caseworkers and implemented retention strategies; however, caseworkers cited several management practices they said lowered their morale and adversely affected their ability to perform their duties. CFSA employed several recruitment approaches recommended by a number of child welfare organizations and exceeded most of its staffing goals for fiscal year 2003. Caseworkers cited high salaries and the training for new caseworkers as factors that encouraged them to remain at CFSA. However, GAO found a general consensus among the caseworkers with which GAO met that some management practices--poor communication, a lack of resources, poor supervision, and no rewards and recognition program--adversely affected their performance and morale. Agency officials said they had made some changes and were planning to take other actions to address these issues. CFSA has developed goals and strategies for recruiting new foster and adoptive homes and improved licensing requirements. CFSA has made progress licensing new families, although more families have stopped serving than expected. Further, CFSA does not have processes for identifying the reasons foster parents stop serving or for determining the effectiveness of its recruitment strategies. CFSA has standardized and raised licensing requirements for all foster and adoptive homes, but as of May 2004, 308 foster homes were unlicensed, with about 22 percent of CFSA's foster children residing in them. CFSA has begun collaborating with DMH and the Family Court to centralize and track mental health services for foster care children, but challenges remain to ensuring timely delivery. CFSA and DMH designed a standard process for referring foster care children to DMH for assessment and treatment and for tracking service delivery. DMH has also started expanding its service capacity for foster care children. For example, it has begun recruiting additional evaluators to perform assessments. While CFSA began using a database to track service delivery in August 2004, it has not analyzed the service delivery data collected on paper prior to August 2004 to determine whether foster care children were receiving timely services. Additionally, CFSA and DMH still face certain challenges, such as integrating caseworkers and Family Court judges into the new referral process. CFSA, DMH, and COG have spending plans that are consistent with the statutory language providing the federal funds, but only a small portion of the foster care improvement funds had been obligated or spent as of June 2004, in part because funding was not received until March 2004. Further, it is unclear how the District and COG plan to support some of these programs in the long-term because future funding is uncertain.
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The terminal area is the area around an airport extending from the airfield or surface to about 10,000 feet vertically and out to about 40 miles in any direction. The terminal area includes airport surface areas such as runways, taxiways, and ramps, as well as the airspace covered by air traffic control towers—typically within 5 miles of a towered airport—and by terminal radar approach control (TRACON) facilities, which typically handle air traffic to within about 40 miles of an airport (see fig. 1). Terminal area safety incidents can occur on the surface at airports or in the airspace around them. Surface incidents may threaten the safety of aircraft, passengers, and airport workers, among others. Terminal area safety incidents that happen on runways and taxiways include incursions and excursions. Runway incursions typically involve the incorrect presence of an aircraft, vehicle, or person on a runway, and runway excursions generally occur when an aircraft veers off or overruns a runway (see fig. 2). Ramp incidents can involve aircraft or airport vehicles, such as baggage carts or ground handling vehicles, as well as airline and airport employees and others. Airborne safety incidents in the terminal area often involve a loss of the minimum required distance between aircraft—as airplanes fly too close to each other—or as individual aircraft fly too close to terrain or obstructions. These incidents are called “losses of separation,” because there is a violation of FAA separation standards that ensure established distances are maintained between aircraft or other obstacles while under the con of air traffic controllers. Generally, air traffic controllers must maintain either vertical or horizontal separation between aircraft (see fig. 3), and losses of separation occur when both of these measures are violated, based on phase of flight and size of the aircraft. Safety in the terminal area is a shared responsibility among FAA, airlines, pilots, and airports. FAA air traffic controllers oversee activity on runways and taxiways, and airlines and airports provide primary safety oversight in ramp areas. Several FAA offices have a role in terminal area safety including: The Office of Runway Safety (Runway Safety) within the Air Traffic Organization (ATO) Safety Office was established in 1999 and le and coordinates the agency’s runway safety efforts. Its primary mission is to improve runway safety by decreasing the number a severity of runway incursions. Runway Safety is responsible for nd developing a national runway safety plan and performance measures for runway safety and evaluating the effectiveness of runway safety activities. The office currently has an acting director. Other FAA offices, including the Office of Aviation Safety, the Office of Airports, other components of ATO, and regional offices sup port Runway Safety’s work to identify hazards and analyze risk. ATO manages air tr affic control and develops and maintains runway safety technology. The Office of Aviation Safety and Flight Standards Service (Flight Standards) within it conduct safety inspections of airlines, audit air traffic safety issues, and administer a program to obtain information about safety incidents involving pilots. The Office of Airports oversees airport-related safety, including airpo infrastructure. This includes issuing airport operating certificates to commercial service airports, establishing airport design and safety standards, and inspecting certificated airports. The Office of Airports also provides Airport Improvement Program (AIP) grants to airports to help support safety improvements. Airlines and airports typically oversee the safety of operations in ra areas. Ramp areas are typically small, congested areas in which departing and arriving aircraft are serviced by ramp workers, who include baggage, catering, and fueling personnel. These areas can be dange for ground workers and passengers. As noted in our 2007 report on runway and ramp safety, FAA’s oversight of ramp areas is generally provided indirectly through its certification of airlines and airports. Bot NTSB and OSHA investigate accidents in the ramp area. Thus, NTSB investigates ramp accidents—and other accidents involving aircraft—that occur from the time any person boards an aircraft with the intention t o fly until the time the last person disembarks the aircraft, if the accident h results in serious or fatal injury or substantial aircraft damage. OSHA can conduct an inspection in response to a fatality, injuries, or a complaint, unless it is preempted by an exercise of statutory authority by FAA. FAA collects and analyzes information about various safety incidents in the terminal area in order to track incidents, identify their causes, and assign severity levels. Currently data are collected at towered airports for runway incursions, some other surface incidents, and for airborne incidents. By contrast, no complete data are collected for incidents in ramp areas. FAA categorizes incidents according to the actions or inactions of air traffic controllers, pilots, or others, such as pedestrians or vehicle operators. Table 1 provides hypothetical examples of each type of incident. Depending on the type of incident identified—air traffic control surface event, operational error or deviation, pilot deviation, or pedestrian/vehicle deviation—different offices within FAA are responsible for investigating individual incidents. FAA is in the process of implementing a data-driven, risk-based approach to safety oversight that FAA expects will help it continuously improve safety by identifying hazards, assessing and mitigating risk, and measuring performance. For decades, the aviation industry and FAA have used data reactively to identify the causes of aviation accidents and incidents and take actions to prevent their recurrence. Using a safety management system approach, the agency plans to use aviation safety data to identify conditions that could lead to incidents, allowing it to address risks proactively. FAA’s current approach for analyzing information about safety in the terminal area includes separate approaches for surface and airborne incidents. Surface incidents. For runway incursions, Runway Safety collects information from the Administrator’s Daily Bulletin and the Air Traffic Quality Assurance database (ATQA)—a mandatory reporting system with incident information recorded by FAA air traffic controller supervisors, support specialists, and managers—and other sources such as incident investigations. Runway Safety determines how an event will be categorized (e.g., air traffic control, pilot, or vehicle/pedestrian deviation, etc.), and the runway incursion severity classification team, which consists of representatives from the Office of Airports, Flight Standards, and ATO Terminal Services, determines the severity of the incursion. Airborne incidents. For terminal area incidents that occur in the air, the primary source of information is ATQA. FAA recently adopted a new process for analyzing these incident data and has taken steps to increase the amount and quality of information collected. FAA officials stated that, prior to this change, data were limited to the information collected in ATQA from FAA managers and supervisors, with limited input from individual controllers through controller statements gathered during incident investigations. We will discuss the new system in more detail in the following section. FAA has taken several steps since 2007 to further improve surface safety at airports, focusing most notably on efforts to reduce the number and severity of runway incursions—the agency’s key performance measures for this area. (See fig. 4.) As part of its 2007 Call to Action Plan, the agency implemented new safety approaches and developed milestones for the implementation of various mid- and long-term initiatives, such as conducting safety reviews of 20 airports where incursions were of greatest concern, upgrading airport markings at airports, and reviewing cockpit and air traffic procedures. Additionally, FAA’s 2009–2011 National Runway Safety Plan establishes priorities for each FAA office involved in reducing incursion risks and identifies performance targets for reducing the risk of runway incursions, including an overall goal to reduce total runway incursions by 10 percent from 1,009 in fiscal year 2008 to 908 incursions by the end of fiscal year 2013. In 2010, FAA issued an order that further strengthened the role of Runway Safety as the agency’s focus for addressing incursions and improving runway safety. FAA has also proposed new rules related to airport safety management systems that address ramp areas. Additionally, FAA established local and regional runway safety action teams that assess runway safety issues at particular airports, formulate runway safety action plans to address these concerns, and execute their runway safety programs. FAA also established the Runway Safety Council (Council) with aviation industry stakeholders to develop a systemic approach to improving runway safety. The Council’s Root Cause Analysis Team—comprised of representatives from FAA and airlines—investigates severe runway incursions to determine root causes in order to identify systemic risks. The Root Cause Analysis Team presents recommendations to the Council, which in turn, assigns accepted recommendations to FAA or the aviation industry, based on which is best able to address root causes and prevent further incursions. The Council is responsible for tracking recommendations and ensuring that they get implemented. FAA’s layered approach to addressing runway safety includes a range of actions, such as encouraging airport improvements, including improving runway safety areas; changes to airport layout and runway markings, signage, and lighting; providing training for pilots and air traffic controllers; mitigating wildlife hazards; and researching, testing, and deploying new technology. According to its 2009–2011 National Runway Safety Pla annual safety reports, FAA’s efforts to decrease the risk of surface incidents include: Improving runway safety areas. In order to reduce fatalities and injuries from runway excursions, the Office of Airports has provide between $200 and $300 million annually since 2000 through AIP grants to improve runway safety areas, which are unobstructed areas surrounding runways. Outreach to general aviation pilots. Regional runway safety action team meetings, briefings, and clinics for general aviation pilots and flight instructors discuss the importance of runway safety and how to avoid incursions. FAA also provided training, printed materials, and electronic media such as DVDs explaining runway safety. New terminology. FAA adopted international air traffic co terminology for taxi clearance instructions to help avoid miscommunication between pilots on the taxiway and runway a traffic controllers. These included new mandatory detailed taxi instructions, including directional turns, fo taxiing to and from ramps and runways. r all aircraft and vehicles Upgraded markings. Markings—such as enhanced centerlines drawn on taxiways and runways—wer commercial airports in 2010. e installed at all 549 FAA-certificated Hot spot identification. Hot spots—locations on runways or taxiways with a history of collisions or incursions or the heightened potentia such incidents—have been identified on airport diagrams to alert pilots of complex locations on runways and taxiways. Airport layout. Some airports have relocated taxiways, allowing pilots to avoid crossing active runways during the taxi phase. These “end around taxiways” facilitate ground movement and minimize conflict with aircraft operating on runways. The Office of Airports has alsoreleased guidance on the design of taxiways and aprons to help prevent runway incursions. Training. FAA has developed video programs, training modules, and best practices for pilots, controllers, and airport personnel aimed at heightening awareness of situations that could lead to incursions. F now also requires that runway incursion prevention be included in ning for controllers, pilots, and all certificated airport refresher trai employees. Research and development of best practices and other useful information. Runway Safety’s Web site has resources, best prac and statistics on runway safety. Moreover, Runway Safety has produced DVDs and Pilot’s Guide brochures, as well as runway incursion safety alerts for airport operators. Wildlife Hazard Mitigation. In addition to an active research program for developing practical techniques for mitigating bird strikes, F encouraged all certificated airports to conduct wildlife hazard assessments and is pursuing rulemaking to make it mandatory for certificated airports to do so. FAA currently provides AIP funds to hire qualified wildlife biologists to develop assessments and mitigation plans, as needed. A number of available technological systems are intended to help re the number and severity of runway incursions, and FAA has made progress installing several of these systems since 2007. For example order to prevent collisions, FAA completed installation of the Airport Surface Detection Equipment, Model X (ASDE-X) system at 35 major airports, which provides air traffic controllers a visual representation of traffic on runways and taxiways (see fig. 5). Other systems that will provide safety information directly to pilots are being installed or tested. For example, runway status lights, an automatic series of lights that giv pilots a visible warning when runways are not clear to enter, cross, or depart on, are planned to be installed at 23 airports by August 2016. See appendix II for more information on safety. To date, runway excursions have not received the same level of attention from FAA as incursions. However, excursions can be as dangerous as incursions; according to research by the Flight Safety Foundation, excursions have resulted in more fatalities than incursions globally. FAA is now planning efforts to track and assess excursions as well. According to FAA officials, in response to recommendations that we and others hav made, Runway Safety will begin overseeing runway excursions on October 1, 2011. Specific responsibilities include collecting and analyzing data to develop steps to reduce the risk of such incidents. According to FAA officials, the office plans to develop an official definition of an excursion, develop a data collection instrument and performance metrics e that would enable it to collect and evaluate excursion data, and develop training and steps to help mitigate excursions. According to a timeline from Runway Safety, it will be several years before this program is totally implemented and FAA has detailed information about excursions. FAA recently issued two proposed rules for airports under the agency’s authority to issue airport operating certificates. The first proposed rule, issued in October 2010, would require airports to establish safety management systems for ramps areas, as well as other parts of the airfield, including runways and taxiways. As previously noted, FAA historically has not primarily overseen safety in ramp areas, which are typically controlled by airlines or—to a lesser extent—airports using their own practices. FAA’s proposal would require airports to establish safety management systems for the entire airfield environment in order to ensure that individuals are trained on the surface of the terminal area; safety implications of working on the hazards are identified proactively, and analysis systems are in place; data analysis, tracking, and reporting syste ms are available for trend analysis and to gain lessons learned; and there is timely communication of safety issues to all stakeholders. A second proposed rule, issued in February 2011, would establish minimum training standards for all personnel who access ramp areas. Required training would occur at least yearly and include familiarization with airport markings, signs, and lighting, as well as procedures for operating in the nonmovement (ramp) area. The public comment period for these proposed rules closed during July 2011. FAA has not indicated when the rules would be finalized. We reported in 2007 that FAA lacked ground handling standards for ramp areas. In the absence of agency standards, other organizations have developed tools to improve ramp safety. For example, the Flight Safety Foundation has collected best practices and developed a template of standard operating procedures to assist ramp supervisors in developing their own procedures. The guidelines are wide ranging and include the reporting of safety information, ramp safety rules, the positioning of equipment and safety cones, refueling, and caring for passengers, among other areas. In addition to the Flight Safety Foundation guidelines, the International Air Transport Association, an international airline association, has developed a safety audit program for ground handling companies aimed at improving safety and cutting airline costs by drastically reducing ground accidents and injuries. The program is available to all ground service providers, who, after successfully completing the audit, are placed on a registry. As of August 2011, Seattle- Tacoma International Airport is the only domestic airport participating in the program. Controllers are required to report any occurrence that may be an operational deviation, operational error, proximity event, or air traffic incident if the reported issue is known only to the employee and occurs while the employee is directly providing air traffic services to aircraft or vehicles or first level watch supervision. concerns have been addressed through informal discussions between ATSAP officials and FAA facilities. In other efforts to obtain more safety data, FAA has taken other steps to make incident reporting less punitive. For example, in July 2009, FAA changed its incident reporting policy such that individually identifying information, such as air traffic controller names and performance records, is no longer associated with specific incidents in ATQA, the central FAA database used by air traffic control managers or supervisors to report incidents. In addition, in July 2010, FAA also stopped issuing incident “not to exceed” targets to individual air traffic control facilities (e.g., towers, TRACONS, or en route facilities). According to officials, these targets created an incentive for underreporting of less serious incidents by supervisors at the facility level, and the targets were discontinued in order to encourage increased reporting at the agency. FAA is also implementing new technologies, specifically, the Traffic Analysis and Review Program (TARP), an error detection system that can be used to automatically capture losses of separation that occur while aircraft are under the control of air traffic control towers and TRACONs. Historically, FAA relied on air traffic controllers and their supervisors to manually report on operational errors, something we have noted in the past may negatively impact data quality and completeness. TARP automatically captures data on all airborne losses of separation, which, according to officials, will increase the volume of data FAA gathers on air traffic safety incidents and enable FAA to obtain a more complete picture of potential safety hazards. According to the fiscal year 2010 FAA Performance and Accountability Report, FAA has deployed TARP at 150 air traffic control tower and TRACON facilities. According to FAA officials, TARP is currently being used as an audit tool for approximately 2 hours per month at some facilities—in lieu of full-time use at all facilities—but further implementation of the system has been delayed as the agency evaluates the impact of the system on controllers and determines how the system will be used and how to handle the additional workload that will be created as more incidents are captured and require investigation. Following the completion of these steps, FAA will take 210 days to fully deploy TARP. Currently, incidents identified through TARP are being included in official incident counts. FAA is also shifting to a new, risk-based process for assessing a select category of airborne losses of separation. FAA began using the Risk Analysis Process (RAP)—which is adapted from a similar process used by the European Organization for the Safety of Air Navigation (Eurocontrol)—in fiscal year 2010. While the new process is being established, RAP will be used in tandem with the existing system. RAP is currently limited to Losses of Standard Separation (LoSS). This subset of airborne incidents includes those in which the separation maintained is less than 66 percent of the minimum separation standard for the planes involved. Under RAP, FAA determines both the severity and the repeatability of selected LoSS events (that is, how likely a certain LoSS event will occur again at any airport under similar circumstances based on a number of factors). These factors include proximity of planes to one another at the time of the event, rate of closure between planes, controller and pilot recovery, and whether or not Traffic Collision Avoidance System (TCAS) technology is triggered by the incident. Prior to the development of RAP, FAA categorized losses of separation based on proximity alone: the greater the loss of separation between two planes, the greater the severity of the incident in question. Operational errors were then rated on an A–C scale, with those that retained more than 90 percent of required minimum separation categorized as proximity events. (Fig. 7 compares the threshold for review of incidents in each system.) Officials stated that RAP is more robust than the previous system because it is able to take numerous factors into account when determining event severity, as well as overall risk to air traffic safety. In addition, the RAP will assess risk for LoSS events that were not assigned a severity category under the old system. As a result, they said the agency will be better equipped to identify systemic issues in air traffic safety and to issue related corrective action requests. Based on analysis of systemic issues identified across incidents, RAP released its first five corrective action requests on July 19, 2011, which were developed to mitigate specific hazards that contribute to what RAP has identified as the highest risk events. We, the Department of Transportation Inspector General (IG), and NTSB have raised concerns about terminal area safety. For example, we recommended, in 2007, that FAA take several steps to enhance runway and ramp safety, such as updating its national runway safety plan, collecting data on runway excursions, and working with OSHA and industry to collect and analyze better information on ramp accidents. In 2007, FAA put in place a Director for Runway Safety and issued a Call to Action aimed at reducing the risk of incursions following several high- profile incidents (see table 2 for select recommendations to FAA). The IG also made recommendations to FAA about runway safety issues and recommended that FAA take several steps to reduce the risk of airborne incidents and improve oversight of this area. For example, the IG recommended that FAA clearly document the severity ratings used by FAA for runway incursions, revise the national plan for runway safety, and realign the Office of Runway Safety. With regard to airborne incidents, the IG recommended establishing a process to rate the severity of pilot deviations and corresponding performance goals, developing milestones for implementing TARP, and assuring that Flight Standards works with ATO Safety Services to determine whether losses of separation are pilot or controller errors, among other recommendations. Further, NTSB continues to include runway safety, safety management systems, and pilot and air traffic controller professionalism issues on its list of most wanted safety improvements. In fiscal years 2009 and 2010, the agency met its interim goals toward reducing the total number of runway incursions at towered airports, but the rate of incursions per million operations continued to increase (see fig. 8). As noted in our 2007 report, both the number and rate of incursions reached a peak in fiscal year 2001, prompting FAA to focus on runway safety. The number and rate of incursions at towered airports decreased dramatically for a few years thereafter, though the impact of FAA’s efforts on these outcomes is uncertain. Beginning in 2004, however, both the number and rate of incursions began increasing again. For example, in fiscal year 2004, there were 733 incursions at a rate of 11.4 incursions per 1 million tower operations, compared with fiscal year 2010, when there were 966 incursions at a rate of 17.8 incursions per 1 million such operations. Although the rate of incursions at towered airports continues to increase, the number of incursions at these airports peaked in fiscal year 2008. The most serious runway incursions at towered airports—where collisions are narrowly avoided—decreased by a large amount from fiscal year 2001 to 2010, and FAA met or exceeded its goals for reducing the rate of these incidents. FAA classifies the severity of runway incursions into four categories—A through D—and its performance targets call for the reduction of the most severe incursions (category A and B) to a rate of no more than 0.45 per million air traffic control tower operations by fiscal year 2010 and for the rate to remain at or below that level through fiscal year 2013. The number of the most severe incidents at towered airports also dropped from fiscal year 2001 to 2010. Thus, category A and B incursions at these airports decreased from 53 to just 6 during that time, with category A incursions decreasing from 20 to 4, and category B incursions decreasing from 33 to 2 (see fig. 9). In fiscal year 2010, the majority of incursions at towered airports were classified as pilot deviations (65 percent), followed by vehicle/pedestrian deviations (19 percent), and operational errors and deviations by air traffic controllers (16 percent) (see fig. 10). Further, for every year since 2001, pilot deviations comprised the majority of runway incursions at these airports, and the proportion involving these errors steadily increased from about 55 percent of all incursions in fiscal year 2001 to 65 percent in fiscal year 2010. We previously reported that most runway incursions at towered airports involved general aviation aircraft and that trend continues. General aviation aircraft make up nearly a third of total operations at towered airports but have consistently accounted for about 60 percent of incidents each year since 2001. More specifically, the rate of incursions per million tower operations involving at least one general aviation aircraft is higher than the rate of incursions not involving general aviation aircraft, and the rate has increased every year since fiscal year 2004 (see fig. 11). Further, general aviation aircraft were involved in over 70 percent of the most serious—category A and B—incursions from fiscal year 2001 through the second quarter of fiscal year 2011. According to FAA officials, general aviation pilots may be more susceptible to incursions and other incidents because of their varying degrees of experience and frequency of flying. Furthermore, general aviation pilots do not generally undergo the same training as commercial airline pilots do. With regard to runway excursions, our review of NTSB data found that general aviation aircraft are also involved in most runway excursions. Although FAA does not yet formally collect information on runway excursions, NTSB provided us with accident investigation reports on 493 accidents that involved runway overruns or excursions since 2008. Seven of these accidents were fatal, resulting in 14 fatalities. Our review of these reports found that 97 percent of the accidents involving excursions referred to the involvement of at least one general aviation aircraft. In our 2007 report, we found that efforts to address the occurrence of safety incidents in ramp areas were hindered by the lack of data on the nature, extent, and cost of ramp incidents and accidents and by the absence of industrywide ground handling standards. As discussed above, FAA collects no comprehensive data on incidents in the ramp area, and NTSB does not routinely collect data on ramp incidents that do not result in injury or aircraft damage. Likewise, as mentioned above, OSHA, the primary source of ramp fatality data, does not collect data on incidents that do not result in at least three serious injuries or fatalities. In the ramp area, OSHA data on worker fatalities show the number of deaths in the ramp area to have varied between 3 and 11 from 2000 to 2010. The rate remained constant—between 4 and 6 deaths per year—from 2008 to 2010. The rate of reported airborne operational errors in the terminal area increased considerably in recent years. From the second quarter of fiscal year 2008 to the second quarter of fiscal year 2011, the rate and number of reported airborne operational errors increased significantly. During this time period, the rate of reported airborne operational errors in the terminal area nearly doubled, increasing 97 percent, and the number of reported airborne operational errors increased from 220 to 378. The rate of incidents began a notable climb in the fourth quarter of fiscal year 2009, peaked in the second quarter of fiscal year 2010, and remained at rates higher than the historical average through the second quarter of 2011 (see fig. 12). FAA officials attributed at least some portion of the spike in reported incidents during the second quarter of fiscal year 2010 to approximately 150 events that occurred as the result of the misinterpretation of an arrival waiver at one TRACON facility. While the rate of airborne operational errors has increased over time in both the TRACON and tower environments, the rate of errors in the TRACON environment has increased more. Between the second quarters of fiscal years 2008 and 2011, the rate of operational errors in the TRACON environment increased from 8.5 to 22.6 operational errors per million air traffic control operations—a 166 percent increase (see fig. 13). In comparison, operational errors increased by 53 percent in the tower environment. Overall, the rate of the most severe airborne operational errors more than doubled between the second quarter of fiscal year 2008 and the second quarter of 2011. While the least severe (category C) incidents are more numerous than the most severe, the most severe (category A) incidents increased from 5 in the second quarter of 2008 to 14 in the second quarter of 2011. In comparison, category C operational errors increased by 135 percent, and category B operational errors decreased by 5 percent. These incident rates do not meet FAA goals under both the prior severity system and using new risk assessment measures. In fiscal year 2010, FAA reported 3.32 category A and B operational errors per million air traffic control operations, significantly exceeding its targeted rate for fiscal year 2010 of 2.05 per million operations. In fiscal year 2011, FAA replaced its operational error measure with a new measure—the System Risk Event Rate (SRER)—a 12-month rolling rate of the most serious LoSS events per thousand such events. The rate of high-risk events also increased using this measure. According to data provided by FAA, the number of the most serious LoSS events—called high-risk events in the new risk assessment process—spiked from 9 events in December 2010 to 16 events in January 2011 but has since decreased. However, the overall SRER increased significantly between December 2010 and February 2011 (from 21.9 to 29.9 high-risk LoSS events per 1000 LoSS events) and remains significantly elevated above FAA’s target of 20 serious LoSS events for every thousand such events. The SRER for the 12-month period ending in April 2011 was 28.97. According to FAA officials, the agency’s target of 20 LoSS events per thousand LoSS incidents represents the system performance baseline gathered using human reporting and may therefore be an unrealistic target as the agency moves to gathering data electronically. FAA plans to continue to collect data on and categorize events using both the old and new systems. Once FAA has completed a 2-year baseline period, it has committed to conduct an independent review of both metrics to determine whether any improvements are needed. Several factors have likely contributed to recent trends in runway incursions and airborne operational errors. The agency has noted that recent increases in runway incursions and airborne operational errors are primarily attributable to changes in FAA’s reporting practices, which encourage increased reporting of incidents. We found evidence to suggest that changes to reporting policies and processes have likely contributed to the increased number of incidents reported—both into ATQA, the official database for incidents—and into ATSAP, the nonpunitive reporting system for air traffic controllers. In addition, the implementation of new technologies and procedures in the terminal area also likely contributed to an increase in the number of reported airborne incidents and runway incursions. FAA has carried out changes aimed at increasing reporting, and each of these factors may have contributed to an increase in the number of reported incidents. That said, it is possible that the increase in safety incidents in the terminal area may also reflect some real increase in the occurrence of safety incidents. As a comparison, we looked at the rate of en route operational errors, which are captured automatically by airplane tracking technology and would therefore not be expected to substantially increase by a change in reporting practices or procedures at the agency. We found that the average rate of en route operational errors in fiscal year 2010 was 38 percent higher than the year before, and that the overall rate increased 13 percent from the second quarter of fiscal year 2008 to the same quarter in 2011. According to FAA officials, some of the increase in reported en route errors may be attributable to increased confidence in the nonpunitive nature of the system—reflected by a decrease in the number of requests for reclassification of incidents from en route facilities. Changes to reporting processes and policies at FAA may explain in part the recent upward trend in reported runway incursions and airborne operational errors. Since operational errors and other losses of separation in both the tower and TRACON environments are currently reported manually by FAA supervisors and quality assurance staff into ATQA, changes in reported error rates may be partially attributable to changes made to encourage more comprehensive reporting of incidents. Most notably, as previously discussed, FAA changed its incident reporting policy in July 2009 such that individually identifying information, such as air traffic controller names and performance records, are no longer associated with specific events in the ATQA database. According to officials, this change may encourage controllers to share more information about incidents with supervisors and quality assurance officers. In addition, in fiscal year 2010, FAA stopped issuing incident “not to exceed” targets to individual facilities. According to officials, these targets may have led supervisors in the past to underreport less serious incidents in order to meet these targets. These policy changes may have increased reporting to an extent that these effects are apparent in incident rates. (See fig. 15 for recent FAA changes to reporting practices overlaid on report operational errors.) Implementation of a nonpunitive, confidential, system of reporting for air traffic controllers may have also contributed to the real increase in the occurrence of operational errors, according to FAA officials. While the implementation of ATSAP may affect reporting rates—either by increasing reporting or by lowering the number of reports to supervisors given that the system satisfies reporting requirements—officials told us that it could also inadvertently lead to an actual increase in the occurrence of operational errors or deviations. According to these officials, the reduced personal accountability ATSAP provides may make some air traffic controllers less risk averse in certain situations. In addition, officials also noted that ATSAP may present a barrier to managerial efforts to directly manage controller performance. For example, if a report is filed into ATSAP, a supervisor may have limited options to assign training or take other corrective actions in response to an incident, even if he or she is aware that an error was made by an individual air traffic controller, presuming the incident did not involve alcohol or drug use or other such violations. The implementation of ATSAP may have resulted in increased reporting of incidents, although reporting into this system does not directly affect official trends in operational errors. According to FAA officials, the confidential, nonpunitive nature of ATSAP has contributed to a positive change in the reporting at FAA. As a result, errors that previously may have gone unreported by air traffic controllers are now being reported to ATSAP. However, data entered into ATSAP are not directly available to FAA and do not feed into ATQA (see fig. 16). In addition, it is possible that some incidents that would have previously been reported to FAA are now being reported only to ATSAP, thus decreasing the number of incidents reported to FAA. According to ATSAP data, approximately 35 percent of all incidents reported to ATSAP in 2010 were “known” to FAA—meaning that the incident was reported into ATQA by a supervisor or manager, as well as into ATSAP by an air traffic controller—while the other 65 percent were not official reported to FAA. Implementation of new technologies in the terminal area may also impact recent trends in surface incidents and airborne losses of separation. For example, since FAA’s ongoing implementation of TARP will allow FAA to automatically capture losses of separation in the tower and TRACON environments, it will also likely increase the number of reported losses of separation. According to officials, during its limited testing at facilities, TARP has already captured errors that were not being reported by air traffic controllers. For surface incidents, the ASDE-X system alerts controllers when aircraft or vehicles are at risk of colliding on runways, resulting in the identification of incidents that controllers might otherwise not be aware of. Designed as a surface surveillance system, ASDE-X helps to prevent collisions by raising alarms when aircraft appear to be at risk of colliding. As these alerts draw attention to near misses or potential collisions, they also serve to notify personnel of possible incursions and thus may have contributed to an increase in reported events, even as they may have prevented accidents. We analyzed the number of reported incursions at airports with ASDE-X and found that, at many of these airports, the number of reported incursions actually increased after their ASDE-X systems became operational. (For more information about our analysis of how the number of runway incursions changed after the installation of ASDE-X, see app. III.) Officials with the Sensis Corporation, the developer of ASDE-X, acknowledged to us that this may be a side effect of the deployment of the system. FAA has taken steps to improve safety in the terminal area since 2007 and has both reduced the number of serious incursions and undertaken successful efforts to increase reporting of incidents, but we identified two areas in which FAA could further improve management of data and technology in order to take a more proactive, systemic approach to improving terminal area safety. These areas include: (1) enhanced oversight of terminal area safety, including the management of runway excursions and ramp areas, and (2) assurance that data for risk assessments are complete, meaningful, and available to decision makers. Stakeholders we spoke with generally lauded Runway Safety’s efforts on incursions, but FAA could do more to expand to other aspects of runway safety—notably runway excursions—as well as playing a more active oversight role in ramp areas. As we noted earlier, FAA is rolling out a new program to gather and analyze data on excursions, which should allow the agency to better understand why excursions happen and develop programs to mitigate risk. FAA is exercising some additional authority over ramps by proposing rules to address airport safety management systems and training for personnel accessing ramp areas, but these efforts are limited and involve requiring airports to develop and implement their own safety guidelines. In 2007, we reported that the lack of standards for ramp operations hindered safety, and an upcoming report by the Airport Cooperative Research Program (ACRP) continues to find that no comprehensive standards exist with regard to ramp area markings, ground operations, or safety training. The two proposed rules by FAA on airport safety management systems and training establish some standards for the ramp area, but proposed federal oversight would still be limited. The proposed rule implementing safety management systems for airports would require airports to develop plans to identify and address hazards in the ramp area and on the airfield, in addition to ensuring that all employees with access to runways, taxiways, and ramps receive training on operational safety and on the airport’s safety management system. Other aspects of ground handling, such as surface marking and ground operations, would continue to largely be overseen by airlines and the ground handling companies that are contracted by them. The placement of the Runway Safety within the ATO Safety Office may limit its ability to serve as an effective focal point for runway and terminal area safety, given that aspects of runway and terminal area safety fall under the purview of several parts of FAA, including ATO, the Office of Airports, and the Office of Aviation Safety. In 2010, the IG recommended that the placement of Runway Safety within ATO be reconsidered, because the office may be limited in its ability to carry out cross-agency risk management efforts. Subsequently, the IG determined that Runway Safety had demonstrated effectiveness within ATO, but pointed to a need to periodically review organizational structures and processes to ensure that it continues to be effective. Runway Safety oversees data, assessments, and performance measures across a number of safety areas—air traffic control, pilot actions and training, outreach to general aviation, airport infrastructure, and technologies, among others—which are under the purview of different offices within FAA. As a result, Runway Safety has the potential to serve as the focal point for risk management in the terminal area. Multiple changes to reporting policies and processes in recent years make it difficult to know the extent to which the recent increases in some terminal area incidents are due to more accurate reporting or an increase in the occurrence of safety incidents or both. For example, FAA officials have specifically attributed the increase in airborne operational errors to changes in reporting practices following the implementation of ATSAP, but, as previously mentioned, the relationship between the implementation of ATSAP and an increase in errors is uncertain. Likewise, other changes to performance measures and internal reporting policies, such as removal of individually identifying information from ATQA, further obscure the source of recent trends. Without accurate and consistent measures of safety outcomes, FAA cannot assess the risks posed to aircraft or passengers over time or the impacts of its efforts to improve safety. As we noted in a 2010 report, FAA has embarked on a data-driven, risk- based safety oversight approach. As part of this effort, FAA has established a new, risk-based measure to track losses of separation, but measures for runway incursions are not risk based, reflecting instead a simple count of incidents. Thus, FAA currently rates the severity of incursions based on proximity and the response time to avoid a collision and does not differentiate between types of aircraft—or the number of lives put at risk—as part of its severity calculation. While any loss of life is catastrophic, the impact of an accident involving a commercial aircraft carrying hundreds of passengers can have different implications than an accident involving smaller aircraft. According to industry stakeholders, the use of proximity as the main criterion for severity of incursions is overly simplistic. As a result, FAA may be unable to use incursion data to identify the most serious systemic safety issues. Similarly, the application of risk assessment to measures of runway safety could allow FAA to focus individually on the risk posed by incursions by large commercial aircraft, as well as the risk posed by an ever-increasing incursion rate among general aviation operations. Additional attention to the root causes of incidents involving general aviation could potentially identify strategies addressing this ongoing challenge, which may include the installation of low-cost ground surveillance systems. While FAA officials did not detail immediate plans to alter the measure for incursions, officials did state that the agency plans to introduce surface incidents into RAP at the beginning of fiscal year 2012. The joint FAA-aviation industry Runway Safety Council is a first step toward the effort to reduce incursion risks. By identifying causes and making recommendations that could help determine what changes would be needed to make measures more risk- based, the Council’s Root Cause Analysis Team can help reduce incursion risks. Further, according to FAA officials, the new measure being developed for excursions will be risk-based; however, this measure will not be fully in use until 2014. By contrast, FAA has taken steps to improve its ability to assess the risk of airborne operational errors and to collect more information. However, under the new risk assessment system, far fewer incidents are subject to analysis than were included in previous, nonrisk-based iterations, and the measure may therefore not account for all potential risk. For instance, RAP does not yet have procedures to assess losses of separation with terrain and with airspace boundaries. Currently, LoSS events in which at least 66 percent of minimum separation is maintained between aircraft are not assessed through FAA’s recently launched RAP. According to FAA officials, the 66 percent threshold for inclusion in RAP was adopted in recognition of the resources required for the enhanced risk-analysis process. This initial threshold is not based on specific risk-based criteria. Furthermore, losses of separation eligible for inclusion in RAP are currently limited to those that occur between two or more radar-tracked aircraft. As a result, many incidents—such as those that occur between aircraft and terrain or aircraft and protected airspace—are currently excluded from FAA’s process for assessing systemic risk. According to FAA officials, this exclusion is in part because there is no system in place through which the current RAP proximity inclusion threshold could be applied to these types of incidents, although FAA officials stated that an effort is under way to expand RAP to include these areas. In addition, FAA’s new measure for assessing air traffic risk levels—the SRER—does not include many losses of separation that were tracked under the old measure, although it does expand the assessment process to include some errors caused by pilots. Further, while the technology has been developed to collect data automatically for potential operational errors involving losses of separation, FAA has delayed the full implementation of TARP in air traffic control towers and TRACONS. According to FAA officials, the implementation of TARP may create workload challenges for quality assurance staff, as the technology is likely to capture hundreds of potential losses of separation that were not previously being reported through existing channels. In 2009, the IG recommended that FAA establish firm timelines for the full implementation of TARP. Data collected through ATSAP, the nonpunitive reporting system, have limitations. There is the potential for serious events to be reported only to ATSAP and to therefore not be included in the official ATQA database or in RAP. Such events are referred to as “unknown” events. In 2010, 65 percent of incidents reported to ATSAP were unknown to FAA. (See fig. 17.) FAA officials acknowledged that there are a large proportion of unknown incidents but stated that these incidents are likely to be minor. In addition, some information about incidents reported to ATSAP is available for analysis by FAA and the aviation industry via the Aviation Safety Information Analysis and Sharing (ASIAS) program, as de-identified ATSAP data are shared with ASIAS. Further, they noted, ATSAP reports may be procedural, rather than reports of incidents or operational errors. Available data from the ATSAP program office indicates, however, that some of the “unknown” reports in the system were potentially serious events. For example, between the program’s launch in July 2008 and June 2011, 74 out of 253 ATSAP reports that were classified as potentially hazardous did not appear in ATQA, accounting for 29 percent of these reports. In June 2011—the most recent month for which data are available—approximately one third of all ATSAP reports classified as potentially major events, and 42 percent of those classified as hazardous, did not appear in ATQA. According to officials, ATSAP allows controllers to report incidents that may have otherwise gone unreported, and the program facilitates early detection and improved awareness of operational deficiencies and adverse trends. These unknown events, FAA officials point out, would not likely have been reported into ATQA before the implementation of ATSAP. Information sharing challenges may impact the ability of FAA to analyze safety data and understand safety trends. Multiple FAA programs and data systems assign contributing factors to incidents, but factors are not coordinated across programs. For instance, both ATSAP and RAP have developed sets of factors that are identified as contributing to incidents during the incident investigation process. However, despite the fact that these two programs look at some of the same type of incidents (airborne losses of separation), program officials have not coordinated their development of the categories used to describe incidents. As a result, officials we interviewed stated that it is difficult to compare data across systems. For example, both ATSAP and RAP issued internal reports identifying top factors contributing to reported incidents, but there is no apparent overlap between the two lists. In addition, while the ATQA database contains more than 50 contributing factors for operational errors, FAA and the ATSAP program office do not use these data to identify systemic safety issues (see table 3). According to FAA officials, FAA is currently developing a common set of contributing factors for ATSAP and RAP, as well as a translation capability that will allow for the inclusion of historical data on contributing factors in future analyses. The IG raised concerns about the quality of ATQA data on contributing factors in a 2009 report, noting that FAA does not consistently include fatigue issues in contributing factor data it collects on operational errors. FAA has added contributing factors related to fatigue to ATSAP and is exploring ways to gather objective shift, schedule, and related resource management data to support enhanced fatigue analysis. Regional and local access to and awareness of data related to both individual incidents and incident trends may be limited. According to FAA officials we interviewed at the regional level, it is difficult for supervisors at the regional and facility levels to obtain information on incident trends specific to their area of supervision in part because key databases, such as ATQA, do not have the capability to allow regional supervisors to run region- or facility-specific data queries. In addition, while multiple data resources may be available, officials stated that information on incidents is scattered, and no central source exists where employees can identify available data resources. While FAA has made advances in the quantity and comprehensiveness of the data it collects on incidents in the terminal area, officials stated that the agency faces difficulty in developing sophisticated databases with which to perform queries and modeling of the data. According to FAA officials, the full implementation of CEDAR will address many of the deficiencies identified by regional and local offices. The nature and scope of ramp accidents are still unknown, just as they were when we reported in 2007, and we were told by officials with Airports Council International that it can be difficult to for airports to get data on incidents in the ramp area—areas typically overseen by airlines. This will pose a challenge as airports move to implement safety management systems and seek to identify and mitigate hazards. As one aviation expert explained, even if data are available locally—which they may not be—the number of incidents at individual airports can be too few to allow for the identification of root causes or the proactive identification of risk. The Office of Runway Safety focuses on improving safety by reducing the number and severity of runway incursions. However, risk management in terminal areas involves more than just incursions—notably runway excursions and incidents in ramp areas. Runway Safety plans to start tracking runway excursions in October 2011, but it will take several years to develop processes for identifying and tracking incidents, identifying and mitigating risks, and measuring outcomes. Likewise, FAA does not track incidents in ramp areas, although we previously recommended that FAA work with the aviation industry and OSHA to develop a mechanism to collect and analyze data on ramp accidents. Airports implementing plans for safety management systems under FAA’s proposed rule will need data that are useful, complete, and meaningful in order to accurately assess risk and plan for safety, but FAA cannot yet provide meaningful data for the assessment and management of risks posed by runway excursions or ramp areas. Without information on incidents in these areas, FAA and its safety partners are hampered in their ability to identify risk, develop mitigation strategies, and track outcomes. FAA addresses runway incursions as a specific type of incident and does not distinguish between commercial and general aviation in its performance measures. However, risks posed by runway safety incidents to passengers and aircraft in the national airspace system are different for commercial aircraft and general aviation. FAA performance measures for runway incursions—including the number, rate, and severity—do not reflect differences between commercial and general aviation and are not risk-based. The agency has installed risk-reduction technologies at larger commercial service airports, for example, but in the absence of risk-based performance measures, it lacks the ability to prioritize projects or measure effectiveness. With regard to general aviation, this traffic currently accounts for about a third of total tower operations, but 60 percent of runway incursions involve these aircraft. While Runway Safety has acknowledged that general aviation has caused more runway incursions, without performance measures that reflect risk, FAA may not be able identify appropriate mitigation strategies to address the large—and growing—proportion of runway incidents—including both incursions and excursions—involving general aviation aircraft. Strategies to decrease the risk posed by safety incidents involving general aviation could include additional outreach to these pilots, increased remediation following pilot errors, or the installation of technologies such as low-cost ground surveillance at airports serving general aviation traffic. Safety in the terminal area is a shared responsibility among FAA, airlines, pilots, and airports, and there are a number of FAA offices that either collect or analyze terminal area incident data, but useful access to complete and meaningful data is limited. The agency currently does not have comprehensive risk-based data, sophisticated databases to perform queries and model data, methods of reporting that capture all incidents, or a level of coordination that would facilitate the comparison of incidents across systems. Technologies aimed at improving reporting have not been fully implemented. As a result, aviation officials managing risk using safety management systems, including local and regional decision makers, have limited—if any—access to FAA incident data. For example, FAA’s official database for air traffic safety does not allow local or regional FAA safety officials to run region- or facility-specific data queries. Further, under the new risk assessment process used for losses of separation, fewer incidents are assessed and accounted for in performance measures—such as losses of separation between aircraft and terrain or aircraft and protected airspace—which may distort risk assessment processes. Finally, according to FAA officials, one reason the agency has not fully implemented TARP is that implementation of TARP may create workload challenges for FAA quality assurance staff, as the technology is likely to capture hundreds of potential losses of separation that were not previously being reported through existing channels. FAA offices and others using a safety management system approach to manage risk should have access to complete and meaningful data to allow for hazard identification and risk management. The ability of FAA and airport officials—and the local Runway Safety Action Teams that they serve on— to identify safety risks, develop mitigation strategies, and measure outcomes is hindered by limited access to complete and meaningful data. To enhance oversight of terminal area safety to include the range of incidents that pose risks to aircraft and passengers, we recommend that the Secretary of Transportation direct the FAA Administrator to take the following three actions: develop and implement plans to track and assess runway excursions and extend oversight to ramp safety; develop separate risk-based assessment processes, measures, and performance goals for runway safety incidents (including both incursions and excursions) involving commercial aircraft and general aviation and expand the existing risk-based process for assessing airborne losses of separation to include incidents beyond those that occur between two or more radar-tracked aircraft; and develop plans to ensure that information about terminal area safety incidents, causes, and risk assessment is meaningful, complete, and available to appropriate decision makers. We provided the Departments of Transportation and Labor, NTSB, and the National Aeronautics and Space Administration (NASA) with a draft of this report for review and comment. The Department of Transportation agreed to consider our recommendations and provided clarifying information about efforts made to improve runway safety, which we incorporated. The Department of Labor, NTSB, and NASA provided technical corrections, which we also incorporated. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Transportation and Labor, NTSB, the Administrator of NASA, and interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me 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. Key contributors to this report are listed in appendix IV. Gerald L. Dillingham, P Director, Physical Infrastructure Issues h.D. Our objective was to review aviation safety and update our 2007 report on runway and ramp safety. To do so, we addressed the following questions: (1) What actions has the Federal Aviation Administration (FAA) taken to improve safety in the terminal area since 2007? (2) What are the trends in terminal area safety and the factors contributing to these trends? and (3) What additional actions could FAA take to improve terminal area safety? To identify actions FAA has taken since 2007 to improve safety in the terminal area and to identify additional actions FAA could take to improve safety, we reviewed our prior reports, as well as documents and reports from FAA, the Department of Transportation Inspector General (IG), the National Transportation Safety Board (NTSB), the International Civil Aviation Organization (ICAO), and others; FAA orders, advisory circulars, and regulations; and applicable laws. We also determined the roles and responsibilities of FAA, NTSB, the Occupational Safety and Health Administration (OSHA), the National Aeronautics and Space Administration (NASA), airports, and airlines involving runway, terminal airborne, and ramp safety. In addition to interviewing officials from FAA, IG, and NTSB, we interviewed aviation experts affiliated with the Air Line Pilots Association, Airports Council International, Air Transportation Association, the Flight Safety Foundation, and the National Air Traffic Controllers Association about terminal area safety practices and technologies. We also interviewed researchers from the Air Cooperative Research Program (ACRP) of the Transportation Research Board and experts affiliated with various aviation technology companies. To obtain information about air traffic control operations, observe the application of key technologies, and interview facility managers, we visited four FAA facilities that were near our GAO offices: the Potomac Consolidated Terminal Radar Approach Control facility, the Washington Air Route Traffic Control Center, and the air traffic control towers at Ronald Reagan Washington National Airport and the Seattle-Tacoma International Airport. We also interviewed airport officials with the Port of Seattle at Seattle- Tacoma International Airport. To obtain information about the Air Traffic Safety Action Program (ATSAP), we interviewed officials with the ATSAP program office and attended an Event Review Committee meeting in Renton, Washington. We also reviewed FAA’s progress in addressing recommendations that we, IG, and NTSB have made in previous years and reviewed the processes that FAA uses to collect and assess runway and air traffic safety data. To identify and describe recent trends in terminal area safety and the factors contributing to these trends, we obtained and analyzed data from FAA, NTSB, and OSHA on safety incidents in the terminal area. We analyzed FAA runway incursion data collected from fiscal year 2001 through the second quarter of fiscal year 2011, as well as FAA data on airborne operational errors from the Air Traffic Quality Assurance database (ATQA) from the third quarter of fiscal year 2007 through the second quarter of fiscal year 2011. We limited our analysis to airborne operational errors in order to avoid double counting of surface operationa errors that are included in our counts of runway incursions. We used Operations Network data from FAA to determine rates of incursions and airborne operational errors per million operations. Rates of incursions were calculated per million tower operations, and rates of airborne operational errors were calculated per million operations perfo traffic control towers, terminal radar approach control (TRACON) facilitie s, and en route facilities on a quarterly basis. We also reviewed NTSB data involving runway incursions and excursions from 2008 through June 2011 and summarized OSHA data on fatalities in the ramp area from 2001 through 2010. We used statistical models to assess the association between safety incidents and the concentration of general aviatio operations and the implementation of the Airport Surface Detection Equipment, Model X (ASDE-X) surface surveillance system from fiscal year 2001 through April 2011. These models estimated how the number of incursions changed after airports installed ASDE-X or increased the proportion of operations involving general aviation. The models accoun for other factors that may contribute to incursions, such as long-term weather patterns, runway layouts, as well as controller and pilot experience. See appendix III for more information about the methods and results of these analyses. To assess the reliability of FAA data, we (1) reviewed internal FAA documents about its collection, entry, and maintenance of the data and (2) interviewed FAA officials who were knowledgeable about the content and limitations of these data. Both NTSB and OSHA provided information about the reliability of their excursion and fatality data, respectively. We determined that these data t were sufficiently reliable for the descriptive and comparative analyses used in this report. We conducted this performance audit from February 2011 to October 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the aud it to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Researching, testing, and deploying new technology is a major part of FAA’s risk-reduction strategy. A number of available technological systems are intended to help reduce the number and severity of runway incursions. For example, to give air traffic controllers better visibility of activity on the airfield and help prevent collisions, FAA has installed the ASDE-X system at 35 major airports, while the Airport Surface Detection Equipment, Model 3 (ASDE-3) radar and the Airport Movement Area Safety System (AMASS) provide surface surveillance at 9 additional airports. Runway status lights, which will be installed at 23 airports, are a fully automatic series of lights that give pilots a visible warning when runways are not clear to enter, cross, or depart on. To mitigate the risks posed by runway excursions, FAA conducted research that led to the development of the Engineered Materials Arresting System (EMAS), a bed of crushable concrete designed to stop aircraft from overrunning runway areas. As of July 2011, EMAS has been installed at 52 runways at 36 airports, and there are plans to install 11 EMAS systems at 7 others. According to FAA officials, EMAS has successfully arrested seven overrunning aircraft with no fatalities or serious injuries and little damage to the aircraft to date. (See table 4 for a brief description of technologies designed to improve runway safety.) This appendix summarizes our statistical analysis of the between the ASDE-X airfield surface surveillance system and runway ine focused on ASDE-X, among many other runway safety cursions. W programs, because of its potential for persuasive impact evaluation. We describe how the process FAA used to install ASDE-X created a “quasi- experiment,” which allows u as to compare how incursions changed at sirports that received the technology relative to airports that kept the cursions. W rograms, because of its potential for persuasive impact evaluation. We escribe how the process FAA used to install ASDE-X created a “quasi- xperiment,” which allows u s to compare how incursions changed at irports that received the technology relative to airports that kept the tatus quo. A a s lo c m p th key goal of ASDE-X is to make air traffic controllers more aware of ctivities on taxiways and runways in order to avoid collisions. The ystem consists of airfield radar and sensors that collect data on the cation of aircraft and vehicles. Computers transform these data in ontinuously updated maps of the airfield, which are displayed on color onitors in air traffic control towers. The system warns controllers of otential collisions—which may draw attention to possible incursions— rough visual and audible alarms. AA used a selective and staggered process to install ASDE-X at 34 irports from 2003 through 2011 (of 35 airports slated to receive this ystem). The variation among airports receiving the technology, as well F a s as the times when they received i evaluation. This type of analysis compares the change in incursions over time at airports that installed ASDE- nX with the change at airports that did t, allows for a quasi-experimental valuation. This type of analysis compares the change in incursions over me at airports that installed ASDE- X with the change at airports that did ot receive the technology, also known as a “difference-in-difference.” alysis of site-specific safety and efficiency benefits as compared to site-specific costs. airports provide a plausible comparison group for analysis, but we use variety of other comparison groups to ensure that our findings are robu st. Many factors that may contribute to incursions are controlled in our analysis here. We control for variation among airports in runway and taxiway layouts, markings, and lighting, in addition to long-term variati in weather, air traffic, and pilot and controller skills. The staggered installation of ASDE-X makes bias due to short-term weather conditions or pilot and controller experience unlikely, because these factors would need to be correlated with 34 installation times throughout the country. In addition, the staggered installation lets us control for factors that affect all airports equally, such as changes in training and procedures made throughout the country at the same time. The time period of our analysis spans fiscal years 2001 through April 2011. We assembled data on the number of incursions that occurred pe month at each FAA-towered airport in this period, along with data on air traffic control tower operations. The latter data included the number of monthly tower operations at each airport, as well as the mixture of commercial and general aviation operations. The operations data ide the population of interest, including the many smaller airports with no incursions that do not appear in the incursion data. FAA provided the installation dates and locations for the ASDE-X, runway status lights, FAROS, and low-cost ground surveillance systems. We used these data to identify whether each technology was installed for each airport and month between fiscal year 2001 and April 2011. We used a statistical model to estimate the association between ASDE-X and the number of incursions for airport i and month t. The model took the form of E(Yit | a,p,tit,xit) = a exp(δp + atit + xitβ), where Yit randomly varies according to the Poisson distribution, a is vector of airport fixed effects, p is a vector of year-month fixed effects, tit indicates whether ASDE-X was operational at airport i in month t, xit are other time-varying covariates, and δ, α, and β are vectors of parameters. We estimated the change in incursions after the installation of ASDE-X using one contemporaneous, before-and-after parameter, α, becaus ASDE-X likely has an immediate effect on incursions once it has been installed that does not change over time. ,4 The covariates xit included the number of air traffic control tower operations (to measure exposure and variation in the nature of activity across airports), indicators for having 25 to 60 percent and greater than 60 percent of operations involving general aviation (excluding 0 to 25 percent), and indicators for having the runway status lights, FAROS, or low-cost ground surveillance systems installed at airport i and time t. T airport. The 485 airports in the panel ensure that these estimates will be accurate approximations, even if incursions are not Poisson-distributed. As Wooldridge 2003 (674- 675) notes, conditional ML estimators consistently estimate the parameters of a fixed effects model, even with arbitrary forms of over- and under-dispersion, heteroskedasticity, and serial correlation. As a result, we can safely use the Poisson conditional likelihood to estimate the parameters while using cluster-robust standard errors. The models used several groups to compare the change in incursions before and after ASDE-X was installed, in order to assess the sensitivity of our results to plausible alternatives. The groups included 1. all FAA-towered airports; 2. airports that were included in the FAA benefit-cost analysis above b did not receive ASDE-X; 3. the top 100 airports in tower operations from fiscal year 2001 through 4. airports that had a similar ground surveillance system, ASDE- 3/AMASS, installed prior to the first installation of ASDE-X (baseline 5. airports that did not have ASDE-3/AMASS installed at baseline; and 6. airports that did not have ASDE-3/AMASS installed at baseline and that were among the top 100 airports in tower operations from fiscal year 2001 through April 2011. Figure 18 plots the average monthly incursion rate for airports that did and did not receive ASDE-X, rescaled to a ratio of the over-time mean to better express the trends. The smooth lines summarize the average incursion rate for each group and month using nonparametric locally weighted regression models. The vertical lines show the ASDE-X installation times for each airport. Prior to the first installation of ASDE-X, the incursion rate changed in roughly the same ways for the ASDE-X and comparison airports. As FAA began to install the system in late 2003, and the incursion rate began to increase for the ASDE-X airports, but it decreased and then increased at a slower rate for the comparison airports. Substituting the other comparison groups in these plots produces similar patterns. Consequently, the raw data suggest that reported incursions increased at airports that received ASDE-X, as compared to the change at airports t did not receive the system. In addition to the individual named above, Heather MacLeod, Assistant Director; Russ Burnett; Martha Chow; Dave Hooper; Delwen Jones; Molly Laster; Brooke Leary; Josh Ormond; and Jeff Tessin made key contributions to this report.
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Takeoffs, landings, and movement around the surface areas of airports (the terminal area) are critical to the safe and efficient movement of air traffic. The nation's aviation system is arguably the safest in the world, but close calls involving aircraft or other vehicles at or near airports are common, occurring almost daily. The Federal Aviation Administration (FAA) provides oversight of the terminal area and has taken action to improve safety, but has been called upon by the National Transportation Safety Board (NTSB) and others to take additional steps to improve its oversight. As requested, this report addresses (1) recent actions FAA has taken to improve safety in the terminal area, (2) recent trends in terminal area safety and factors contributing to those trends, and (3) any additional actions FAA could take to improve safety in the terminal area. To address these issues, GAO analyzed data from FAA data; reviewed reports and FAA documents; and interviewed federal and industry officials. Since 2007, FAA has taken several steps to further improve safety at and around airports, including implementing procedural and technological changes to improve runway safety, proposing a rule that would require airports to establish risk-management plans that include the ramp areas where aircraft are serviced, collecting more data on safety incidents, and shifting toward risk-based analysis of airborne aviation safety information. Several of these initiatives are intended to better identify systemic issues in air traffic safety. Rates of reported safety incidents in the terminal area continue to increase. FAA met its interim goals toward reducing the total number of runway incursions--the unauthorized presence of an airplane, vehicle, or person on the runway--in 2009 and 2010, but the overall rate of incursions at towered airports has trended steadily upward. In fiscal year 2004, there were 11 incursions per million operations at these airports; by fiscal year 2010, the rate increased to 18 incursions per million operations. The rate and number of airborne operational errors--errors made by air traffic controllers--have increased considerably in recent years, with the rate nearly doubling from the second quarter of fiscal 2008 to the same period of 2011. FAA has not met its related performance goals. Comprehensive data are not available for some safety incidents, including runway overruns or incidents in ramp areas. Recent increases in reported runway incursions and airborne operational errors can be somewhat attributed to several changes in reporting policies and procedures at FAA; however, trends may also indicate an increase in the actual occurrence of incidents. Enhanced oversight and additional information about surface and airborne incidents could help improve safety in the terminal area. FAA oversight in the terminal area is currently limited to certain types of incidents, notably runway incursions and certain airborne incidents, and does not include runway overruns or incidents in ramp areas. In addition, the agency lacks data collection processes, risk-based metrics, and assessment frameworks for analyzing other safety incidents such as runway overruns, incidents in ramp areas, or a wider range of airborne errors. Further, changes to reporting processes and procedures make it difficult to assess safety trends, and existing data may not be readily available to decision makers, including those at the regional and local levels. As a result, FAA may have difficulty assessing recent trends in safety incidents, the risks posed to aircraft or passengers in the terminal area, and the impact of the agency's efforts to improve safety. GAO recommends that FAA (1) extend oversight of terminal area safety to include runway overruns and ramp areas, (2) develop risk-based measures for runway safety incidents, and (3) improve information sharing about incidents. The Department of Transportation agreed to consider the recommendations and provided clarifying information about efforts made to improve runway safety, which GAO incorporated.
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In 2003, Congress passed the MMA, which created the Medicare Part D program. The MMA requires that all Part D sponsors have a program to control fraud, waste, and abuse. CMS is responsible for safeguarding the Part D program from fraud, waste, and abuse. In 2003, Congress passed the MMA, which created a prescription drug benefit known as Medicare Part D. Voluntary enrollment in the Medicare Part D program began November 15, 2005, and the benefit went into effect January 1, 2006. Although the Medicare Part D program is overseen by CMS, Part D drug benefit plans are administered by private companies that apply to CMS to participate in the program. When approved, these private companies contract with the federal government to be Part D sponsors and market Part D drug plans directly to Medicare beneficiaries. The MMA includes a requirement that all Part D sponsors have a program to control fraud, waste, and abuse in Part D; CMS regulations establish the requirements for comprehensive compliance plans for Part D plan sponsors. To guide Part D sponsors in designing a fraud and abuse program that addressed Part D risks, in April 2006, CMS issued recommendations for Part D sponsors’ fraud and abuse programs based on input from various sources, including law enforcement and industry representatives. The guidance, issued as chapter 9 in the Prescription Drug Benefit Manual, contains further interpretation and guidelines on the steps sponsors should take to detect, correct, and prevent fraud, waste, and abuse in Part D. CMS required Part D sponsors to have fraud and abuse programs operational and in effect at the time their Part D contracts were awarded and expected sponsors to adopt the recommendations in chapter 9 by January 1, 2007. Table 1 describes the required elements of a comprehensive compliance plan and selected recommended measures for addressing fraud, waste, and abuse specific to Part D in each of the required compliance plan elements. In the chapter 9 guidance, CMS recommends that Part D sponsors design their fraud, waste, and abuse programs to safeguard against identified risk areas and identifies examples of fraud, waste, and abuse risks associated with Part D stakeholders, including internal and external parties. Internal parties include Part D sponsors and their employees; external parties include physicians, pharmacies, and Medicare beneficiaries. Chapter 9 also states that sponsors’ preexisting fraud and abuse programs should be focused on controlling fraud by external parties submitting claims to the sponsor, and stated that Part D sponsors are to identify and address internal fraud, waste, and abuse by the sponsor and its employees as well. In chapter 9, CMS also identified examples of potential fraud, waste, and abuse by Part D sponsors, such as marketing schemes to improperly enroll Medicare beneficiaries in Part D plans or deliberately using inaccurate data to receive improper payments from CMS. CMS identified examples of potential fraud, waste, and abuse by Medicare beneficiaries, such as beneficiaries misrepresenting their identity to illegally obtain the drug benefit or engaging in doctor shopping, where a patient seeks prescriptions from multiple physicians with the intent to abuse or sell drugs. CMS identified potential examples of fraud, waste, and abuse by pharmacies, citing improper billing practices, such as billing for nonexistent prescriptions. Regulations and the chapter 9 guidance recognize that contractors can be significant stakeholders in sponsors’ Part D operations. CMS permits Part D sponsors to use contractors to perform various Part D functions. However, CMS regulations and chapter 9 state that the Part D sponsor is ultimately responsible for fulfilling the terms and conditions set out in the sponsor’s contract with CMS, even if the sponsor delegates a Part D function to a contractor. In addition, Part D rules establish contractual obligations for Part D sponsors that delegate tasks to contractors. CMS is responsible for safeguarding the Part D program from fraud, waste, and abuse, including ensuring sponsors’ compliance with applicable requirements. While many groups within CMS are responsible for overseeing different aspects of the Part D program, two divisions provide oversight of Part D sponsors’ fraud and abuse programs. OFM is the lead office for program integrity and financial oversight, including responsibility related to oversight of fraud, waste, and abuse in the Part D program. OFM developed the chapter 9 guidance for sponsors’ fraud and abuse programs and is responsible for reviewing and approving fraud and abuse program plans when organizations first apply to become Part D sponsors. CBC is the lead office for operational oversight of Part D, including sponsor management, program audits, and enforcement actions. OFM and CBC are responsible for conducting audits of Part D sponsors’ compliance with fraud and abuse program requirements. CBC is responsible for conducting broad Part D program audits that include, but are not limited to, Part D sponsors’ implementation of their compliance plans, including fraud and abuse programs. In contrast, OFM is responsible for financial audits and audits of Part D sponsors’ fraud and abuse programs. CMS contracted with the MEDICs to support OFM’s audit, oversight, and antifraud and abuse efforts in Part D. In October 2005, CMS issued its Oversight Strategy for overseeing Part D sponsors, particularly with regard to mitigating fraud, waste, and abuse. In the strategy, CMS noted that in conducting oversight of Part D sponsors CBC would rely on self-reported, unaudited data provided to CMS by Part D sponsors. However, in the strategy, CMS also acknowledged that program audits conducted by CBC would be necessary to ensure compliance and to document that CMS has fulfilled its program oversight responsibilities. According to the Oversight Strategy, CBC would follow a 3-year audit cycle that would include both desk audits—reviews of documents requested from Part D sponsors—and on-site audits covering all aspects of the Prescription Drug Benefit Manual over the 3 years. In December 2006, HHS’s OIG conducted a review of Part D sponsors’ compliance plans that found that many Part D sponsors’ compliance plans did not address all of CMS’s compliance plan requirements, including fraud and abuse program plans. In response, CMS reported that “CMS will begin these compliance plan audits in 2007, and sponsors will be accountable for meeting all requirements.” OFM’s oversight of Part D sponsors relies on the MEDICs to audit Medicare Part D fraud and abuse programs. CMS has entered into contracts under which task orders were issued to three MEDICs to conduct various activities related to Part D. The first MEDIC began its work in November 2005, and the other two MEDICs began work in December 2006. At that time, OFM estimated that the MEDICs would conduct audits of Part D sponsors’ fraud and abuse programs in the first years of Part D. In 2005 and 2006, CMS estimated that at least 10 audits of fraud and abuse programs would be conducted by each of the MEDICs each year under task orders to be issued under the contract. Specifically, CMS estimated that the first MEDIC would complete 10 of these audits during the 2005—2006 contract year and that the three MEDICs would complete 35 of these audits during the 2006—2007 contract year. The five Part D sponsors we reviewed had not completely implemented all of CMS’s seven required compliance plan elements and selected recommended measures for Part D fraud and abuse programs. All Part D sponsors had the required elements and recommended measures for written policies, procedures, and standards of conduct (element 1); effective lines of communication (element 4); and enforcement of standards through disciplinary guidelines (element 5). However, Part D sponsors varied in their implementation of the remaining required elements and selected recommend measures. Table 2 illustrates the variation in the extent to which the five Part D sponsors implemented the required elements and selected recommended measures for their fraud and abuse programs. All five Part D sponsors we reviewed completely met the requirements for written policies, procedures, and standards of conduct. All five had the required written policies, procedures, or the standards of conduct that articulated a commitment to comply with all applicable federal and state standards. All three Part D sponsors that relied on a first-tier entity in carrying out its Part D responsibilities had included provisions in their contract with the entity requiring compliance with all applicable federal laws, regulations, and CMS instructions. All five Part D sponsors completely met the selected recommended measures by having written policies, procedures, or standards of conduct that applied to detecting, correcting, and preventing fraud, waste, and abuse. All five had standards of conduct that were available to employees on the Part D sponsors’ internal Web sites. In addition, Part D sponsors reported that information regarding written policies, procedures, or standards of conduct was disseminated through training or employees had to sign attestations that they had reviewed and understood the policies, or both. Four of the five Part D sponsors completely met the requirements for having both a compliance officer and compliance committee accountable to senior management. The remaining Part D sponsor only partially met the requirement because it did not have a compliance committee. Of the five Part D sponsors’ compliance officers, three of the compliance officers had been in that role since the Part D benefit was implemented in January 2006. The other two compliance officers started in their roles during 2007. All of the Part D compliance committees that existed were overseen by the compliance officer, were accountable to senior management, and were responsible for advising the compliance officer on various issues, ranging from implementing compliance plans to developing their Part D operations. For example, one Part D compliance committee was involved in monitoring the implementation of the activities outlined in the compliance plan, providing regular reports to senior management, and providing input on training. Another Part D sponsor used its corporate compliance committee instead of a separate Part D compliance committee to address Part D issues; a formal Part D compliance committee had not been implemented. The corporate compliance committee meetings included senior executives and the Part D compliance officer. Three Part D sponsors completely met the selected recommended measures for a compliance officer and committee. Two Part D sponsors partially met the recommended measures. Of these, one sponsor’s compliance officer did not report to senior management on at least a quarterly basis. The compliance officer from this Part D sponsor stated that he or she did not report regularly to senior management because the Part D sponsor had yet to have any cases that were determined to be fraud, waste, or abuse. The remaining Part D sponsor’s compliance committee did not meet on at least a quarterly basis. All five Part D compliance officers were responsible for overseeing and monitoring the implementation and maintenance of fraud and abuse programs, as recommended. The range of activities and responsibilities for the Part D compliance officers varied. Two compliance officers were directly involved in fraud and abuse program activities, while the other three delegated those responsibilities to other staff, or some components of their role were a function of another department or were delegated to a contractor. For example, one compliance officer was involved in decisions regarding fraud, waste, and abuse investigations and corrective actions, while another compliance officer delegated this responsibility. We found that four of the five Part D sponsors provided their Part D employees with general fraud, waste, and abuse training that covered Part D. Two of these sponsors completely met the requirements for education and training by also providing or ensuring that their Part D employees and first-tier entity, if applicable, received general fraud, waste, and abuse training. Two other sponsors partially met the requirements— they provided general fraud, waste, and abuse training to Part D employees, but they did not provide this training to their first-tier entity or ensure that the entity’s employees received it. One Part D sponsor did not meet the requirements because it did not provide a general training that covered Part D fraud, waste, and abuse to its employees. However, this sponsor reported that a general fraud, waste, and abuse training module on Part D was in development. The training curriculums of the Part D sponsors covered common fraud risks and vulnerabilities; federal laws related to fraud, waste, and abuse; and the sponsors’ protocols for detection and referral to government authorities. However, the extent of information about detecting, correcting, and preventing fraud in Part D varied among the curriculums. For example, one sponsor’s corporate-wide Ethics and Compliance training course contained a section on health-care fraud that had one reference to Part D. Similarly, another sponsor added a section to its preexisting healthcare fraud and abuse training curriculum for identifying Part D violations, such as enrolling a Medicare beneficiary in a plan different than the one the beneficiary selected. In contrast, one sponsor developed a fraud and abuse training that was entirely devoted to Part D and that discussed in detail CMS’s requirements and recommendations for an effective Part D fraud and abuse program and how the sponsor was meeting those standards. In addition, this sponsor’s curriculum was the only one that identified the potential for misconduct at the sponsor level. Specifically, this sponsor’s curriculum provided hypothetical scenarios of risks that employees may encounter on the job—such as a supervisor asking an employee to falsify Part D data submitted to the government to inflate enrollment. Only one Part D sponsor completely met the selected recommended measures for education and training by providing general training that covered Part D fraud, waste, and abuse to its employees on at least an annual basis and providing specialized training to its employees whose responsibilities or departments, such as marketing, put them at greater risk of encountering fraud, waste, or abuse. This sponsor provided employees in its pharmacy benefit management department with a specialized training on the government’s guidelines for preventing fraud, waste, and abuse in Part D. Three sponsors partially met the recommended measures; two did not provide specialized training to their Part D employees and three did not ensure that this training was provided to first-tier entities. One Part D sponsor did not meet any of the selected recommended measures for effective training and education. Additionally, we found that one sponsor’s interpretation of CMS’s recommendation for specialized training differed from CMS’s expectations. An official from this sponsor considered that operational training in a particular job function met this recommendation, even though the training did not include a reference to fraud, waste, and abuse. All five Part D sponsors completely met the requirements for effective lines of communication by having lines of communication between the compliance officer and the organization’s management, employees, and contractors. While the lines of communications may not have been directed to the compliance officers, all of these officers had access to information received on these lines. In addition, all five Part D sponsors met the selected recommended measures. Specifically, all five Part D sponsors used reporting mechanisms to receive reports of potential fraud, waste, and abuse and had investigated these reports within two weeks, as recommended. All five had confidential or anonymous mechanisms, such as hotlines, for receiving compliance questions, reports of potential risks, and reports of potential fraud, waste, or abuse from internal and external parties. All five sponsors we reviewed had separate reporting mechanisms for internal parties, including employees, and for external parties, including beneficiaries, to report potential offenses. All five Part D sponsors made information about the methods for reporting potential offenses available to internal and external parties, as recommended. For internal parties, all five Part D sponsors provided information to employees regarding the methods for reporting potential offenses on their companies’ internal Web sites. In addition, four Part D sponsors provided information regarding the hotline number and other methods for reporting to employees during their Medicare Part D fraud and abuse training. For external parties, two of the compliance officers for the Part D sponsors in our review reported that beneficiaries were typically informed of the methods for reporting potential fraud and abuse on their explanation of benefits. One Part D sponsor provided promotional material to one of their first-tier entities with the hotline number for reporting potential fraud, waste, or abuse. All five Part D sponsors had investigated concerns and reports of potential offenses received through the internal or external reporting mechanisms, as recommended. One Part D sponsor delegated investigation activities to a first-tier entity. Only two of the five Part D sponsors had received Part D fraud reports through the internal reporting mechanism. One Part D sponsor stated that Part D concerns may not have been reported through the internal mechanism because employees were bypassing the internal hotline and using other mechanisms for reporting, such as directly reporting a potential case of fraud, waste, or abuse to the special investigations unit. An official from another Part D sponsor reported that it had yet to receive any calls related to Medicare Part D on its internal reporting mechanism. All five Part D sponsors in our review had addressed or responded to reports of potential offenses received through their external reporting mechanism, including reports of potential offenses by beneficiaries and pharmacy providers. For example, one Part D sponsor received a report from a pharmacy that a family member of one of the sponsor’s beneficiaries was filling prescriptions for a drug for his own use and paying for them with the beneficiary’s Medicare Part D benefit. Other Part D sponsors received reports that beneficiaries were doctor shopping or selling their prescription drugs. The requirements for the enforcement through disciplinary guidelines were completely met by all five Part D sponsors. All five of the Part D sponsors in our review enforced standards through well-publicized disciplinary guidelines for individuals, as required. Most sponsors’ disciplinary guidelines were corporate policies that applied to all company products, including the Part D prescription drug plan. All five Part D sponsors promoted the disciplinary guidelines to encourage reporting of potential offenses, as recommended. Officials for all five Part D sponsors reported that disciplinary guidelines were incorporated into training courses or were available on the sponsor’s internal Web sites, or both. To publicize enforcement of disciplinary standards, one sponsor used its Ethics and Compliance Newsletter to communicate that disciplinary actions had been taken. Three Part D sponsors completely met the requirements by having procedures for internal monitoring and auditing at the sponsor and first- tier entity level, when applicable. One Part D sponsor partially met the requirements because, although it had procedures for internal monitoring and auditing, this sponsor did not have the monitoring and auditing procedures for its first-tier entity. One Part D sponsor did not meet the requirements because it did not provide us with internal monitoring and auditing procedures that met the criteria. Sponsors’ monitoring procedures were often broadly-focused departmental manuals that generally did not specifically refer to Part D. Auditing procedures included work plans with time frames for completion or processes for responding to auditing results. Three Part D sponsors completely met the recommended measures for internal auditing and monitoring because they implemented procedures for monitoring and auditing at the sponsor and first-tier entity, when applicable, and conducted data analysis and risk assessments. One Part D sponsor partially met the recommended measures because it had not monitored or audited its first-tier entity. One Part D sponsor did not meet any of the recommended measures. The data-monitoring activities of the sponsors in our review typically focused on protecting corporate assets against fraudulent claims by third parties, rather than detecting fraud, waste, or abuse at the sponsor level as well, as recommended to protect the Medicare program and its beneficiaries. Sponsors’ data monitoring for Part D typically focused on the conduct of external parties, such as monitoring pharmacies’ dispensing patterns, beneficiaries’ drug utilization, and physicians’ prescribing patterns, and did not monitor internal practices by the sponsor or its employees that also posed risks for Medicare, such as double billing of Medicare. Similarly, sponsors’ monitoring activities for Part D often reflected activities in place before Part D for their other lines of business, such as regular analyses of prescriptions claims data from pharmacies in their network, and did not generate a separate analysis of Part D claims. In our review, we found that only one sponsor targeted its monitoring efforts specifically to detect fraud, waste, and abuse in a Part D risk area. This sponsor mined Part D claims for irregular activities, such as signs of doctor shopping among beneficiaries prescribed narcotics. The sponsor’s compliance officer also noted that the special investigations unit sometimes engaged in additional Part D data monitoring if prompted by a suspected case of fraud, waste, or abuse. We found that four of the five sponsors conducted internal audits for Part D, as recommended. The audits generally focused on Part D operations and did not specifically audit for fraud, waste, or abuse. In general, sponsors’ Part D audit subjects related to operational issues or risks to company assets, such as the accuracy and completeness of the Part D membership process, Part D disenrollment issues, and the completeness and accuracy of pharmacy claims data. For example, one Part D sponsor’s audit identified administrative issues in collecting unpaid premiums from Part D beneficiaries and lack of timely processing of beneficiary applications. A Part D audit by another sponsor identified inaccurate pharmacy claims as potentially leading to overpayments of claims by the sponsor as opposed to Medicare. Only one sponsor’s audit specifically cited detection of possible fraud, waste, and abuse in Medicare Part D as the purpose of the audit. This audit of 20,000 pharmacy claims identified more than $1.2 million in Part D overpayments for recovery from pharmacies. This was the only example provided to us that identified funds for possible repayment to Medicare. Of the three sponsors that had a first-tier entity for Part D—such as a pharmacy benefit manager—two monitored and audited their first-tier entity, as recommended. One sponsor official said that because billing was a high-risk area for fraud, they check for billing irregularities in audits of their first-tier entity. Four sponsors conducted risk assessments to identify risk areas associated with their Part D programs. Sponsors’ risk assessments cited internal issues that pose risks for fraud, waste, and abuse in Part D—such as proper reporting of overpayments to CMS, accuracy and truthfulness of the data submitted to CMS for the purpose of federal reimbursement, and sales conduct that may mislead or confuse beneficiaries, or misrepresent the product. One Part D sponsor had undertaken internal audits that reflected the internal Part D fraud, waste, and abuse risks cited in its risk assessment, as recommended. Four sponsors completely met the requirements for prompt responses and corrective action initiatives by developing the respective procedures and conducting timely and reasonable inquiry into potential offenses. One sponsor only partially met the requirements because this sponsor had not developed corrective action procedures in the event that fraud, waste, or abuse was detected. The corrective action procedures provided by Part D sponsors varied in the level of detail and information provided. For example, one sponsor cited its employee disciplinary guidelines as its corrective action procedures, while another sponsor’s corrective action procedures addressed various stakeholders—pharmacy providers and beneficiaries—and the possible actions to be taken in the event of a compliance violation or detected offense. All Part D sponsors reported initiating inquiries into reported potential offenses as required. Four Part D sponsors reported that they had cases that warranted corrective action. Only one sponsor reported the need to take disciplinary action against one of its employees. This Part D sponsor reported terminating an employee for being involved in an identity-theft scheme using the personal identification information of beneficiaries. This Part D sponsor also reported terminating a pharmacy technician after the technician stole a beneficiary’s prescription from the pharmacy refill center and attempted to sell it to the beneficiary at a discounted price. As a result of criminal proceedings, this individual was sentenced to 2 years of probation, and ordered to pay restitution for the cost of the drug. Finally, three sponsors reported repaying CMS an overpayment, as required. The four sponsors that reported taking disciplinary or corrective actions varied in their understanding and use of such actions. One Part D sponsor reported that instead of taking corrective or disciplinary action itself, most often cases were turned over to the MEDICs or local law enforcement to determine the necessary course of action. Another Part D sponsor reported that its understanding of taking a corrective action was reporting the case to the MEDIC. Three of the Part D sponsors completely met the selected recommended measures in our review by: (1) having procedures that specified that an investigation into a detected offense would begin within two weeks after it was reported; (2) having procedures to voluntarily self-report any findings of potential fraud or misconduct to CMS or the appropriate government authority; and (3) self-reporting any findings of potential fraud or misconduct to CMS or the appropriate government authority, if warranted. Two Part D sponsors only partially met the recommended measures because they did not have procedures specifying that an investigation into a detected offense would begin within 2 weeks after it was reported. All five Part D sponsors we reviewed had procedures in place for voluntarily self-reporting fraud or misconduct to the MEDICs or CMS, as recommended. All five sponsors had also self-reported potential Part D fraud or misconduct to the MEDICs. For example, an official from a Part D sponsor reported that the sponsor referred a case to the MEDIC after conducting an investigation that identified a “phantom pharmacy” billing over $2 million in false claims. CMS’s oversight of Part D sponsors’ fraud and abuse programs has been limited. CMS’s oversight activities to date have included the review and approval of fraud and abuse program plans that Part D sponsors submit as part of their initial Part D sponsor applications. Although CMS indicated that it planned to conduct audits to monitor Part D sponsors’ implementation of fraud and abuse programs, CMS has not yet conducted these audits. CMS’s oversight activities to date have been limited to review and approval of Part D sponsors’ compliance plans detailing their fraud and abuse program plans submitted as part of their initial Part D sponsor applications. A CMS official reported that in 2005, the first year program plans were reviewed, some sponsors submitted plans that did not meet the agency’s requirements and recommendations specific to fraud, waste, and abuse in Part D. When starting the Part D program, a CMS official reported that CMS expected that sponsors would understand the regulations and that sponsors would articulate clearly how their compliance plans addressed fraud, waste, and abuse specific to Part D. However, this official told us that after reviewing the components of sponsors’ compliance plans that were included in their Part D applications, CMS officials realized that sponsors needed more guidance. For example, a CMS official told us that some sponsors’ applications needed follow-up on all of the components of their fraud and abuse programs. According to CMS officials, in many cases, Part D sponsors initially submitted corporate-wide compliance plans that did not address fraud, waste, and abuse specific to Part D, as CMS expected. Rather than disapproving these sponsors’ fraud and abuse program plans, CMS officials reported that they worked with the sponsors to help them develop fraud and abuse program plans that would be approved in that first year. CMS’s review of fraud and abuse program plans was limited to the initial contract-application process. CMS officials reported that sponsors with approved fraud and abuse program plans prior to the issuance of chapter 9 in April 2006 were not required to resubmit program plans in order for CMS to verify that sponsors’ plans were in accordance with the new guidance. In addition, CMS officials told us that CMS did not require Part D sponsors to submit new or updated fraud and abuse program plans during the contract renewal process for program year 2007 or 2008, which limited CMS’s ability to ensure that existing Part D sponsors continued to maintain compliance with this requirement. CMS also provided technical assistance, such as guidance and information sessions to Part D sponsors to help them understand the agency’s expectations regarding the development and implementation of fraud and abuse programs. CMS also clarified its expectations regarding sponsors’ fraud and abuse programs by issuing a final rule in December 2007. In addition, CMS provided information sessions, such as the Compliance Conference in August 2006 that included Part D and an Open Door Forum in May 2006, to discuss the guidance for Part D sponsors regarding the development and implementation of fraud and abuse programs. CMS has not conducted oversight activities of Part D sponsors’ program implementation, such as audit and enforcement actions, to ensure compliance with fraud and abuse program requirements. CMS has taken a collaborative rather than an enforcement approach with Part D sponsors to implement the Part D program and safeguard it from fraud, waste, and abuse. In its Part D Oversight Strategy, issued in 2005, CMS stated that it would reserve enforcement activities to large, repeated, or extreme Part D program violations. Part D oversight responsibilities are shared between two CMS offices. First, the CBC has responsibility for Part D operational oversight, including sponsor compliance with all Part D program rules. In April 2006, CMS’s CBC issued a Part D Audit Protocol identifying 14 program areas for its audits of Part D sponsors, such as sponsors’ implementation of CMS’s fraud and abuse program requirements. However, in November 2006, CBC issued a short-term audit strategy stating that it had limited resources for auditing Part D programs due to the increasing number of organizations contracting with CMS to offer Medicare products. CBC noted that it did not have the resources to audit every plan, across every program attribute, every 3 years as originally stated in its 2005 Oversight Strategy. CBC reported that it would identify the minimal level of effort needed to meet its oversight responsibilities and ensure that Medicare stakeholders remained confident in the program. CBC stated that to conserve resources it would be conducting desk audits as much as possible, which would consist of reviews of documents requested from Part D sponsors. In 2007, the CBC initiated program audits based upon the short-term audit strategy it issued in November 2006. In 2007, these CBC program audits assessed Part D sponsors’ compliance with selected program areas, but the CBC audits did not assess sponsors’ implementation of fraud and abuse programs. Moreover, CBC does not plan to audit sponsors’ implementation of fraud and abuse programs in 2008. In June 2007, CBC conducted a self-assessment survey of Part D sponsors regarding the implementation of their fraud and abuse programs. A CBC official reported that the purpose of the survey was to help CMS identify the degree to which sponsors implemented compliance plan requirements and recommended measures. In a follow up survey conducted in March and April 2008, CBC found that nearly all prescription drug plans (PDP) reported that they fully met CMS’s compliance plan requirements. Secondly, CMS’s OFM has a targeted role in oversight that focuses on financial oversight and program integrity, such as Part D fraud prevention and detection. CMS contracted with the MEDICs, which are overseen by OFM, to assist with OFM’s program integrity efforts for Part D. Audits of Part D sponsors’ compliance plans are part of the current MEDIC statement of work. However, no task orders specific to auditing sponsors’ fraud and abuse programs have been issued. Accordingly, no audits of sponsors’ fraud and abuse programs have been initiated since the Part D program began. In comments on a draft of this report, CMS stated that each MEDIC will begin audits of Part D sponsors’ compliance plans by the end of summer 2008. The MEDICs will use the Compliance Plan Audit Chapter of the Part D Audit Guide to perform this work. An OFM official told us that OFM has limited funding for the MEDICs’ fraud and abuse program audits. OFM explained that under funding levels as of April 2008, the MEDICs receive and investigate reports of fraud, but the MEDICs did not have the staff to conduct audits of sponsors’ programs to control fraud, waste, and abuse. We have designated the overall Medicare program as high risk, and the size, nature, and complexity of the Part D program make it a particular risk for fraud, waste, and abuse. In spite of this risk and 3 years after the start of the Part D program, CMS has not conducted oversight activities to monitor sponsors’ implementation of fraud and abuse programs. CMS has acknowledged that program compliance and integrity audits conducted by CMS are necessary to ensure compliance and document CMS’s program oversight responsibilities. In particular, the agency reported that it would conduct audits of fraud and abuse programs in 2007. However, although both offices have the responsibility to do so, CBC has not conducted these audits, and OFM has not initiated MEDIC audits of fraud and abuse programs as it had planned. Our review of five Medicare Part D sponsors’ implementation of fraud, waste, and abuse programs supports the need for such oversight. We found that none of these five sponsors, which cover more than a third of Part D enrollees, completely implemented all of the required compliance plan elements and selected recommended measures for their fraud and abuse programs. Lack of CMS oversight of Medicare Part D sponsors’ implementation of programs to prevent fraud, waste, and abuse risks significant misuse of funds in this $39 billion program. We believe that CMS oversight of Medicare Part D sponsors’ programs could increase the completeness of sponsors’ implementation of required compliance plan elements and selected recommended measures and, as a result, reduce the risk to Medicare. To help safeguard the Medicare Part D program from fraud, waste, and abuse, we recommend the Administrator of CMS ensure that CMS conducts timely audits of Part D fraud and abuse programs to monitor sponsors’ implementation of these programs. CMS provided written comments on a draft of this report. CMS stated that it concurred with our recommendation and that it is prioritizing its oversight activities to ensure sponsors’ compliance with CMS’s policies. CMS also agreed with our finding regarding the extent to which Part D sponsors have implemented programs to control fraud, waste, and abuse. CMS disagreed with our finding that the agency’s oversight has been limited. However, CMS’s comments did not provide additional evidence of audits of sponsors’ fraud, waste, and abuse programs, or of oversight activities beyond those described in the report. We believe that such audits are necessary to ensure sponsors’ compliance. In addition, CMS stated that insufficient resources have been one of the primary impediments to its implementation of a robust oversight strategy. CMS noted that Congress did not respond to its request for additional program integrity funds in fiscal year 2006 through fiscal year 2008. However, we believe that program integrity will remain at risk until CMS conducts timely audits to monitor Part D sponsors’ implementation of fraud and abuse programs. CMS’s written comments are reprinted in appendix II. CMS also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this report. We will then send copies to the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-7114 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. GAO staff who made major contributions to this report are listed in appendix III. To examine the extent to which certain Part D sponsors implemented programs to control fraud, waste, and abuse, we conducted on-site reviews at five Part D sponsors. We selected these five sponsors for our review because they each offered a stand-alone Part D prescription drug plan that provided nationwide coverage, varied in enrollment size, and collectively provided coverage for a sizeable proportion of Part D beneficiaries. These five national prescription drug plans (PDP) selected for our review from these five sponsors represented about 35 percent of total Medicare Part D enrollment as of April 2007. Our sample is not generalizable to the entire Part D sponsor population. Four of the five sponsors we reviewed were private health insurance companies and one was a pharmacy benefit manager. For these on-site reviews, we developed a data collection instrument based on: (1) the required compliance plan elements and certain recommended measures for fraud and abuse programs outlined in regulations and chapter 9 of the Part D Prescription Drug Benefit Manual and (2) additional input provided by the Centers for Medicare & Medicaid Services (CMS). CMS’s regulations provided the core required elements of a compliance plan and established a framework for fraud and abuse programs. CMS’s chapter 9 guidance provided several recommendations for how sponsors should implement a program within that framework to control fraud, waste, and abuse as part of an effective Part D compliance plan. Our data collection instrument did not include all of CMS’s recommended measures. We selected recommended measures for inclusion in our data collection instrument based on a variety of factors, such as measures that we judged were the most helpful to fulfilling the purpose of the requirements, measures that were recommended by the OIG and subject-matter experts for compliance program evaluations, including government officials from Veterans’ Affairs (VA) and an industry representative, measures that helped tailor a fraud and abuse program to Part D, and measures that indicated that a required component or procedure had been implemented. For example, CMS required procedures for internal monitoring and auditing, but provided a variety of recommendations on the types of internal monitoring and auditing that could be implemented. We selected the recommendations we considered to be the most helpful to fulfilling the requirements, such as the recommendation to conduct an audit, rather than the recommendation regarding the size, scope, and structure of the internal audit department. This study extends beyond a previous report from the Office of the Inspector General (OIG), which reviewed Part D sponsors’ compliance plans to assess whether the plans addressed all of the requirements and selected recommendations. The OIG limited its assessment to a document review of the compliance plans submitted to CMS and did not assess the extent to which the compliance plans had been implemented. However, we assessed the implementation of the compliance plans by reviewing documentary evidence on-site to examine how sponsors addressed fraud, waste, and abuse specific to Medicare Part D for each of the required elements of each Part D sponsor’s compliance plan. This included the compliance plan and any additional documents, such as procedures, that were referenced in the compliance plan. To complete our data collection instrument, we used documentary evidence to verify implementation of each element. We requested at least one document pertaining to each of the required elements and selected recommended measures. For example, we asked the sponsors to provide a copy of the required auditing procedures and evidence that the Part D sponsor had implemented the auditing procedures as recommended by providing a copy of the findings from at least one audit related to Part D that had been conducted. Our determination of whether sponsors met the criteria for a requirement or recommendation was based on the document’s applicability to Part D and the specific element under review, not the extensiveness of the document’s content. For example, some evidence we accepted contained one section referencing the requirement or recommendation, while other documents were more detailed. All the policies and procedures in the documents we reviewed were implemented by sponsors and in use at the time of our on-site reviews. In addition, we determined that the sponsors’ met the requirements or selected recommendations if they implemented the required element or selected recommended measures in their compliance plan. We also conducted interviews with Part D sponsor senior administrators, and compliance and other staff, including contractors’ employees. To gain a comprehensive picture of the sponsor’s fraud and abuse activities, in some cases, we also interviewed additional staff members involved in Part D functions, including staff from departments such as special investigations, monitoring and auditing, ethics, and pharmacy benefit management. In addition to the contact named above, Martin T. Gahart, Assistant Director; Jennifer Apter; Catina Bradley; Jawaria Gilani; Jennel Harvey; Joy Kraybill; Amy Shefrin; and Jennifer Whitworth made key contributions to this report.
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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a voluntary outpatient prescription drug benefit, known as Medicare Part D. The Centers for Medicare & Medicaid Services (CMS) contracts with private companies to serve as Part D sponsors and administer the Part D prescription drug benefit plans. To protect beneficiaries and the fiscal integrity of the program, the MMA requires Part D sponsors to implement programs to control for fraud and abuse in Part D. Subsequent regulations and guidance from CMS contain requirements and recommended measures for these programs. This report examines (1) the extent to which certain Part D sponsors have implemented programs to control fraud, waste, and abuse and (2) the extent of CMS's oversight of Part D sponsors' programs to control fraud, waste, and abuse. GAO conducted on-site reviews of five of the largest Part D sponsors' fraud and abuse programs. GAO also interviewed officials from CMS and reviewed CMS documents. The five Part D sponsors in GAO's review had not completely implemented all of CMS's required compliance plan elements and selected recommended measures for Part D fraud and abuse programs. All Part D sponsors had completely implemented the requirements and selected recommendations for three of the seven required compliance plan elements. However, Part D sponsors varied in their implementation of the remaining required elements and selected recommended measures. CMS oversight of Part D sponsors' fraud and abuse programs has been limited. To date, CMS's activities have been limited to the review and approval of sponsors' fraud and abuse program plans submitted as part of the initial Part D applications. For example, CMS officials reported that they worked with sponsors to help them develop fraud and abuse program plans that met the agency's compliance plan requirements and recommendations specific to fraud and abuse. However, CMS has not conducted oversight to assess Part D sponsors' implementation of fraud and abuse programs. Officials from CMS stated that the agency had not audited sponsors' implementation of fraud and abuse programs in 2007, and as of April 2008, no audits of these programs had been conducted.
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Federal agencies rely extensively on computerized information systems and electronic data to carry out their missions. The security of these systems and data is essential to prevent data tampering, disruptions in critical operations, fraud, and inappropriate disclosure of sensitive information. Protecting federal computer systems and the systems that support critical infrastructures has never been more important, owing to the ease of obtaining and using hacking tools, the steady advances in the sophistication and effectiveness of attack technology, and the emergence of new and more destructive attacks. Without proper safeguards, there is enormous risk that individuals and groups with malicious intent may intrude into inadequately protected systems and use this access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Enacted into law on December 17, 2002, as Title III of the E-Government Act of 2002, FISMA authorized and strengthened information security program, evaluation, and reporting requirements. It assigns specific responsibilities to agency heads, chief information officers (CIO), and IGs. It also assigns OMB and the National Institute of Standards and Technology (NIST) with responsibilities with regard to oversight and guidance. Among other things, OMB is responsible for overseeing agency information security policies and practices, including developing and overseeing guidance on information security and overseeing compliance. NIST is tasked with developing standards and guidance for implementation of FISMA requirements by federal agencies. However, 4 years into the implementation of FISMA, many agencies continue to exhibit weaknesses in carrying out the act’s requirements. Overall, FISMA requires each agency to develop, document, and implement an agencywide information security program. This program should provide security for the information and information systems that support the operations and assets of the agency, including those provided or managed by another agency, contractor, or other source. Among the key activities and responsibilities associated with implementing this program are the following: Development, maintenance, and annual update of an inventory of major information systems (including major national security systems) that are operated by the agency or are under its control. Risk-based policies and procedures that cost-effectively reduce information security risks to an acceptable level and ensure that information security is addressed throughout the life cycle of each information system, including through compliance with minimally acceptable system configuration requirements. Security awareness training for agency personnel, including contractors and other users of information systems that support the operations and assets of the agency, and training for personnel with significant responsibilities for information security. Periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, performed with a frequency depending on risk, but not less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems. A process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in the information security policies, procedures, and practices of the agency. In addition, as part of its responsibilities for overseeing the establishment of agency information security programs in accordance with FISMA, OMB requires that systems be certified and accredited, a process by which senior agency officials certify that the risk level of information systems is acceptable and that the systems are approved for operation. Because these key activities are interdependent, weaknesses in one activity challenge the effective accomplishment of other FISMA activities. For example, a complete and accurate system inventory provides a basis for tracking FISMA compliance and for testing the effectiveness of security controls for all systems and their components—necessary to assess system risk. The inventory and risk assessments in turn feed an agency’s strategy for managing risk and maintaining departmental risk- based policies and procedures. Similarly, effectively training personnel strengthens an agency’s ability to properly and consistently implement required security controls and to maintain an effective program over time. To help ensure that agencies are accountable for meeting the act’s requirements, FISMA requires each agency to annually report to OMB, selected congressional committees, and the Comptroller General of the United States on the adequacy of information security policies, procedures, and practices and on compliance with requirements. Agency heads are required to annually report the results of their independent evaluations to OMB. Defense, Homeland Security, Justice, and State face challenges in implementing key information security control activities required by FISMA and OMB, as shown in table 1. The reasons that the departments are challenged in these areas vary. For example, some departments attribute weaknesses to limitations in the tools and processes they use to perform certain activities (such as training and remedial actions). Until the departments address these challenges and fully implement an effective departmentwide information security program, they increase the risk that they may not effectively protect the confidentiality, integrity, and availability of their information and information systems. FISMA and OMB guidance require each agency to develop, maintain, and annually update an inventory of major information systems that are operated by the department or that are under its control. For each system, OMB requires agencies to use their inventories to support information resource management, including monitoring, testing, and evaluation of information security controls. Of the four departments, Homeland Security and Justice reported having complete system inventories. OMB has announced in its FY 2006 Report to Congress on Implementation of The Federal Information Security Management Act of 2002 that Justice’s automated tool will be available to other federal agencies under the information system security line of business. However, Defense and State have not developed accurate and complete FISMA inventories. Since 2004, the IG at Defense has reported that the department does not have a complete and accurate inventory of its major information systems. A contributing factor to this incomplete inventory is that Defense does not have a common definition of an information system. As noted in guidance that the department issued in 2006, Defense policies have at least two definitions of a system, neither of which provides consistent criteria for what should be entered into a FISMA inventory. The 2006 guidance provides a third set of criteria and states that the two policy definitions should act only as a starting point. However, Defense components must make independent interpretations of whether the asset under evaluation should be reported as a system for FISMA purposes, and the varied interpretations create discrepancies in the inventory. For example, Department of the Navy officials stated that not having a common definition of what is an information technology (IT) system makes it virtually impossible to distinguish between a system and its constituent subsystems/applications versus a family of systems and constituent systems. Without establishing and enforcing the use of one common definition, Defense cannot implement consistent inventory management practices across its components. State has developed a definition of a major information system for the purposes of its inventory; however, there is disagreement with its IG regarding how to apply the definition to individual IT assets—either separately or as part of a consolidated system. In 2006, State’s IG found Web applications that State officials had not included separately in their FISMA inventory. Because of time limitations, the IG was unable to determine whether other IT assets were missing from the inventory and rejected the entire FISMA inventory maintained by State. State now has an effort under way to resolve this challenge and identify all Web applications for inclusion in the inventory. If this effort results in agreement with State’s IG, it could help the department in obtaining independent verification of its system inventory. FISMA requires that agency information security programs include risk- based policies and procedures that ensure that information security is addressed throughout the life cycle of each information system, including through compliance with minimally acceptable system configuration requirements. According to the NIST guidance for implementing configuration management requirements, the policies for baseline system configurations provide information about the makeup of a particular system component (e.g., the standard software load for a workstation or notebook computer, including updated patch information). In addition, the system configuration settings are the adjustable parameters of these components that enforce the agency security policy consistent with operational requirements. According to the fiscal year 2006 CIO FISMA reports, all four departments reported that they had established a departmentwide policy for common security configurations. However, as detailed in table 2, only State reported successfully implementing its common configuration policy on all system platforms. State attributes its success to the development and implementation of a strong configuration management compliance program known as “Evaluation and Verification.” According to State, the program conducts remote scans to confirm whether State systems are operating as intended, in accordance with mandatory security configuration requirements. The program also helps provide the CIO with an additional level of assurance by identifying known security vulnerabilities within State systems and applications. However, Defense, Homeland Security, and Justice reported inconsistent implementation of common secure configuration policies across departmental systems. Without consistent implementation of common security configurations across systems, these departments increase the risk that their systems will have avoidable security vulnerabilities. FISMA mandates that all federal employees and contractors who use department information systems be provided with periodic training in information security awareness and accepted information security practices. FISMA also requires agencies to provide appropriate training on information security to personnel who have significant security responsibilities. This training, described in NIST guidance, should inform personnel, including contractors and other users of information systems supporting the operations and assets of an agency, of information security risks associated with their activities and of the roles and responsibilities of personnel to properly and effectively implement the controls required by policies and procedures that are designed to reduce these risks. Although the four departments reported that they have implemented training for the majority of their personnel, three departments face individual challenges, as follows: Defense officials reported that the department’s components have not been able to document and track whether their 2.3 million users (who are distributed worldwide) have received the required awareness training. For example, the Department of the Army is currently unable to ensure that users who access its IT systems have taken the required awareness training. To overcome this obstacle, the Army has identified a need for a componentwide tool that will ensure that only users who have taken the required training are permitted to access its systems. In addition, Defense officials stated that several of its components have difficulty in identifying and tracking all employees who have significant IT security responsibilities. For example, U.S. Air Force officials stated that it is challenging to identify these personnel when they are not within an IT functional area, and the Defense Information Systems Agency stated that it is difficult to track information security training requirements for contractors because of the lack of a central personnel database. In fiscal year 2006, Defense issued a training and workforce improvement manual to provide instructions to components to account for and track training of all IT security personnel, even in the absence of a central personnel database. Such a manual, if properly implemented, could help Defense ensure that all personnel receive appropriate security training. However, until Defense implements a mechanism to track training of personnel, it will be unable to verify that personnel are effectively trained in their information security roles and responsibilities. Homeland Security has not been able to ensure that employees who have significant IT security responsibilities receive specialized training. Specifically, the Homeland Security IG reported that the department has not yet established a program to train all individuals who have significant IT security responsibilities. Furthermore, in fiscal year 2006, the IG reported that Homeland Security did not ensure that employees with these responsibilities had completed the required training in the department’s process for validating the annual FISMA metrics. In addition, the department reported that it was unable to accurately report on the percentage of employees who have received specialized training because its reporting tool counts each course taken, instead of tracking that an individual has taken a specialized course. As a result, it could not be assured that all users had completed required training. Homeland Security has efforts under way to implement a centralized Web-based learning management system that will track the completion of security training. Until such a system is properly implemented, the department is unable to identify personnel who have not completed required training. State has not been able to verify that all employees and contractors have received required annual awareness training. The State IG reported that the department was unable to determine the total number of users who are required to complete the annual awareness training because of duplicate entries in State’s database that generates the number of users. Without adequate controls to ensure the accuracy of training information, the department cannot confirm that all personnel who require awareness training have actually completed the training. FISMA requires that department information security programs include periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices. This testing is to be performed with a frequency that depends on risk, but no less than annually. It is to include testing of management, operational, and technical controls for every information system identified in the FISMA-required inventory of major systems. Furthermore, a review of each system is essential to determine the program’s effectiveness. However, as we explained in a prior report, the depth and breadth of such system reviews are flexible and depend on several factors, such as (1) the potential risk and magnitude of harm to the system or data, (2) the relative comprehensiveness of the last year’s review, and (3) the adequacy and successful implementation of the plan of action and milestones for weaknesses in the system. Each of the four departments reported progress in increasing the percentage of systems for which reviews were performed and security controls tested (see fig. 1). However, the departments have not demonstrated adequate and effective monitoring and evaluation of information security controls. In previous work, we showed that guidance for performing such assessments at these departments was not sufficient, and that the departments have not adequately and effectively implemented policies for periodically testing and evaluating information security controls. We reported that the policies for the 24 Chief Financial Officer’s Act agencies for periodically testing and evaluating security controls did not fully address elements included in OMB and NIST guidelines and standards for performing effective security testing and evaluations. In particular, we reported that Defense, Homeland Security, Justice, and State had not established adequate instructions for determining the depth and breadth of periodic tests. Table 3 indicates weaknesses in developing and promulgating documented policies to address the security elements needed for effective testing. Ensuring that departmental policies are sufficient to address federal standards and guidelines helps to ensure their effective implementation in meeting FISMA requirements for testing and evaluation. Until these departments address the weaknesses in their policies, departments may not be able to overcome the weaknesses in the corresponding security control activities required by FISMA. In addition, the departments reported that security control testing was not performed consistently across all components in three of the four departments. Justice was the only department to report that all of its components successfully completed the required annual security control and contingency plan testing on all their systems. This success was achieved through the department’s efforts to establish and maintain a system inventory and to manage departmentwide risks. In contrast, Defense, Homeland Security, and State reported inconsistent testing of security controls and contingency plans among their components. As shown in tables 4 to 6, components of Defense, Homeland Security, and State reported widely varying percentages of systems tested. For example, at Homeland Security, the percentages for contingency plan testing ranged from 39 to 97 percent. Without consistent security testing across all components, a department lacks assurance that it is maintaining adequate information security departmentwide. In addition to periodically evaluating the effectiveness of security policies and controls, acting to address any identified weaknesses is a fundamental activity that allows an organization to manage its information security risks cost-effectively, rather than reacting to individual problems only after a violation has been detected or an audit finding has been reported. FISMA directs agencies to establish a process for remediating identified weaknesses in their information security policies and procedures. When weaknesses are identified, agencies are required to follow OMB and NIST guidance for developing and maintaining a plan of action and milestones. NIST Special Publication 800-37 states that remediation plans need to be updated to address weaknesses identified as a result of periodic testing. Key to an effective remediation plan is the accurate and complete inclusion of weaknesses identified during periodic testing. Remediation plans (also referred to as plans of action and milestones) should list all identified weaknesses and show estimated resource needs or other challenges to resolving them, key milestones and completion dates, and the status of corrective actions. In their fiscal year 2006 FISMA reports, the IGs at all four departments reported that the departments did not consistently use the remediation plan process to manage the correction of their information security actions. Specifically, the four departments had not fully ensured (1) that significant IT security weaknesses are addressed in a timely manner and receive appropriate resources or (2) that when an IT security weakness is identified, program officials develop, implement, and manage plans of action and milestones for their systems. Table 7 lists the challenges identified by the four departments and IGs regarding why they struggle to effectively handle deficiencies in information security policies, procedures, and practices. Although the four departments have control monitoring and weakness remediation processes in place, each department faces barriers to effectively incorporating these processes into their departmentwide information security programs: Defense officials reported that the size of the department has made it difficult to overcome its challenges in developing remediation plans. However, Defense is in the process of developing a departmentwide remediation process, but the process has not been completed and promulgated in final form. Interim guidance has been issued, and the Defense CIO stated that more time is needed to coordinate staffing to complete the final remediation guidance. Without complete guidance and an established departmentwide process, Defense cannot be assured that identified security weaknesses have been tracked and corrected. At Homeland Security, component agencies view the departmentwide FISMA reporting tool as more of a hindrance than a help for tracking their weaknesses, so use of the tool is inconsistent across component agencies. However, the department headquarters disagrees with the components on the usefulness of the tool. Unless the department can achieve user acceptance of this tool, it will be challenged to establish a consistent departmentwide remediation process. At Justice, the transition from an earlier NIST control framework to that in the most recent guidance resulted in duplicate versions of plans of action and milestones (one for each framework). According to Justice officials, the department’s tool for tracking these plans does not permit easy reconciliation of these redundancies because there is no automated process in place to do so. As a result, the department is challenged in accurately tracking information security weaknesses. Without such accurate tracking, the department has little assurance that security weaknesses are being addressed appropriately. In September 2006, State’s IG stated that the department has not yet verified that IT security findings and recommendations from external and internal reviews are being addressed and resolved as part of the remediation process. The department is aware of the need to have all data in its tracking tool—including weaknesses reportable via the remediation process—monitored and validated on a regular basis. To address this issue in fiscal year 2007, the senior agency information security officer plans to use a “system vulnerability checklist” to ensure that system owners are aware of the weaknesses and plan to remediate them in a timely manner according to the set milestones. If properly implemented, such a process could help to ensure that identified security weaknesses have been tracked and corrected. OMB has established a certification and accreditation process for federal agencies that supports the establishment of the information security programs required by FISMA. This process requires various activities, including assessing system risk, documenting security controls in place and planned, testing controls in place, and analyzing test results. Such a process provides a basis on which a senior agency official decides whether or not to approve system operation. Requiring such approvals from senior officials helps to ensure that risk is considered in the context of departmentwide mission operations. However, as seen in table 8, three of the four departments reported that not all systems in their inventory are fully certified and accredited, and two of the four departments’ IGs rated their respective department’s certification and accreditation process as “poor.” Only Justice overcame its challenges of prior years and achieved success in this activity. According to Defense officials, the reason for the low percentage reported is that many of these systems received interim authority to operate, which is not reflected in the reported numbers. Defense considers such interim authorities appropriate for certain systems, such as legacy systems and battlefield systems. However, systems without a full authorization to operate are an increased risk to agencywide operations, contributing to the overall risk to the agency. In fiscal years 2005 and 2006, the Homeland Security IG reported that the data contained in the department’s tracking tool used for monitoring the certification and accreditation process were often either incomplete or insufficient. In addition, in Homeland Security’s effort to produce complete certification and accreditation documentation to satisfy federal requirements, the department’s IG judged that the quality of work performed and documented did not meet applicable criteria. The IG has made recommendations to improve the quality of all certification and accreditation documents. In September 2006, the State IG reported that the department’s bureaus performed certification and accreditation of their respective systems, and that two components (Information Resource Management and Diplomatic Security) also performed certification and accreditation on both applications and systems. The IG believed that the certification and accreditation process was fragmented and did not enable the department to adequately verify that all potential vulnerabilities are being addressed. The IG recommended that the CIO assign one entity the responsibility to manage the certification and accreditation process. Accordingly, the department now has an effort under way to address the inconsistencies in its certification and accreditation process, which has received positive feedback from internal stakeholders. Although we have not evaluated the new process, if it is implemented consistently across the department, it could reduce potential risks to the department’s information systems. Defense, Homeland Security, Justice, and State face challenges in implementing key information security control activities required by FISMA and OMB, which include maintaining complete and accurate system inventories, implementing common security configurations for all system platforms, training personnel, establishing and consistently implementing complete policies and processes for testing security controls, and fully certifying and accrediting information systems. The challenges in implementing these requirements arose from various weaknesses, including inadequate tools and gaps or inconsistencies in guidance. These departments recognize the need to improve their implementation processes and have begun various steps to do so. For example, State is addressing the inconsistencies with its certification and accreditation process, and Defense is in the process of developing a departmentwide remediation process. Until each department improves its performance of key FISMA activities, the likelihood of fully implementing an effective information security program is diminished. To assist the Departments of Defense, Homeland Security, Justice, and State in addressing challenges to implementing FISMA requirements, we are making the following 15 recommendations. We recommend that the Secretary of Defense direct the Department of Defense’s CIO to take the following six actions: Develop and implement a plan with milestones to finalize and implement a departmentwide definition of a major information system that is accepted by the Defense IG. Develop and implement a plan with milestones to achieve full implementation of common security configurations across all system platforms. Develop and implement a plan with milestones to implement a mechanism to track information security training of personnel (i.e., security awareness and specialized training). Address the weaknesses in security control testing policies as described in this report, and ensure that components complete required annual security control and contingency plan testing on all systems. Complete development of the departmentwide remediation process and finalize the remediation guidance. Develop and implement a plan with milestones to ensure that all information systems receive a full authorization to operate, and to improve the department’s certification and accreditation process. We recommend that the Secretary of Homeland Security direct the Department of Homeland Security’s CIO to take the following four actions: Develop and implement a plan with milestones to achieve full implementation of common security configurations across all system platforms. Coordinate with Homeland Security’s Office of Human Capital to finalize implementation of the centralized Web-based learning management system for tracking the information security training of personnel. Address the weaknesses in security control testing policies as described in this report, and ensure that components complete required annual security control and contingency plan testing on all systems. Determine whether the department’s FISMA reporting tool meets the requirements of different users, such as those at components, and take any necessary corrective action. We recommend that the Attorney General direct the Department of Justice’s CIO to take the following three actions: Develop and implement a plan with milestones to achieve full implementation of common security configurations across all system platforms. Address the weaknesses in security control testing policies as described in this report. Reconcile redundancies in the department’s remediation plan tracking tool. Finally, we recommend that the Secretary of State direct State’s CIO to take the following two actions: Improve mechanisms for tracking information security awareness training of personnel. Address the weaknesses in security control testing policies as described in this report, and ensure that components complete required annual security control and contingency plan testing on all systems. We received written comments on a draft of this report from Defense’s Deputy Assistant Secretary of Defense Information and Identity Assurance (reproduced in app. II), from the Director of Homeland Security’s Departmental GAO/OIG Liaison Office (reproduced in app. III), from Justice’s Assistant Attorney General for Administration (reproduced in app. IV), and from State’s Assistant Secretary for Resource Management and Chief Financial Officer (reproduced in app. V). In these comments, officials from Homeland Security, Justice, and State generally agreed with our recommendations to their respective departments, and stated that they had implemented or were in the process of implementing them. Defense generally agreed with two recommendations, partially agreed with a third, and did not agree with the other three. All four departments provided technical comments, which we have incorporated as appropriate. In its comments, Defense did not concur with our recommendation to develop and implement a departmentwide definition of a major information system that is accepted by the Defense IG. Defense stated that it has a standard definition for FISMA reporting and has informed the Defense IG that it will continue to use the definition in the annual data call. While Defense does have a definition of a major information system specified in its annual IT repository guidance, as we discuss in our report, Defense’s own guidance provides at least two definitions of a system. This forces the components, and the Defense IG, to make independent interpretations of what should be included in the inventory for FISMA reporting purposes, leading to inconsistent results. Thus, we continue to believe our recommendation has merit. Defense partially concurred with our recommendation to achieve full implementation of common security configurations across all system platforms, noting that it was spearheading a federal initiative and that the policy is planned for implementation by February 2008. Defense concurred in principle with our recommendation to implement a mechanism to track information security training of personnel and stated that the department has already initiated actions to complete the recommendation. Defense also concurred in principle with our recommendation to address the weaknesses in security control testing policies and ensure that components complete required security control and contingency plan testing for all systems. Defense did not concur with our recommendation to complete the development of the departmentwide remediation process and finalize the remediation guidance. However, officials commented that the interim guidance, discussed in our report, will be finalized in September 2007. Defense also did not concur with our recommendation to ensure that all information systems receive a full authorization to operate and to improve the department’s certification and accreditation process. Defense stated that it believes an interim authorization to operate represents a sound risk management practice and balances operational requirements with acceptable risk, while further noting that its combined interim and full authorizations to operate total 91.9 percent of Defense systems. Although interim authorizations to operate represent some level of accepting risk, we believe that without a full authorization to operate, there is an increased risk to the department’s operations and continue to believe our recommendation has merit. In addition, Defense stated that the report does not accurately reflect the current security posture of the department and the progress it has made in implementing the provisions of FISMA. Throughout our report, where appropriate, we acknowledge the progress made by the department in implementing the provisions of FISMA and have deleted certain outdated information contained in the draft report. Nonetheless, Defense still faces challenges in individual areas of FISMA as noted in our report. In its comments, Homeland Security noted that the report does not provide common solutions that could be applied to large agencies across the federal government. Our review was not governmentwide in scope; rather, it was limited to challenges faced by Defense, Homeland Security, Justice, and State. Accordingly, our recommendations are addressed individually to these four departments. State also provided several comments related to the contents of our report. First, the department did not agree with the report’s implication that the issues associated with the recommendations serve as challenges or obstacles that inhibit the implementation of FISMA. Rather, State characterizes them as weaknesses that are receiving the proper attention. We believe that the issues identified in our report are appropriately characterized as the challenges State faces with regard to verifying whether all of its employees received the required FISMA security awareness training and with regard to certifying and accrediting its systems. Our report also discusses the progress State has made in these two areas. Second, in response to the recommendation to improve mechanisms for tracking information security awareness training of all personnel, State asserted that the report declared that it is unable to identify all of its employees. However, our report does not make this claim; instead, we note that State has not been able to verify that all of its employees and contractors have received the required training. Finally, State also noted in its comments that prior GAO reports and testimonies discussed the lack of a common IG reporting framework and that current FISMA reporting does not take full account of an agency’s ability to detect, respond to, and react to cyber security threats and manage vulnerabilities. While State officials told us that these issues inhibit the department from implementing the provisions of FISMA, we emphasize that despite external factors, which may influence measurement or perception of an agency’s performance, the department still controlled the internal processes that effectively execute all of the information security program activities required by FISMA, which constituted the scope of this report. These issues were addressed, as noted by State in its comments, on a governmentwide basis in other GAO reports and testimonies that had a broader scope. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees; the Secretaries of Defense, Homeland Security, and State; and the U.S. Attorney General. 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 have any questions regarding this report, please contact me at (202) 512-6244 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 VI. Our objective was to determine the challenges or obstacles that inhibit the implementation of the information security provisions of the Federal Information Security Management Act of 2002 (FISMA) at the Departments of Defense, Homeland Security, Justice, and State. To do this, we reviewed and analyzed FISMA (Public Law 107-347) and mapped these requirements to (1) National Institute of Standards and Technology (NIST) guidelines and (2) Office of Management and Budget (OMB) reporting requirements. We also reviewed and analyzed relevant NIST special publications and federal information processing standards that were created and modified due to FISMA, as well as guidance and reports issued by OMB. For example, we reviewed and analyzed its Fiscal Year 2005 Report to Congress on Implementation of The Federal Information Security Management Act of 2002 and OMB Circular A-130, Management of Federal Information Resources. In addition, we reviewed our previous information security work. We also interviewed individuals from OMB’s Office of Information and Regulatory Affairs and Office of General Counsel and interviewed officials from the NIST Computer Security Division to discuss their FISMA implementation project work as mandated by FISMA. We also reviewed and analyzed chief information officer (CIO) and inspectors general FISMA reports for fiscal years 2003 through 2006 at Defense, Homeland Security, Justice, and State. In addition, we reviewed and analyzed various plans, policies, and procedures at the four departments. These included strategic plans, risk management policies, and budget documentation. We also held structured interviews with individuals who had FISMA implementation as their primary responsibility at each department and at selected department components. Specifically, at Defense we interviewed individuals from the Office of the Secretary of Defense as well as three Defense service components—the Departments of the Army and Navy, and the U.S. Air Force—and individuals from the Defense Information Systems Agency. At Homeland Security, we interviewed officials within the Office of the CIO as well as from the U.S. Coast Guard, Federal Emergency Management Agency, U.S. Citizenship and Immigration Services, Transportation Security Administration, and U.S. Immigration and Customs Enforcement. At Justice, we interviewed officials within the Bureau of Alcohol, Tobacco, Firearms and Explosives; the Justice Management Division; the Federal Bureau of Investigation; the Executive Office of United States Attorneys; and the Drug Enforcement Administration. At State, we interviewed officials of the Office of the Chief Information Officer, the Office of Foreign Missions, the Bureau of Diplomatic Security, and the Bureau of Information Resources Management. Finally, we met with the Office of the Inspector General at each of the four departments to discuss what challenges its department has encountered in implementing FISMA. Our work was conducted in Washington, D.C., from July 2006 through May 2007. All work was performed in accordance with generally accepted government auditing standards. In addition to the contact named above, key contributions to this report were made by Barbara Collier, Nancy DeFrancesco (Assistant Director), Neil Doherty, Timothy Eagle, Jennifer Franks, Nancy Glover, Anjalique Lawrence, Stephanie Lee, David Plocher, and Jonathan Ticehurst.
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The Federal Information Security Management Act of 2002 (FISMA) strengthened security requirements by, among other things, requiring federal agencies to establish programs to provide cost-effective security for information and information systems. In overseeing FISMA implementation, the Office of Management and Budget (OMB) has established supporting processes and reporting requirements. However, 4 years into implementation of the act, agencies have not yet fully implemented key provisions. In this context, GAO determined what challenges or obstacles inhibit the implementation of the information security provisions of FISMA at the Departments of Defense, Homeland Security, Justice, and State. To do this, GAO reviewed and analyzed department policies, procedures, and reports related to department information security programs and interviewed agency officials. Defense, Homeland Security, Justice, and State face challenges in implementing key information security control activities required by FISMA and by OMB in its oversight role. These activities include creating and maintaining an inventory of major systems, implementing common security configurations, ensuring that staff receive information security training, testing and evaluating controls, taking remedial actions where deficiencies are found, and certifying and accrediting systems for operation. The four departments were challenged in several of these areas. For example, Defense is challenged in developing a complete FISMA inventory of systems because it has different definitions of what constitutes a "system." As another example, Homeland Security reported that the tool it uses to report security training counts each course taken, instead of tracking that an individual has taken a specialized course. As a result, the department lacks assurance that all users have received appropriate training. Until the departments address their challenges and fully implement effective departmentwide information security programs, increased risk exists that they will not be able to effectively protect the confidentiality, integrity, and availability of their information and information systems.
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Since the 1960s, the United States has used satellites to observe the earth and its land, oceans, atmosphere, and space environments. Satellites provide a global perspective of the environment and allow observations in areas that may be otherwise unreachable or unsuitable for measurements. Used in combination with ground, sea, and airborne observing systems, satellites have become an indispensable part of measuring and forecasting weather and climate. For example, satellites provide the graphical images used to identify current weather patterns, as well as the data that go into numerical weather prediction models. These models are used to forecast weather 1 to 2 weeks in advance and to issue warnings about severe weather, including the path and intensity of hurricanes. Satellite data are also used to warn infrastructure owners when increased solar activity is expected to affect key assets, including communication satellites or the electric power grid. When collected over time, satellite data can also be used to observe climate change—the trends and changes in the earth’s climate. These data are used to monitor and project seasonal, annual, and decadal changes in the earth’s temperature, vegetation coverage, and ozone coverage. Since the 1960s, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar- orbiting Operational Environmental Satellite (POES) series, which is managed by NOAA, and the Defense Meteorological Satellite Program (DMSP), which is managed by the Air Force. Two operational DMSP satellites and one operational POES satellite are currently in orbit and are positioned so that they cross the equator in the early morning, midmorning, and early afternoon. In addition, the government relies on a European satellite, called the Meteorological Operational satellite, for data in the midmorning orbit. Together, they ensure that, for any region of the earth, the data provided to users are generally no more than 6 hours old. With the expectation that combining the POES and DMSP programs would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two satellite programs into a single satellite program—NPOESS—capable of satisfying both civilian and military requirements. To manage this program, DOD, NOAA, and NASA formed a tri-agency Integrated Program Office, with NOAA responsible for overall program management for the converged system and for satellite operations, the Air Force responsible for acquisition, and NASA responsible for facilitating the development and incorporation of new technologies into the converged system. When its primary contract was awarded in August 2002, NPOESS was estimated to cost about $7 billion through 2026 and was considered critical to the United States’ ability to maintain the continuity of data required for weather forecasting and global climate monitoring. To reduce the risk involved in developing new technologies and to maintain climate data continuity, the program planned to launch a demonstration satellite, called the NPOESS Preparatory Project (NPP) in May 2006. NPP was to demonstrate selected instruments that would later be included on the NPOESS satellites. The first NPOESS satellite was to be available for launch in March 2008. However, in the years after the program was initiated, NPOESS encountered significant technical challenges in sensor development, program cost growth, and schedule delays. By November 2005, we estimated that the program’s cost had grown to $10 billion, and the schedule for the first launch was delayed by almost 2 years. These issues led to a 2006 restructuring of the program, which reduced the program’s functionality by decreasing the number of planned satellites, orbits, and instruments. The restructuring also led agency executives to decide to mitigate potential data gaps by using NPP as an operational satellite. Even after the restructuring, however, the program continued to encounter technical issues in developing two sensors, significant tri- agency management challenges, schedule delays, and further cost increases. To help address these issues, in recent years we have made a series of recommendations to, among other things, improve executive- level oversight and develop realistic time frames for revising cost and schedule baselines. Faced with costs that were expected to exceed $14 billion and launch schedules that were delayed by over 5 years, in August 2009, the Executive Office of the President formed a task force, led by the Office of Science and Technology Policy, to investigate the management and acquisition options that would improve the NPOESS program. As a result of this review, the Director of the Office of Science and Technology Policy announced in February 2010 that NOAA and DOD would no longer jointly procure the NPOESS satellite system; instead, each agency would plan and acquire its own satellite system. Specifically, NOAA is responsible for the afternoon orbit and the observations planned for the first and third NPOESS satellites. DOD is responsible for the early-morning orbit and the observations planned for the second and fourth NPOESS satellites. The partnership with the European satellite agencies for the midmorning orbit is to continue as planned. In May 2010, we reported on NOAA’s and DOD’s preliminary plans for initiating new environmental satellite programs and highlighted key transition risks facing the agencies. At that time, NOAA had developed preliminary plans for its new satellite acquisition program—called the Joint Polar Satellite System (JPSS). Specifically, NOAA planned to acquire two satellites (called JPSS-1 and JPSS-2) for launch in 2015 and 2018. NOAA also planned technical changes to the satellites, including using a smaller spacecraft than the one planned for NPOESS and removing sensors that were planned for the NPOESS satellites in the afternoon orbit. In addition, NOAA planned to transfer the management of the satellite acquisition from the NPOESS program office to NASA’s Goddard Space Flight Center so that it could be co-located at a space system acquisition center, as advocated by an independent review team. NOAA developed a team to lead the transition from NPOESS to JPSS and planned to begin transitioning in July 2010 and complete a transition plan—including cost and schedule estimates—by the end of September 2010. NOAA estimated that the JPSS program would cost approximately $11.9 billion to complete through 2024. It also anticipated funding of about $1 billion in fiscal year 2011 to set up the new program office and handle the costs associated with transitioning contracts from the Air Force to NASA while continuing to develop NPP and the first JPSS satellite. DOD was at an earlier stage in its planning process at the time of our June 2010 testimony, in part because it had more time before the first satellite in the morning orbit was needed. DOD officials were developing plans—including costs, schedules, and functionality—for their new program, called the Defense Weather Satellite System (DWSS). At that time, DOD expected to make final decisions on the spacecraft, sensors, procurement strategy, and staffing in August 2010, and to begin the program immediately. In our report, we noted that both agencies faced key risks in transitioning from NPOESS to their separate programs. These risks included the loss of key staff and capabilities, delays in negotiating contract changes and establishing new program offices, the loss of support for the other agency’s requirements, and insufficient oversight of new program management. We reported that until these risks were effectively mitigated, it was likely that the satellite programs’ costs would continue to grow and launch dates would continue to be delayed. We also noted that further delays could lead to gaps in the continuity of critical satellite data. We made recommendations to ensure that the transition from NPOESS to its successor programs was efficiently and effectively managed. Among other things, we recommended that the Secretaries of Defense and Commerce direct their respective NPOESS follow-on programs to expedite decisions on the expected cost, schedule, and capabilities of their planned programs and to direct their respective follow-on programs to develop plans to address the key transition risks we identified. As discussed below, the agencies have not yet fully implemented these recommendations. Over the last year, NOAA and NASA have worked to establish the JPSS program, to keep the NPP satellite’s development on track, and to begin developing plans for the JPSS satellite. However, of the funding made available to NOAA in its fiscal year 2011 appropriations, JPSS was allocated $471.9 million—far less than the $1 billion identified in the President’s budget to establish a program and stay on track with satellite deliverables. As a result, the JPSS program office decided to focus on developing NPP and the satellite’s ground system so that it could remain on track for an October 2011 launch. The program slowed development efforts on the first JPSS satellite and halted work on the second JPSS satellite. Table 1 shows the status of key components of NPP and JPSS-1. Although we recommended in May 2010 that NOAA expedite decisions on the cost, schedule, and capabilities of JPSS, NOAA has not yet done so. According to NOAA officials, uncertainty surrounding the agency’s fiscal year 2011 budget has made it difficult to establish a program baseline. However, NOAA has developed a requirements document and is obtaining an independent cost estimate. The agency expects to have a complete program baseline in place by February 2012. Until this baseline is in place, it is not clear what functionality will be delivered by when and at what cost. Given the critical development activities planned for 2012, it is imperative that NOAA move expeditiously to establish a credible program baseline. NOAA is facing a potential gap in satellite data continuity. When NPOESS was first disbanded, program officials anticipated launching the JPSS satellites in 2015 and 2018 (while acknowledging that these dates could change as the program’s plans were firmed up). Over the past year, as program officials made critical decisions to defer work on JPSS in order to keep NPP on track, the launch dates for JPSS-1 and JPSS-2 have changed. Program officials currently estimate that the satellites will launch in late 2016 and 2021. There are two key scenarios that could lead to a gap in satellite data in the afternoon orbit between the end of life of the NPP satellite and the availability of the first JPSS satellite. Under the first scenario, NPP sensors may not last until JPSS-1 is launched. The NASA Inspector General reported that NASA is concerned that selected NPP sensors may last only 3 years because of workmanship issues. The second scenario for a satellite data gap involves further delays in the JPSS-1 launch date. This could occur due to shortfalls in program funding or technical issues in the development of the satellite. Figure 1 depicts possible gaps. According to NOAA, a data gap would lead to less accurate and timely weather prediction models used to support weather forecasting, and advanced warning of extreme events—such as hurricanes, storm surges, and floods—would be diminished. The agency reported that this could place lives, property, and critical infrastructure in danger. In addition, NOAA estimated that the time it takes to respond to emergency search and rescue beacons could double. Given the potential for a gap in satellite data, NOAA officials are considering whether to remove functionality from JPSS-1 in order to allow it to be developed—and launched—more quickly. For example, program officials are considering increasing the time it takes for data processing centers to receive the data, removing the ground systems’ ability to process some data, and removing sensors. DOD has developed draft plans for its DWSS program. The DWSS satellites will take over the morning orbit after the remaining DMSP satellites reach the end of their respective lives. The DWSS program will be comprised of two satellites—the first expected to be launched no earlier than 2018. Each will have three sensors: a Visible/Infrared Imager/Radiometer Suite, a Space Environment Monitor, and a microwave imager/sounder. DOD plans to formally review system requirements in December 2011 and to conduct a preliminary design review by September 2012. In addition, DOD plans to develop a requirements document and obtain an independent cost estimate during fiscal year 2012. Although we recommended in May 2010 that DOD expedite decisions on the cost, schedule, and capabilities of DWSS, DOD has not yet finalized the functionality that will be provided by the DWSS program, or developed a cost and schedule baseline. For example, DOD has not yet decided what microwave sounder will be developed for DWSS, and whether it will merely meet legacy requirements or provide the full scope of functionality originally planned for NPOESS. Until DOD defines the scope of its program, including the capabilities each satellite will provide, both military and civilian users will be unable to prepare for DWSS satellite data and any data shortfalls. Over a year ago, we identified key transition risks facing NOAA and DOD, including the need to support the other agency’s requirements, ensure effective oversight of new program management, manage cost and schedule implications from contract and other program changes, and ensure the availability of key staff and capabilities, and we recommended that the agencies move to mitigate these risks. Today, the agencies continue to face key risks in transitioning from NPOESS to their new programs. These risk areas are discussed below. Supporting the other agency’s requirements: As a joint program, NPOESS was expected to fulfill many military, civilian, and research requirements for environmental data. However, because the requirements of NOAA and DOD are different, the agencies may develop programs that meet their own needs but not the other’s. Because both NOAA and DOD have not decided on the final functionality of their respective programs, each could choose to remove functionality that is important to the other agency and its users. This has started to occur. NOAA has already made decisions to remove a transmission capability that is important to the Navy. Other functions that are currently under consideration (such as delaying receipt of the data or removing ground processing functions) could also affect military operations. Agency officials reported that they formed a joint working group in July 2011 to discuss and mitigate these issues, but it is too soon to determine what progress has been made, if any. If the agencies cannot find a way to build an effective partnership that facilitates both efficient and effective decision-making on data continuity needs, the needs of both agencies—and their users—may not be adequately incorporated into the new programs. Oversight of new program management: Under its new JPSS program, NOAA plans to transfer parts of the NPOESS program to NASA, but it has not yet defined how it will oversee NASA’s efforts. We have reported that NASA has consistently underestimated time and cost and has not adequately managed risk factors such as contractor performance. Because of such issues, we listed NASA’s acquisition management as a high-risk area in 1990, and it remains a high-risk area today. NOAA officials reported that they are developing a management control plan with NASA and intend to perform an independent review of this plan when it is completed. This plan has now been in development for about 18 months, and neither NOAA nor NASA could provide a firm time frame for its completion. Without strong NOAA oversight of NASA’s management of program components, JPSS may continue to face the same cost, schedule, and contract management challenges as the NPOESS program. Cost and schedule implications resulting from contract and program changes: NASA has transferred the sensor development and common ground systems contracts from the NPOESS contract. However, NOAA has been in negotiations for at least 6 months with the NPOESS contractor regarding intellectual property rights for components of JPSS. The agency could not provide a time frame for when it expects this issue to be resolved. Until these issues are resolved, the full cost and schedule implications of contract and program changes will be unknown. Ensuring key staff and capabilities: The NPOESS program office was composed of NOAA, NASA, Air Force, and contractor staff with knowledge and experience in the status, risks, and lessons learned from the NPOESS program. This knowledge would be important to both programs after the transition period. According to NOAA and NASA officials, the JPSS program office is now fully staffed. On the other hand, the DOD program has only staffed approximately 80 out of 155 positions in its program office. In addition, NOAA officials acknowledged that they had estimated that a contractor workforce of approximately 1,600 would work on JPSS activities; however, only 819 are on board due to budget constraints. Unless DOD is proactive in ensuring that its program office is fully staffed and NOAA contractors are able to fill all necessary positions, the new programs may not be able to complete work as scheduled and satellite launches could be delayed. In summary, the NPOESS program was disbanded in the hope that separate DOD and NOAA programs could prove more successful than the joint program, that costs and schedules might finally begin to stabilize, and that the continuity of satellite data critical to both military and civilian missions would be assured. However, over 18 months later, NOAA and DOD are still scrambling to establish their respective programs and to develop baseline cost and schedule estimates for those programs. As a result, it still is not clear what the programs will deliver, when, and at what cost. In addition, the agencies continue to face a number of transition risks, including the continued need to support each other’s requirements and residual contracting issues. As NOAA makes difficult decisions on whether to remove promised JPSS functionality in order to mitigate a satellite data gap, it will be important to prioritize the functionality and to work with DOD to ensure that critical requirements are still met. Timely decisions on cost, schedule, and capabilities are needed to allow both acquisitions to move forward and to ensure that painful gaps in satellite data can be minimized. Until both NOAA and DOD can develop and finalize credible plans for their respective programs, and mitigate or minimize the risks, neither agency’s users can plan for how to address this gap. Chairman Broun, Chairman Harris, Ranking Member Miller, Ranking Member Edwards, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you 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 at [email protected]. Other key contributors include Colleen Phillips (Assistant Director), Kate Agatone, Franklin Jackson, Fatima Jahan, and Lee McCracken. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Environmental satellites provide critical data used in weather forecasting and measuring variations in climate over time. In February 2010, the White House's Office of Science and Technology Policy disbanded the National Polar-orbiting Operational Environmental Satellite System (NPOESS)--a tri-agency satellite acquisition that had encountered continuing cost, schedule, and management problems--and instructed the National Oceanic and Atmospheric Administration (NOAA) and the Department of Defense (DOD) to undertake separate acquisitions. Both agencies have begun planning their respective programs--the Joint Polar Satellite System (JPSS) and the Defense Weather Satellite System (DWSS)--including creating program offices and transitioning contracts. GAO was asked to summarize the status of ongoing work assessing (1) NOAA's and DOD's plans for their separate acquisitions and (2) the key risks in transitioning from NPOESS to these new programs. In preparing this statement, GAO relied on the work supporting previous reports, attended monthly program management meetings, reviewed documentation on both programs, and interviewed agency officials. In May 2010, GAO reported on the transition from NPOESS to two separate programs, and recommended that both NOAA and DOD expedite decisions on the cost, schedule, and capabilities of their respective programs. Since that time, both agencies have made progress on their programs, but neither has finalized its plans or fully implemented the recommendations. NOAA is currently focusing on the October 2011 launch of the NPOESS Preparatory Project satellite--a demonstration satellite that the agency now plans to use operationally in order to minimize potential gaps in coverage. In addition, NOAA has transferred contracts for satellite sensors from the NPOESS program to the JPSS program. However, NOAA officials stated that the agency slowed down the development of the first JPSS satellite due to budget constraints, causing a delay in the launch date. As a result, NOAA is facing a potential gap in satellite data continuity. Such a delay could significantly impact the nation's ability to obtain advanced warning of extreme weather events such as hurricanes. Meanwhile, DOD began planning for its satellite program. Department officials reported that DWSS is to consist of two satellites with three sensors: an imager, microwave imager/sounder, and a space environment sensor. The first satellite is to be launched no earlier than 2018. The department has not, however, finalized the cost, schedule, and functionality of the program. It expects to do so in early 2012. Until both NOAA and DOD develop and finalize credible plans for their respective programs, it will not be clear what the programs will deliver, when, and at what cost. In its prior report, GAO also recommended that NOAA and DOD establish plans to mitigate key risks in transitioning from NPOESS to the successor programs, including ensuring effective oversight of JPSS program management, and addressing cost and schedule implications from contract and program changes. Both agencies have taken steps to mitigate these risks, but more remains to be done. For example, NOAA could not provide firm time frames for completing its management control plan or addressing residual contracting issues. Moving forward, it will be important for the agencies to continue efforts to mitigate these risks in order to ensure the success of their respective programs. GAO is not making new recommendations in this statement.
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Historically, the Department has invested about 10 percent of its approximately $20 billion annual budget in information technology resources. The majority of all information technology resource expenditures—over 90 percent—are made by management and operating contractors, who identify and acquire resources needed to support the Department’s programs at the site (field) level. A past GAO review found that the Department’s contractors had wide latitude in controlling their information technology resources and spent substantial resources on developing and operating duplicate systems at the site level. Key to the Department’s success in eliminating its duplicate information systems is ensuring that information technology is acquired, used, and managed effectively. This includes knowing what information resources exist or are planned and how they improve performance of agency missions. The Congress and the Office of Management and Budget have supported the need for effective management of agencywide information resources through (1) the Paperwork Reduction Act of 1995, which requires agencies to follow a number of practices aimed at improving the productivity, efficiencies, and effectiveness of government operations, (2) the Information Technology Management Reform Act (ITMRA) of 1996, which supplements the Paperwork Reduction Act, and requires agencies to design and implement a strategic process for maximizing the value and managing the risks of their technology investments, and (3) the Office of Management and Budget’s (OMB) Evaluating Information Technology Investments: A Practical Guide, published in November 1995, which guides agencies in planning for, acquiring, and implementing information systems. Developing and maintaining a complete inventory of the Department’s information resources is a key requirement of the Paperwork Reduction Act and is essential to meeting the goals of ITMRA. Further, a critical element of OMB’s investment guide is the need for agencies to create a portfolio of their information technology investments. As part of its strategy for streamlining information systems, the Department plans to eliminate or consolidate systems which have the same or similar capabilities and analyze requirements for new systems to prevent additional purchases of duplicate systems. As a key step in this process, the Department’s Office of Information Management (OIM) developed a baseline inventory to identify the functions and capabilities of software systems that are being developed, proposed, and operated by the Department and its management and operating contractors. OIM intended to use this inventory to analyze the Department’s existing information systems environment and help identify systems that could be eliminated or consolidated. This intent was expressed in the Department’s strategic alignment initiative plan to integrate information management. To most effectively carry out this effort, therefore, OIM needs an inventory that contains complete and accurate data, fully describes system capabilities, and is based on consistent reporting by the Department’s management and operating contractors. Currently, however, the baseline inventory is substantially incomplete and lacks information describing systems’ functional capabilities. Specifically, in developing the baseline inventory, OIM relied primarily on data gathered from the Department and its management and operating contractors in early 1995 for inclusion in the System Review Inventory System (SRIS). SRIS is a headquarters database used by OIM to maintain information on the Department’s software systems, including the name, primary function, specific capabilities, data content, operating platforms, and cost of the systems. The Department requires that all systems being developed, proposed, and operated by the Department and its sites that have life-cycle costs exceeding $250,000 be reported to OIM for inclusion in the SRIS database. We believe that OIM’s baseline inventory of software systems will not be adequate to support the Department’s streamlining efforts because the SRIS data is incomplete and inconsistently reported. OIM’s analyses showed that only two-thirds of the Department’s management and operating contractors responded to its request for updated SRIS information in 1995. Moreover, according to this analysis, the information which contractors did submit was incomplete in that it did not identify the functional capabilities of about two-thirds of the 2,053 systems reported in the SRIS database. Without this type of information, the Department cannot accurately assess its existing information systems environment or make informed decisions regarding the most appropriate candidates for elimination or consolidation. The data deficiencies that we noted exist largely because the Department has allowed its contractors wide latitude in developing and implementing software inventory procedures and standards, and has not required them to follow the Department’s software management guidance. Although the Department’s existing software management order requires each site to establish and operate its own software management program, the order allows sites to determine how to accomplish this. In addition, although the Department’s “Software Management Guide” (which was put in place to assist the sites in developing software management programs) states that sites should maintain inventories of the software that they acquire, develop, or operate, the Department does not require contractors to follow it. As a result, contractors (1) have inconsistent practices in developing and maintaining information on their systems and (2) use inconsistent methods for classifying systems by function and capability. For example, although the official responsible for maintaining the software inventory at the Department’s largest (in terms of funding) EM site told us that the site recently reviewed in detail the systems reported in its software inventory in order to ensure that all the requested data were identified, some other sites reported having starkly different practices, including the following: Contractor officials at another major EM site stated that they had not verified any of the inventory data reported by their site and that hundreds of additional systems were probably unaccounted for in their inventory. A field office official responsible for reviewing software management at two national laboratories stated that these laboratories have not inventoried the vast majority of the systems acquired by the sites to support their program and project requirements. Our analyses of two major EM sites’ inventories, which together identified 1,348 systems, showed that these inventories lacked data on (1) the functions of 59 percent of the systems and (2) the development cost of 84 percent of the systems. Management and operating contractors also use a variety of methods for classifying site software systems by the specific capabilities they provide. Because of this lack of consistency in classifying systems, some sites do not report the requested data to the Department or they report incomplete data. For example, EM’s two largest sites use different classification methods, and neither of these methods is the same as that used for SRIS, which classifies the functional capabilities of systems according to 12 primary and 48 secondary categories. One of the sites does not classify any of its systems according to functional capabilities, with the exception of engineering systems. The other site classifies its systems according to 16 primary categories of functional capabilities, including the 12 primary categories identified for SRIS but does not classify systems according to the secondary categories identified for SRIS. An official at this site stated that because its classification method differs from that used for SRIS, the site did not provide OIM any information on the functional capabilities of its systems in 1995. Contractor officials at both sites stated that before they can provide the required updates to SRIS, they must perform time-consuming word searches and other research, and modify their systems classifications to agree with SRIS’s classifications. The Department currently is developing a consolidated order for information resources management that will replace the existing software management order (DOE 1330.1D). The new order, which is still in draft, establishes Department policies, responsibilities, and authorities for the planning, funding, development, acquisition, security, and integration of information technology resources. The draft order states that a local software inventory management system shall be developed to maintain an awareness of the software available at each site. However, as written, the order does not specify (1) standards for classifying systems according to their functional capabilities or (2) procedures for ensuring the integrity of software systems data included in the inventories. As a result, contractors will continue to have wide latitude in how they choose to develop and maintain software system inventories, and thus, the Department will not likely progress toward having an inventory that it can effectively use to identify duplicate systems. Streamlining information systems is essential to helping the Department realize savings. In addition, it is essential that the Department and its contractors be able to assess the capabilities of existing systems prior to acquiring new systems to avoid further duplication and waste. However, without mechanisms for ensuring more reliable reporting by the Department’s management and operating contractors, these efforts will not succeed. Because approximately 90 percent of all information technology resource expenditures are made by management and operating contractors at the site level, the success of the Department’s improvement efforts hinges on their effective participation. We recommend that you direct the Deputy Assistant Secretary for Information Management to develop, and include in the draft consolidated information resources management order, (1) specific standards for classifying software systems according to their functional capabilities and (2) procedures for ensuring that the data included in software system inventories are complete and reliable; and require all management and operating contractors to immediately evaluate their software system inventories for completeness and accuracy, address any weaknesses identified, and create and provide OIM a database which is consistent with the Department’s standards. Department of Energy officials, including the Deputy Assistant Secretary for Information Management, provided written comments on a draft of this report. We have incorporated their comments where appropriate and reprinted them in appendix I. These officials disagreed with our recommendations. Specifically, the officials said that they had not meant to imply that a complete inventory of departmental and contractor systems would be available or needed to support the Department’s streamlining effort. Moreover, they stated that they did not believe that it was appropriate for the Department to require its management and operating contractors to either maintain information system inventories or to adhere to specific systems classifications for identifying their information systems. They stated that such inventories are not required by either the Paperwork Reduction Act of 1995 or the Information Technology Management Reform Act of 1996. They further stated that “collective experience of the Information Management staff is that detailed inventories are too expensive and time-consuming to develop and maintain and that they do not yield the necessary insight in either consolidating applications or precluding duplications.” They stated that they will rely on performance-based contracts to consolidate and eliminate duplicate systems. We disagree with the Department’s position that such inventories lack value for consolidating and eliminating duplicate systems and that the cited legislation does not require systems inventories. Knowing what information resources an organization has is necessary to effectively manage them, and further, to make decisions regarding the investment in additional resources. As noted in our report, the Department has spent significant resources on developing and implementing duplicate information systems at its sites. In its Integrate Information Management Implementation Plan, the Department, itself, acknowledged the need for a baseline inventory of its information resources to facilitate its streamlining effort and help maximize its investment in information systems. For example, the plan called for developing a comprehensive corporate information management program to maximize the Department’s information system investments by avoiding unnecessary duplication of effort and reducing redundant systems. To help achieve this, the plan cited a critical need to obtain an accurate baseline inventory of current and planned system development/acquisition activities and costs, including baselining existing information management architectures, infrastructures, standards, information structures, and resources departmentwide. In addition, OIM officials involved in implementing the streamlining initiative told us during our review that a baseline inventory was being developed to help identify systems that could be consolidated or eliminated. Moreover, developing and maintaining a complete inventory of the Department’s information resources is essential to implementing a strategic information resources management process, as required by the Paperwork Reduction Act and the recently enacted Information Technology Management Reform Act of 1996. These acts require agencies to design and implement a strategic process for maximizing the value and assessing and managing the risks of information technology acquisitions. This process is to be used by the agency head, Chief Information Officer, and program officials to select, control, and evaluate agencywide investments in information technology. To ensure that investments are effectively managed, the Paperwork Reduction Act requires agencies to develop and maintain a current and complete inventory of their information resources. Information resources include computers, software, and other automated data processing equipment owned and operated by the agency directly, owned by an agency and operated by a contractor, or owned and operated by a contractor under contract with the agency. The Act excludes “governtment-owned contractor-operated facilities” from the definition of the term “agency” (44 U.S.C. Sec. 3502(1)). Thus, the broad management responsibilities imposed by Section 3506 fall on the Department and not the contractor. However, we do not read the Act as excluding government-owned contractor-operated information resources from the requirements imposed on agencies by Section 3506. In addition, the Office of Management and Budget’s Evaluating Information Technology Investments: A Practical Guide provides a systematic approach to managing the risks and returns of information technology investments. According to this guide, one of the organizational attributes critical to the success of an agency’s information technology investments is defining a portfolio that includes information technology projects in every phase (initial concept, new, ongoing, or fully operational) and for every type (mission critical, cross-functional, infrastructure, administrative, and R&D) of information technology systems. Since approximately 90 percent of the Department’s information technology investments are made by its management and operating contractors, it is incumbent upon the Department to collect and maintain accurate information on these information resources. Without this information, the Department cannot expect to develop a full and accurate accounting of its information technology expenditures or to adequately assess the extent to which its information resources contribute to program productivity, efficiency, and effectiveness. In addition, even with performance-based contracts, information on what resources exist agencywide will be essential to contractors in identifying the appropriate systems to consolidate or eliminate, and to the Department in assessing how well contractors meet performance goals aimed at eliminating systems duplication to achieve savings. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement of actions taken on our recommendations. You must send the statement to the Senate Committee on Governmental Affairs and the House Committee on Governmental Reform and Oversight within 60 days after the date of this report. You must also submit a written statement to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made over 60 days after the date of this letter. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Committees on Appropriations, the Senate Committee on Governmental Affairs, the House Committee on Governmental Reform and Oversight, and the Director of the Office of Management and Budget. We will also make copies available to others upon request. We performed our review from July 1995 through March 1996, in accordance with generally accepted government auditing standards. Details on the scope and methodology of this work are in appendix II. If you have questions about this report, please contact me on (202) 512-6240 or Valerie C. Melvin, Assistant Director, on (202) 512-6304. Major contributors to this report are listed in appendix III. To assess software systems acquired to support the Department of Energy’s Environmental Management (EM) Program, we obtained and analyzed software systems inventory data describing the names, functional capabilities, costs, developmental stages, and operating platforms of software systems at 8 departmental offices and 19 sites supporting the EM program. We interviewed Department of Energy field office staff and management and operating contractor officials responsible for developing and maintaining site software system inventories. We also analyzed documentation provided by officials in the Department’s Office of Information Management regarding the collection, analysis, and use of departmental and site software systems inventory data, policies and procedures for developing and maintaining software system inventories, and strategies and plans for streamlining information systems. In addition, we analyzed legislative criteria on managing information technology investments contained in the Paperwork Reduction Act of 1995 and the Information Technology Management Reform Act of 1996. Finally, we analyzed applicable sections of the Department’s software management guidance, including DOE Order 1330.1D, Computer Software Management, and discussed with responsible information resources management officials, software management provisions contained in the Department’s draft consolidated information resources management order. We performed our work from July 1995 through March 1996, in accordance with generally accepted government auditing standards. Our work was conducted primarily at the Department’s headquarters in Washington, D.C., and its field offices in Albuquerque, New Mexico; Richland, Washington; Golden, Colorado; and Aiken, South Carolina. The Department of Energy provided comments on a draft of this report. These comments are presented in appendix I and evaluated in the report. Peggy A. Stott, Senior Information Systems Analyst Peter Fernandez, Senior Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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. 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GAO reviewed the Department of Energy's (DOE) software systems that support its Environmental Management Program, focusing on problems that could significantly impair DOE ability to eliminate duplicate information systems while it tries to streamline its information environment and achieve savings. GAO found that: (1) DOE is basing its streamlining efforts on a baseline inventory of data on specific software systems, but the inventory is incomplete and lacks critical information on the systems' functional capabilities; (2) the inventory will not help to eliminate duplicate information systems; (3) only two-thirds of the DOE management and operating contractors responded to the 1995 DOE data request; (4) the data deficiencies are due to contractors' inconsistent development and implementation of software inventory procedures and standards and classification of systems, and DOE failure to require them to comply with DOE software management guidance; (5) DOE is developing new guidance for information resources management, but it still does not specify standards for classifying systems according to their functional capabilities or procedures for ensuring data integrity; and (6) contractors will still have wide latitude in their development and maintenance of software system inventories and DOE will not have an effective method for eliminating duplicate systems.
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OMB and federal agencies have key roles and responsibilities for overseeing IT investment management. OMB is responsible for working with agencies to ensure investments are appropriately planned and justified pursuant to the Clinger-Cohen Act of 1996. The law places responsibility for managing investments with the heads of agencies and establishes chief information officers (CIO) to advise and assist agency heads in carrying out this responsibility.OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by federal agencies and report to Congress on the net program performance benefits achieved as a result of these investments. Additionally, this law requires Federal agencies are responsible for managing their IT investment portfolio, including the risks from their major information system initiatives, in order to maximize the value of these investments to the agency. Federal agencies expect to spend at least $82 billion in fiscal year 2014 to meet their increasing demand for IT products and services, such as purchases of software licenses. Additionally, two executive orders contain information for federal agencies relative to the management of software licenses. In particular, executive order 13103 specifies that each agency shall adopt policies and procedures to ensure that the agency uses only computer software not in violation of copyright laws. These procedures may include information on preparing agency software inventories. Additionally, as part of executive on promoting efficient spending, agencies are required to order 13589,assess current device inventories and usage, and establish controls to ensure that they are not paying for unused or underutilized IT equipment, installed software, or services. According to the Information Technology Infrastructure Library’s Guide to Software Asset Management, software licenses are legal rights to use software in accordance with terms and conditions specified by the software copyright owner. Rights to use software are separate from the legal rights to the software itself, which are normally kept by the software manufacturer or other third party. Licenses may be bought and are normally required whenever externally acquired software is used, which will typically be when the software is installed on a computer (or when executed on a computer even if installed elsewhere such as on a server). They may also be defined in enterprise terms, such as number of workstations or employees, in which case a license is required for each qualifying unit or individual regardless of actual usage. Many software products are commercial-off-the-shelf, meaning the software is sold in substantial quantities in the commercial market place. Commercial software typically includes fees for initial and continued use of licenses. These fees may include, as part of the license contract, access to product support and/or other services, including upgrades. Licensing models and definitions may significantly differ depending on the software product and vendor. For example, the guidebasic types of licenses vary by duration and measure of usage: Perpetual licenses: These licenses are when use rights are permanent once purchased. Subscription or rental licenses: These licenses are used for a specific period of time, which can vary from days to years and may or may not include upgrade rights. Temporary licenses: These licenses are pending full payment or receipt of proof of purchase. Per copy, by workstation/seat/device, name used, anonymous user, or concurrent user: Historically most licenses sold have been on a per-copy-used basis, with several different units of measure possible. Sometimes multiple users will be allowed per license Concurrent usage: This type of license allows a specified number of users to connect simultaneously to a software application. Products exist to help monitor and control concurrent usage; however, concurrent licenses are not as commonly available as per copy licenses. Per server speed or per processor: These licenses are linked to the speed or power of the server on which they run, or the number of processors within the server. Enterprise or site: These licenses are sold on an enterprise or site basis that requires a count of qualifying entities. Other complexities: Other, more complex licensing situations related to usage also exist with regard to licensing and the use of techniques such as multiplexing, clustering, virtualization, shared services, thin client, roaming services, and cloud and grid computing. The objective of software license management is to manage, control, and protect an organization’s software assets, including management of the risks arising from the use of those software assets. Proper management of software licenses helps to minimize risks by ensuring that licenses are used in compliance with licensing agreements and cost-effectively deployed, and that software purchasing and maintenance expenses are properly controlled. To help ensure that the legal agreements that come with procured software licenses are adhered to and that organizations avoid purchasing unnecessary licenses, proper management of licenses is essential. OMB and most federal agencies that we reviewed do not have adequate policies for managing software licenses. OMB has a broader IT management initiative, known as PortfolioStat, which is intended to assist agencies in gathering information on their IT investments, including software licenses. However, OMB does not have a directive guiding agencies in developing comprehensive software license management policies. Further, while 2 agencies have adequate policies for managing software licenses, the vast majority of agencies do not. Specifically, of the 24 major federal agencies, 18 have developed them, but they are not comprehensive; and 4 agencies have not developed any. The lack of robust licensing policies is due in part to the absence of direction from OMB. Without guidance from OMB or comprehensive policies, it will be difficult for the agencies to consistently and effectively manage software licenses. OMB has developed policy that addresses software licenses as part of its broader PortfolioStat IT initiative, as well as an executive order containing additional direction to the agencies. Specifically, OMB launched the PortfolioStat initiative in March 2012, and it requires agencies to conduct an annual, agency-wide IT portfolio review to, among other things, reduce commodity IT spending and demonstrate how their IT investments align with the agency’s mission and business functions. Toward this end, OMB established several key requirements for agencies, including designating a lead official with responsibility for implementing the process and consolidating at least two duplicative commodity IT areas; such areas could include software licenses. PortfolioStat is also intended to assist agencies in meeting the targets and requirements under other OMB initiatives aimed at eliminating waste and duplication and promoting shared services across the federal government, such as the Federal Strategic Sourcing Initiative.example, through the PortfolioStat process, OMB works with agencies to improve agency IT procurement processes, as outlined in the Federal Strategic Sourcing Initiative, in order to reduce prices on specific commodities that agency IT managers acquire, including software licenses. However, it is up to the agencies to decide whether software licenses should be a priority for consolidation during the PortfolioStat review. Several agencies identified enterprise software licensing as a target area for cost savings or avoidance in the plans they provided to OMB in September 2012: the Department of Housing and Urban Development (HUD), the Department of State (State), the Department of Homeland Security (DHS), and the Department of Veterans Affairs (VA). Further, while PortfolioStat can assist agencies in identifying cost savings and avoidance related to software licensing, this initiative, combined with the key executive order on more efficient software spending, is not enough to guide the agencies in developing comprehensive licensing management policies. As previously discussed, the executive order requires agencies to establish controls to ensure that they are not paying for unused or underutilized software. However, OMB lacks a directive that guides the agencies to ensure that they have appropriate policies. An official from OMB’s Office of E-Government and Information Technology stated that the PortfolioStat effort is intentionally focused on the organization as opposed to an individual area such as software license management. This official added that they have no plans to develop such guidance at this time. Until the agencies have sufficient direction from OMB, opportunities to systematically identify software license related cost savings across the federal government will likely continue to be missed. Given the absence of an OMB directive providing guidance to agencies on licensing management policy, we identified seven elements that a comprehensive software licensing policy should specify: identify clear roles, responsibilities, and central oversight authority within the department for managing enterprise software license agreements and commercial software licenses; establish a comprehensive inventory (80 percent of software license spending and/or enterprise licenses in the department) by identifying and collecting information about software license agreements using automated discovery and inventory tools; regularly track and maintain software licenses to assist the agency in implementing decisions throughout the software license management life cycle; analyze software usage and other data to make cost-effective provide training relevant to software license management; establish goals and objectives of the software license management consider the software license management life-cycle phases (i.e., requisition, reception, deployment and maintenance, retirement, and disposal phases) to implement effective decision making and incorporate existing standards, processes, and metrics. The following table provides a composite assessment of the 24 agencies’ policies on managing software license against the seven elements. Two of the 24 agencies have developed comprehensive policies for managing software licenses, the Department of Labor (Labor) and DHS. For example, in April 2013, Labor’s Office of the CIO software license management policies documented, among other things, how the agency manages installation requests and licensing of software that is applicable to its office and customers, as well as how licenses become part of its inventory. Similarly, in February 2012, DHS provided guidance that the Office of the CIO will monitor agency component usage of the enterprise license agreement software transfer process, refine the process as needed, and ensure cost avoidances are achieved. Related guidance also directs all DHS components, directorates, and offices not to use other contracting vehicles to procure software licenses once enterprise licenses are in place DHS-wide. Further, 18 agencies have taken steps to include software license management policies in their IT management policies and procedures. However, inclusion of the seven elements we identified varied with each agency. Appendix II provides detailed information describing the extent to which the 18 agencies had comprehensive policies, and the following are illustrative examples. Defense established policies that include the establishment of a comprehensive inventory of software licenses and the analysis of these data to inform investment decisions to identify opportunities to reduce costs, but the department has not developed policies on centralizing management, tracking an inventory using automated tools, providing training to appropriate personnel on managing these licenses, or considering the software license management life-cycle phases. State has policies that identify agency responsibilities regarding the management of Microsoft and Oracle enterprise license agreements and the tracking of software licenses, but has not developed a policy for establishing a comprehensive inventory, analyzing software license data to inform investment decisions, providing training on management of software licenses, establishing goals and objectives of managing software licenses, and considering the software license management life-cycle phases. The Environmental Protection Agency (EPA) has policies at the business-unit level that address centralized management, establishing inventories, and tracking software licenses using tools; however, the agency has not developed a policy for analyzing software license data to inform decision making, providing training on managing software licenses, establishing goals and objectives for managing licenses, or considering the software license management life-cycle phases. Finally, 4 agencies (the Department of Commerce (Commerce), the Department of Health and Human Services (HHS), the Department of the Interior (Interior), and the National Science Foundation (NSF)) had not developed department-wide policies for managing software licenses, according to officials. In one example, Commerce stated that it does not have policies at the department level, but instead the individual components are responsible for managing software licenses at the bureau level and may have issued relevant software license management policies. As an additional example, HHS has not established policies for managing software licenses, but stated that it plans to establish a vendor management office that will develop and manage guidance for centrally managing its software licenses. The general consensus of the agency officials we spoke to on their policy weaknesses was that they were due, in part, to the lack of a priority for establishing or enhancing department- or agency-level software license management. As noted earlier, more specific direction from OMB could assist agencies in giving more adequate attention to this area. Until agencies develop comprehensive policies related to managing software licenses, they cannot ensure that they are consistently and cost- effectively managing software throughout the agency. Federal agencies are generally not following the leading practices we identified for managing their software licenses. These practices include: centralizing management; establishing a comprehensive inventory of licenses; regularly tracking and maintaining comprehensive inventories using automated discovery and inventory tools and metrics; analyzing the software license data to inform investment decisions and identify opportunities to reduce costs; and providing appropriate personnel with sufficient training on software license management. Table 2 describes these leading practices in managing software licenses. Of the 24 major federal agencies, 4 had fully demonstrated at least one of the leading practices, and none of the agencies had implemented all of the leading practices. Table 3 outlines the extent to which each of the 24 major federal agencies have implemented leading practices for managing software licenses. Following the table is a summary of the agencies’ implementation of each key practice. Additional details on the 24 agencies are provided in appendix II. The majority of agencies have a partially centralized approach to managing software licenses. Four of the 24 agencies have a centralized approach to managing the majority (80 percent) of agency software license spending, and/or agency enterprise licenses; 15 agencies have a partially centralized approach; and 5 agencies have a decentralized approach to managing software licenses. For example, NSF manages licenses for enterprise-wide software in a centralized manner, which accounts for the majority of software used at the agency. Management of licenses for special-use software is decentralized, but it accounts for about 10 percent of the agency’s overall software inventory. With regard to the 15 with a partially centralized approach, these agencies may manage enterprise license agreements for selected software centrally, but other software, which accounts for the bulk of software used, may be managed by either agency components or individual program areas. For example, Labor manages all of the agency’s Microsoft enterprise license agreements and other software managed within the Office of the CIO. However, Labor stated it does not track software licenses of other agency components. To better centralize the management of software licenses, Labor stated that it is in the process of combining all IT components and management of their software within the Office of the CIO and this effort is expected to be completed in fiscal year 2016. The 5 agencies that have a decentralized approach for managing software licenses have delegated responsibilities to the components or individual program areas. For example, Commerce manages software licenses in a decentralized manner, where management of software licenses is delegated to the agency’s components, and the management structure within these components may vary. Agency officials stated that in some components the Office of CIO is responsible for managing software licenses, whereas other Commerce components operate in an even more decentralized manner, with individual offices being responsible for managing software licenses. However, of these five agencies, officials from two agencies (HHS and Interior) noted they are planning to move toward centralizing their approach to managing software licenses. The majority of agencies do not have comprehensive inventories of software licenses. Two of the 24 agencies have a comprehensive inventory of software licenses; 20 have some form of an inventory; and 2 do not have any inventory of their software licenses purchased. Specifically, according to HUD and NSF software license documentation, these agencies have a comprehensive inventory of software licenses that consists of the majority of the agency’s spending on software licenses and/or enterprise licenses. Twenty agencies have some form of an inventory, but they do not include the majority of the software license spending or number of licenses. For example, Energy has an inventory of software licenses within the Office of the CIO that it stated represents approximately 6 percent of the total number of users department-wide. Similarly, the Small Business Administration (SBA) has a centrally managed inventory, but the inventory is not comprehensive since it excludes information from several program offices. However, according to SBA officials, the agency has a tool to discover all software licenses on the SBA network that it expects to deploy later in fiscal year 2014. The remaining 2 agencies do not have any inventory representing the majority of software license spending or total licenses. The majority of agencies are partially tracking and managing software license deployment and usage. None of the 24 agencies are fully tracking and maintaining software license inventories. Specifically, 20 are partially tracking and managing licenses using automated discovery and inventory tools and metrics, and 4 do not track or manage software licenses with automated tools. Overall, agencies’ tracking and managing of inventories varies. For example, the Department of Agriculture (USDA) uses two automated discovery and inventory tools to capture configuration information for all end points across the department to include desktops, laptops, and servers. However, officials from the Office of the CIO noted that these reports are not produced on a regular basis and the agency is not able to track software licenses outside of enterprise license agreements. As another example, according to DHS officials, the agency does not track comprehensive inventories using automated tools and metrics, but they stated that agency components track software outside of DHS’s enterprise license agreements. However, DHS officials stated that DHS does not have visibility of the majority of the department’s licenses. Additionally, Interior is using an automated discovery and inventory tool to track 21 different applications and operating systems. According to agency officials, Interior also uses spreadsheets to manually track licenses. However, the agency is not frequently tracking, managing, and reporting on the majority of software licenses. Four agencies are not tracking and maintaining their inventories using automated discovery and inventory tools. Agencies are not adequately analyzing data to identify opportunities for cost savings in software license purchases. None of the 24 agencies are fully analyzing software license data to inform investment decisions: 15 have analyzed some data to inform investment decisions or identify software license contract savings opportunities department-wide, and the remaining 9 have not assessed any software license data to identify opportunities for cost savings. More specifically, while the 15 agencies do not have controls in place for analyzing data on a regular basis, they are finding opportunities in an ad hoc manner to reduce software license spending and duplication. For example: Through OMB’s PortfolioStat process, Commerce reported achieving a total of $1.05 million in cost savings in fiscal year 2012 through consolidation of selected software contracts, taking advantage of lower prices offered through enterprise licensing. DHS conducted department-wide contract business case assessments on re-competing Adobe enterprise license agreements. Based on the analyses, the agency reported cost avoidance over $125 million through the Adobe agreement from March 2010 through December 31, 2012. As another example, DHS negotiated more than 10 enterprise licensing agreementshardware vendors, which led to cost avoidance of $181 million in fiscal year 2012. Furthermore, through the PortfolioStat process, in October 2012, the agency reported a total estimated savings or cost avoidance of approximately $376 million from fiscal year 2013 to fiscal year 2015 with its enterprise license agreement initiative. According to National Aeronautics and Space Administration (NASA) officials, in fiscal year 2013, the agency realized cost savings of approximately $33 million by consolidating major IT contracts, including Cisco and Microsoft licenses, to achieve efficiencies. VA reported through the PortfolioStat process that it renegotiated a fiscal year 2012 enterprise license agreement to reduce costs associated with software products used, saving the agency approximately $13 million in net cost avoidance in fiscal year 2012 and $37 million in net cost avoidance for fiscal year 2013. State reported through the PortfolioStat process a total estimated savings or cost avoidance of $6 million for fiscal years 2014 and 2015 with regard to enterprise licensing software. The remaining agencies did not demonstrate that they had analyzed software license data to inform investment decisions. For example, Department of Justice officials stated that this is primarily performed as subordinate activities within programs or as annual activities for software renewal through contract negotiations. However, documentation of this analysis was not provided. The majority of agencies lack training on management of software licenses. None of the 24 agencies provided sufficient training to appropriate personnel on managing software licenses. Specifically, 5 provided some, but not all, key training on managing software licenses, including contract terms and conditions, and 19 did not provide any software licenses management training. Specifically, in April 2013, NASA provided a webinar presentation on its Enterprise License Management Team that included information on the program’s mission, objectives, dependencies and interfaces, and business cases, among other things. However, this training did not include aspects of sufficient software license management training such as negotiations, laws and regulations, and contract terms and conditions department-wide. Similarly, while NRC has provided software license management training to employees related to configuration management through its broader training on Information Technology Infrastructure Library, it has not done so for contract terms and conditions as well as negotiations of software license agreements. While these agencies have taken positive steps, the vast majority of the federal agencies lack sufficient training. The inadequate implementation of leading practices in software license management can be linked to the weaknesses in agencies’ policies and decentralized approaches to license management. As a result, agencies’ oversight of software license spending has been limited or lacking. Therefore, without improved policies and oversight, agencies will likely miss opportunities for significant savings across the federal government. Given the weaknesses identified in this report regarding agencies’ lack of comprehensive, well-maintained inventories of software licenses, we cannot accurately describe the most widely used software applications across the government, including the extent to which they were over and under purchased. Further, the data provided by agencies regarding their most widely used applications are varying, incomplete, or not available—and thus, cannot be compared across the government. Varying data: The agencies that had data on widely used software applications provided it in various ways, including by license count, usage, and cost. For example: State, General Services Administration (GSA), and Labor provided data by both license count and cost. According to a State official, in fiscal year 2013, the cost for the department’s most widely used software applications was about $17 million. Officials also stated that Microsoft Office Professional 2010 is the costliest application for the department (about $7 million) and Entrust Entelligence Security Provider is the most widely used application by licenses (approximately 124,000 licenses, costing about $436,000). GSA provided a list of 13,809 different applications with total software licenses counts for each specific application. According to the agency, in fiscal year 2013, Oracle was the costliest application (about $5.4 million), and Extend360 Enforcement Agent was the agency’s most widely used application, with about 17,430 licenses. According to GSA officials, in fiscal year 2013, the cost for the most widely used software applications by license count was about $13 million. Furthermore, Labor reported that its most widely used software applications costs about $1.1 million in fiscal year 2012. In addition, Labor reported that Windows 7 bundled with Microsoft Office Professional 2010 was the department’s most costly software (approximately $427,000 with 3,050 users). On the other hand, SCCM Advanced Client was the department’s most common software, with 3,107 users and costing about $41,000. NASA and OPM provided data by cost. Specifically, NASA and OPM reported on their costliest applications and stated that the most widely used applications by license count and cost are the same. In particular, OPM reported that its most widely used applications cost about $9.7 million in fiscal year 2013. Among these, OPM reported its Microsoft and Oracle enterprise licenses agreement are the most costly applications with about $2.1 million for each application, but no data on license count was provided. NASA reported that in fiscal year 2012 the agency spent about $13 million on its most widely used applications. Among these, NASA reported that Oracle is the most widely used application by both license count and cost. In fiscal year 2012, the agency spent approximately $4.6 million on this software for 122,279 licenses. U.S. Agency for International Development (USAID) and Treasury provided data by license count. USAID reported Microsoft Configuration Manager Client as its most widely used application, with 12,341 licenses, but no cost data were provided. Similarly, Treasury reported Microsoft as its most widely used application, with about 1.3 million licenses, but no further data were provided on actual applications, and department officials stated it does not maintain a list of the most costly applications; rather it uses the procurement process as an opportunity to reassess software needs. USDA provided data on license usage. Specifically, these data included the total number of computers and the total number of times the software was used. For example Microsoft Corporation was listed, with 124,310 computers and 83,542,797 total instances in which the software was used; however, further data were not provided on the use of the actual applications (i.e., the number of instances in which the software was used or the total of duration of time it was used). Incomplete data: The data provided by the agencies on the most widely used applications were not always complete. For example, EPA’s reported data included count and cost for a subset of software, and therefore it was unclear which applications were most widely used. In addition, while ten agencies (Commerce, the Department of Transportation (DOT), Education, the Department of Energy (Energy), Interior, Justice, NRC, SBA, and the Social Security Administration (SSA)) provided a list of most widely used applications, no specific usage data on the number of instances in which the software was used, the total of duration of time it was used, or no cost was provided. Unavailable data: Four agencies (Defense, HHS, DHS and VA) did not have available data on the most widely used applications. The agencies cited various reasons for not having these data, or for having incomplete data. These reasons included non-centralized management of software licenses and not having validated, reliable information. For example, HHS indicated that these data are not available because the operating divisions manage their own software applications. Similarly, according to DHS officials, to provide the data on its most widely used and costliest applications would require a larger departmental effort, including a data call to each of the components. In addition, VA indicated that it is in the process of validating this information and could not provide an accurate answer. As for the extent to which most widely used software licenses were over and under purchased, none of the 24 agencies had cost data available for over- or under-purchasing of their most widely used software applications. Three agencies provided partial information on over- or under-purchasing for the most widely used applications: Defense, SBA, and USDA. Specifically, Defense officials stated that information on over- or under- purchasing exists within the Department of the Army for Microsoft products; however, no data were provided. SBA believes this figure is under $75,000 annually but did not have documentation to support this assertion. Also, according to USDA officials, for fiscal year 2014, the agency reduced its Microsoft Desktop licensing by over 4,000 units for the new contract renewal and 11,000 for Adobe Acrobat Standard software. However, the remaining 21 agencies do not have information on over- or under-purchasing for the most widely used applications. For example, Commerce officials stated they are not aware of any over- or under- purchased software and attributed this to a decentralized approach to managing licenses. In addition, USAID officials stated that reporting on over- and under-purchased licenses is problematic because of the manual efforts that are required to gather and compare data against known purchases. GSA officials stated that GSA does not have this information available; however, they indicated that GSA plans to form an office tasked with this responsibility. Until agencies address the weaknesses identified in how they manage their software licenses, including establishing a comprehensive inventory that is regularly tracked and maintained, the most widely used applications across the federal government cannot be accurately determined. Additionally, because agencies were unable to identify the extent to which these applications were over or under purchased, they risk procuring software in a costly and ineffective manner. The federal government procures thousands of software licenses agreements annually, and therefore effectively managing them is critical to ensure that agencies maximize the value of these investments. OMB has issued a policy associated with a broader IT management initiative but does not have a directive that assists agencies in developing licensing policies. This is especially important since the majority of agencies lack comprehensive policies and have significant weaknesses in managing their software licenses. While most agencies have established policies that address leading practices for effectively managing software licenses, they are not comprehensive. This has contributed to the majority of agencies (1) not having a fully centralized approach for managing licenses, (2) not fully establishing a comprehensive inventory for regularly tracking and maintaining software licenses, (3) not regularly tracking and maintaining an inventory using tools and metrics, or (4) not providing sufficient training on software management. The result is an inability to analyze software license data to more cost-effectively buy and maintain software licenses, and ascertain the software applications most widely used across the federal government. Consequently, while agencies were able to identify millions in savings for software, there is the potential for even greater savings and additional opportunities to reduce software license spending and duplication than what agencies have reported. Until OMB and the agencies focus on improving policies and processes, they will not have the data to manage software licenses and will likely miss opportunities to reduce costs. We recommend that the Director of OMB issue a directive to the agencies on developing comprehensive software licensing policies comprised of the seven elements identified in this report. We are also making numerous recommendations to the 24 departments and agencies in our review to improve their policies and practices for managing software licenses. Appendix III contains these recommendations. We provided a draft of this report to OMB and the 24 Chief Financial Officers Act agencies in our review for comment and received responses from all 25. OMB disagreed with our recommendation to issue a directive and of the 24 agencies that we made specific recommendations to, 11 agreed, 5 partially agreed, 2 neither agreed nor disagreed, and 6 had no comments. The agencies’ comments and our responses are summarized below. In written comments, OMB noted that there are several management tools in place with respect to software license management, including the three we identified in our report; however, the agency disagreed with our statements that OMB and federal agencies need to improve policies on managing software licenses, and that until agencies have sufficient direction from OMB, opportunities to systematically identify software license related cost savings across the federal government will likely continue to be missed. In particular, OMB cited two additional management initiatives that it asserted have significant bearing in the area of software licensing that were not included in our report. These two initiatives are known as “Maximizing Use of SmartBuy and Avoiding Duplication” and “Cross Agency Priority Goal: Cybersecurity.” OMB stated that the SmartBuy initiative, along with the initiatives detailed in our report, deliver a policy foundation that allows an agency to leverage GSA and collaborate with agencies and monitor performance. In addition, OMB stated that the Cybersecurity initiative can be used to understand the risk and vulnerabilities of the software an agency is using. The agency also noted that through the collective OMB initiatives, agencies now have the tools to identify when there is underutilization of software and are better able to recapture those underutilized licenses and deploy them to people who need them. While we agree that OMB’s initiatives collectively represent important management tools for agencies, they are not enough to guide agencies in developing comprehensive license management policies. More specifically, the two initiatives along with the other three we previously cited do not provide guidance to agencies on developing software license management policies comprised of the seven elements identified in our report. Our report shows that only 2 of the 24 major agencies have comprehensive policies in place; and only 2 have comprehensive license inventories. Until this gap in guidance is addressed, agencies will likely continue to lack the visibility into what needs to be managed, and be unable to take full advantage of OMB’s SmartBuy and other tools to drive license efficiency and utilization. Therefore, we continue to believe that OMB should develop a directive that guides the agencies to ensure that they have appropriate policies. OMB’s comments are reprinted in appendix XX. In e-mail comments, an official from Agriculture’s Audit Liaison Group stated that the department generally concurs with our findings and recommendations and plans to move forward with our recommendations. In written comments, Commerce stated the department concurred with our findings as they apply to the status of software license management within the department, but partially concurred with four of our six recommendations. Specifically, the department plans to develop an agency-wide comprehensive policy for the management of software licenses, and ensure that software license management training is provided to appropriate agency personnel. Since the department did not provide any information on the reasons why it partially concurred with the remaining recommendations, we are maintaining our recommendations. Commerce’s comments are reprinted in appendix IV. In written comments, Defense concurred with two of the six recommendations and partially concurred with the remaining ones. Specifically, the department partially concurred with our recommendations to develop a comprehensive policy; employ a centralized license management approach; establish a comprehensive license inventory; and regularly track and maintain the inventory using automated tools and metrics. With regard to a need for a comprehensive policy and centralized approach, the department stated that it concurs that a license management policy is necessary to address the weaknesses we identified; and that the majority of license spending and/or enterprise- wide licenses should be managed using an approach that is coordinated and integrated with key personnel. However, Defense stated it does not concur that a centralized management approach is appropriate for the size and complexity of the department. We continue to believe our recommendations are valid because consistent with leading practices, in order to take advantage of economies of scale, a single entity should have access to department- wide software license data. Furthermore, the National Defense Authorization Act for Fiscal Year 2013 requires the Defense CIO, in consultation with Defense component CIOs, to issue a plan to conduct a department-wide inventory of a subset of software licenses that will maximize its return on investment; and to describe in the plan how the department can achieve the greatest economies of scale and savings in the procurement, use, and optimization of these licenses. In addition, the National Defense Authorization Act for Fiscal Year 2014 further clarifies what the plan should entail. Adequately conducting an inventory will necessitate that Defense centrally manage its software license data. Having licensing management policy in place to address the identified weaknesses, as well as employing a centralized approach, would position the department to more effectively carry out these mandated requirements, among other things. With regard to the need for a license inventory and tools to track the inventory, Defense stated that it concurs that inventory data should be collected for agency software licenses purchased and/or enterprise- wide licenses; and that effective license management requires regular tracking and maintaining of inventory data using automated tools and metrics. However, the department stated it does not concur that maintaining an inventory comprising the majority of software regardless of dollar value is required. Further, Defense stated it may be resource exhaustive to incorporate automated tools to establish inventories for the majority of licenses; and may not be practicable to retroactively collect standard data about historical license transactions due to the decentralized nature of purchasing and license management today within the department. We agree that inventory data does not need to include all software regardless of dollar value. As detailed in our report, leading practices note a comprehensive inventory should represent the majority (80 percent) of the agency’s software license spending and/or enterprise licenses to allow the department visibility that reduces redundant applications and identification of other cost saving opportunities. Moreover, in response to the requirements in the National Defense Authorization Act for Fiscal Year 2013, Defense’s own licensing inventory plan is based on the software products with the highest relative spend across the department to target the products that present the greatest potential economies of scale and cost savings. In other words, the department is already planning to take steps to establish an inventory consistent with our recommendation. Regarding the use of automated tools to collect and maintain the licensing inventory, we agree that the department should take the most cost-effective and forward-looking approach. Accordingly, a focus on implementing tools and metrics on current and future software license purchases (rather than historical transactions) is reasonable. Such an approach is consistent with our recommendations; therefore, we are maintaining them. The department’s comments are reprinted in appendix V. In written comments, Education concurred with our recommendations and stated it plans to implement a revised software acquisition policy in 2014, which will allow for better management, tracking, and reporting of software licenses. The department’s comments are reprinted in appendix VI. In written comments, Energy neither agreed nor disagreed with our recommendations, but stated that it has taken a number of steps to aggregate licensing, and at this time has no plans to centralize software licensing. In particular, the department stated it agrees that there may be opportunities to aggregate licensing to achieve volume discounts and integrate disparate but related data sources. Energy further stated its IT Modernization Strategy, targeted for completion in fiscal year 2016, seeks to reduce the number of procurement vehicles and to leverage the department’s collective buying power, among other things. Energy also described activities under way that it believes address our specific recommendations, as well as clarified specific facts (on developing a comprehensive policy and having visibility into 45 percent of the department’s licenses), which we incorporated in the report as appropriate. While we agree that these activities are important steps, we continue to believe that further work is needed to improve software license management at the department. Because of Energy’s decentralized approach, it does not have visibility into the majority of the department’s software licenses. Additionally, while the department stated analysis is done on agency-wide software usage and training is managed on an office-by-office basis, Energy could not provide evidence to substantiate these claims. Until the department takes a more centralized approach, as well as addresses the other identified weaknesses, such as regular analysis of licensing inventory data to inform decisions and relevant management training, the department will likely not be adequately positioned to take advantage of the procurement vehicles and collective buying power currently being planned as part of its modernization strategy. The department’s comments are reprinted in appendix VII. In written comments, HHS neither agreed nor disagreed with our recommendations and noted initiatives it plans to take to promote cost savings and visibility regarding IT spending. The department’s comments are reprinted in appendix VIII. In written comments, DHS concurred with our recommendations and identified steps the department plans to take to address the weaknesses. The department’s comments are reprinted in appendix IX. In written comments, HUD had no comments on our report and stated it would provide more definitive information with timelines once the final report has been issued. The department’s comments are reprinted in appendix X. In written comments, Interior agreed with most of our findings and concurred with five recommendations and partially concurred with one recommendation. The department partially disagreed with our recommendation to provide sufficient software license management training to appropriate personnel, stating that it will continue to provide training on contract terms and conditions, among other things and it does not agree that unique training is needed for software license management. We agree that unique training in software license management is not needed if included as part of other training as we identified in our report. However, the department did not provide any documentation to support that training has been provided to appropriate personnel. We therefore maintain our recommendation. The department’s comments are reprinted in appendix XI. In e-mail comments, an official from Justice’s Audit Liaison Group stated that the department concurs with the recommendations and will address how it plans to implement them once the final report has been issued. In e-mail comments, an official from Labor’s Office of the Assistant Secretary for Policy stated the department had no comments. In written comments, State noted that it concurred with our recommendations and plans to identify actions to address these recommendations. The department’s comments are reprinted in appendix XII. In e-mail comments, the Deputy Director of Audit Relations from Transportation stated it had no comments. In written comments, the Department of the Treasury had no comments on the report. The department’s comments are reprinted in appendix XIII. In written comments, VA generally agreed with our conclusions and concurred with our six recommendations. The department also identified initiatives underway to address the weaknesses identified in the report. The department’s comments are reprinted in appendix XIV. In written comments, EPA partially agreed with our assessment and acknowledges that there is work to be done to better manage software licenses for the agency. Since the agency did not specifically state why it partially concurred, we are maintaining our recommendations. The agency’s comments are reprinted in appendix XV. In written comments, GSA agreed with our findings and recommendations and stated it would take actions as appropriate. The agency’s comments are reprinted in appendix XVI. In written comments, NASA concurred with three recommendations and partially concurred with three others. Specifically, the agency partially concurred with our recommendations to employ a centralized management approach, establish a comprehensive license inventory, and regularly track and maintain this inventory using automated tools and metrics. The agency stated that to fully implement a centralized software license management approach will require several phases, working with NASA stakeholders to ensure both mission and institutional software is integrated. In particular, NASA stated it would be difficult to employ one centralized software license management tool because, while it has a mechanism in place for a few of its large enterprise license purchases, several of its large IT contracts have purchasing of licenses embedded in the contract conditions. Accordingly, the agency cannot easily obtain inventory data for licenses not in its control (i.e., contractor-managed licenses). Additionally, NASA noted that to fully establish and regularly track and maintain a comprehensive inventory will require changes to some of the large IT contracts at the agency to be able to automatically pull the licensing information into a centralized system, with increased costs. While we agree that a phased approach to implementing a centralized software license approach may be the most practicable, we are not advocating the department collect information on licenses it does not control. Instead our recommendations to establish and regularly track and maintain a comprehensive inventory of licenses are for the licenses that NASA purchases directly, as we noted in our report. Thus, we maintain our recommendations. The agency’s comments are reprinted in appendix XVII. In written comments, NSF stated that it had no comments on our report. The agency’s comments are reprinted in appendix XVIII. In written comments, NRC stated it generally agreed with our report and had no further comments. The agency’s comments are reprinted in appendix XIX. In written comments, OPM concurred with our recommendations and noted actions the agency plans to take. The agency’s comments are reprinted in appendix XXI. In e-mail comments, an official from SBA’s Office of Congressional and Legislative Affairs stated it had no comments. In written comments, SSA agreed with our recommendations and identified actions the agency plans to take. The agency’s comments are reprinted in appendix XXII. In written comments, USAID agreed with our recommendations and identified actions it plans to take. The agency’s comments are reprinted in appendix XXIII. We are sending copies of this report to the appropriate congressional committees; the Secretaries of the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Labor, State, Transportation, the Treasury, and Veterans Affairs; the Attorney General; the Administrator of the Environmental Protection Agency; the Administrator of the General Services Administration; the Administrator of the National Aeronautics and Space Administration; the Director of the National Science Foundation; the Chairman of the Nuclear Regulatory Commission; the Director of the Office of Management and Budget; the Director of the Office of Personnel Management; the Administrator of the Small Business Administration; the Commissioner of the Social Security Administration; the Administrator of the U.S. Agency for International Development; and other interested parties. This report also is available at no charge on the GAO website at http://www.gao.gov. Should you or your staff have any questions on information discussed in this report, please contact me at (202) 512-4456 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 XXIV. Our objectives for this engagement were to (1) assess the extent to which the Office of Management and Budget (OMB) and federal agencies have appropriate policies on software license management, (2) determine the extent to which federal agencies are adequately managing software licenses, and (3) describe the software applications most widely used by the federal agencies and the extent to which they were over or under purchased. The scope of our review included the 24 major agencies covered by the Chief Financial Officers Act of 1990. To address our first objective, we identified seven elements that comprehensive software license policies should contain. To do so, we first identified experts in the field of software license management by reviewing software license management websites and professional literature. We then selected six experts based on type, depth, and relevance of software license management experience, as well as relevance of published work, awards and recognition in the professional community, recommendations, and availability with a range of private and public sector experience. We selected the following six individuals: Patricia Adams—Research Director, Gartner, Inc. Victoria Barber—Research Director, Gartner, Inc. Tim Clark—Partner, The FactPoint Group Steve Cooper—Chief Information Officer (CIO) Executive Advisor, Mason-Harriman Group and former Federal Aviation Administration CIO Mark Day—Deputy Assistant Commissioner, Office of Integrated Technology Services, General Services Administration Amy Konary—Research Vice President, International Data Following our expert selection process, we interviewed each of the recognized experts to solicit information about what software license policies should contain. We then compared the information collected from the experts against OMB guidance, relevant executive orders, other federal guidance, and professional literature. We synthesized the resulting information into a list of seven elements: identify clear roles, responsibilities, and central oversight authority within the department for managing enterprise software license agreements and commercial software licenses; establish a comprehensive inventory (80 percent of software license spending and/or enterprise licenses in the department) by identifying and collecting information about software license agreements using automated discovery and inventory tools; regularly track and maintain software licenses to assist the agency in implementing decisions throughout the software license management life cycle; analyze software usage and other data to make cost-effective provide training relevant to software license management; establish goals and objectives of the software license management consider the software license management life-cycle phases (i.e., requisition, reception, deployment and maintenance, retirement, and disposal phases) to implement effective decision making and incorporate existing standards, processes, and metrics. We then solicited feedback from our experts on the elements developed, and integrated this feedback to finalize our elements. Three of the experts contributed to the validation of our list of elements. For each of the 24 agencies, we then obtained and analyzed policy documents, such as agency and departmental guidance, policies, procedures, regulations, and standard operating procedures, and compared them to the seven elements. We also obtained information through interviews with officials responsible for software license management activities. Further, to assess the extent to which the OMB has appropriate guidance on software license management, we collected and analyzed OMB guidance on the PortfolioStat and Strategic Sourcing initiatives to determine its efforts to oversee federal agencies’ management of software licenses. We then compared these efforts to relevant legislation and executive orders. In addition, we reviewed the results of our prior work on PortfolioStat. We then interviewed OMB officials to identify their views on whether the relevant guidance for software license management to federal agencies is appropriately established. For our second objective, on managing licenses, we identified five leading practices in the field of software license management. We used the same process involving the six experts as described for the first objective. We synthesized the resulting information into a set of leading practices that can help agencies manage their software licenses, including (1) centralizing the management of software licenses; (2) establishing a comprehensive inventory that represents at least 80 percent of the agency’s total software license spending and/or total software licenses agency-wide; (3) regularly tracking and maintaining an inventory using automated discovery and inventory tools and metrics; (4) analyzing the data to inform investment decisions and identifying opportunities to reduce costs; and (5) providing appropriate agency personnel with sufficient software license management training. We then solicited feedback from our experts on the leading practices developed, and integrated this feedback to finalize our leading practices. Three of these experts contributed to the validation of our list of effective practices. To determine the extent to which federal agencies are adequately managing their software licenses, we obtained and analyzed relevant software license information such as budget documentation for fiscal years 2012 and 2013, software contracts, management of software license policies and procedures, software license inventories for fiscal years 2012 and 2013, documentation on internally reported cost saving, training curriculums, software management application documentation and reports. We also obtained information through interviews with officials responsible for software license management activities. For each agency, we then compared agencies’ documentation against the five leading practices to determine the extent to which they are adequately managing licenses. To assess the reliability of the data agencies provided in their software license inventories, we confirmed with agencies whether these inventories were comprehensive (i.e., representing at least 80 percent of the agency’s total software license spending and/or total software licenses agency-wide). In cases where the agency attested to its being comprehensive, we asked agency officials how they ensure the data within their inventories are comprehensive, reliable, valid, and accurate, and requested supporting documentation, such as those related to internal control processes. For those inventories that agencies reported as not comprehensive, we determined additional data reliability steps were not required because agencies have knowledge to determine whether they do not have a comprehensive inventory and would not have concerns with inventories being rated as not comprehensive if the rating was based on their own assessment. We concluded that the data were sufficiently reliable for our purposes for the first two objectives. Finally, for our third objective, we collected and analyzed information on the most widely used software applications, such as agencies’ software inventories and/or lists of applications according to volume and spending. In addition, we obtained information on whether software licenses were over or under purchased for the most widely used applications, as documented by the agencies. For each of the 24 agencies, we analyzed the information to describe the extent to which the most widely used applications were over or under purchased. We also interviewed agency officials. We identified issues with the reliability of the information on the most widely used applications because the data varied or were incomplete. We did not test the adequacy of agencies’ cost data. Our evaluation of these cost data was based on what we were told by agencies and the information the agencies could provide. We conducted this performance audit from March 2013 to May 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. We conducted detailed assessments of the 24 Chief Financial Officers Act agencies’ software license management practices against leading practices. The following section summarizes the results of our assessment of each agency’s software license management against leading practices. Table 4 provides a detailed summary of the results of our assessment of the Department of Agriculture’s (USDA) practices for managing software licenses against leading practices. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 5 provides a detailed summary of the results of our assessment of the Department of Commerce’s (Commerce) practices for managing software licenses against leading practices. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 6 provides a detailed summary of the results of our assessment of the Department of Defense’s (Defense) practices for managing software licenses against leading practices. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 7 provides a detailed summary of the results of our assessment of the Department of Education’s (Education) practices for managing software licenses against leading practices. Table 8 provides a detailed summary of the results of our assessment of the Department of Energy’s (Energy) practices for managing software licenses against leading practices. Summary of evidence Energy’s policy, Order 200.1A on IT Management, requires the Office of the CIO to address centralized management through consolidation of software acquisition, volume purchasing arrangements and enterprise-wide agreements and track and maintain its inventory of software licenses. However, Energy does not have policy addressing analysis of license data to better inform investment decision making, education and training, establishing goals and objectives of the program, and managing licenses throughout their entire lifecycle. Energy’s licenses are primarily managed in a decentralized manner. According to Energy officials, licenses within the Office of the Chief Information Officer are tracked centrally, which accounts for approximately 45 percent of the department’s users. Energy does have an inventory of software licenses; however, it is limited to the licenses managed by the Office of the Chief Information Officer, which, according to Energy officials, account for approximately 45 percent of the department’s users. Specifically, this inventory includes information covering the version number, total number of licenses, and total number of licenses in use. Energy uses automated tools to track licenses within the Office of the Chief Information Officer, but this only covers licenses managed by the office, which accounts for approximately 45 percent of department’s users. Energy does not analyze the data to inform investment decisions and identify opportunities to reduce costs. Energy officials stated this is occurring at the program level; however, documentation to support this was not available. Energy has not provided relevant software license management training; however, according to officials, there may be localized training within programs and field sites. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 9 provides a detailed summary of the results of our assessment of the Department of Health and Human Services’ (HHS) practices for managing software licenses against leading practices. Summary of evidence HHS officials stated that the department has not developed department-wide policies for managing software licenses. However, the officials stated that it has hired a Vendor Management Office Director and that the vendor management office will take the lead in centrally managing HHS commercial vendors and applicable software licenses. According to HHS officials, the establishment of the vendor management office is in process. While HHS officials stated it has a limited inventory, the department did not provide supporting documentation of this inventory. In addition, according to HHS officials, outside of a limited amount of information on software such as Windows and Microsoft Office, HHS manages its software licenses in a decentralized manner. HHS officials explained that the department’s operating divisions manage their own needs and HHS does not have insight into the management of the majority of software or inventories. However, the department plans to fully staff a vendor management office to centralize the management of software licenses. HHS has not established a comprehensive inventory representing the majority of software license spending or total licenses. According to officials, it does not have a comprehensive software license inventory because it has multiple operating divisions that internally manage software and software contracts do not clearly consist of just software. HHS does not regularly track and maintain comprehensive inventories of software licenses using automated tools and metrics. HHS has not analyzed fiscal year 2012 and 2013 department-wide software license data, such as costs, benefits, usage, and trending data, to inform investment decisions to identify opportunities to reduce costs. The department officials stated that this information is not available. HHS officials stated that the department does not have documentation that it provided agency personnel with sufficient software license management training. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 10 provides a detailed summary of the results of our assessment of the Department of Homeland Security’s (DHS) practices for managing software licenses against leading practices. Table 11 provides a detailed summary of the results of our assessment of the Department of Housing and Urban Development’s (HUD) practices for managing software licenses against leading practices. Summary of evidence While HUD infrastructure requirements, including license management, are managed mostly through HUD’s Information Technology Services contract, which has policies for management of those licenses, the agency has not established policy for the agency’s licenses including Microsoft and Oracle, which account for about $7.2 million. HUD officials agreed that the agency’s IT license management policies should be updated to reflect current licensing agreements for its software. HUD manages software licenses in a centralized manner through its Office of the Chief Information Officer. HUD officials stated that about 95 percent of the software is managed through its infrastructure managed services contract. HUD oversees these contractor services through a set of service-level agreements that are tracked, monitored, and evaluated continuously by an independent verification and validation contract, according to officials. HUD officials also stated that its discovery tool licenses are managed by the HUD Office of the Chief Information Officer outside of its services contract. HUD oversees a comprehensive inventory of software the department uses. The majority of the software is managed by contractors. According to HUD officials, the Office of the Chief Information Officer oversees an inventory representing 95 percent of its software licenses, which are managed entirely by contractors through service- level agreements. According to HUD officials, about 95 percent of the department’s software, with the exception of discovery tool licenses, is managed by contractors that the Office of the Chief Information Officer oversees. HUD regularly tracks this software information through contractors and use of an automated tool. In addition, the department has acquired independent verification and validation contractor support to validate infrastructure service-level agreement metrics and performance information for all enterprise infrastructure services provided by contractors. However, HUD officials stated that the department’s contracts do not have performance measures or service- level agreements specifically related to managing software licenses. HUD has not analyzed department-wide data, such as costs, benefits, usage, and trending data, to inform investment decisions to identify opportunities to reduce costs. According to HUD officials, the department’s contractors provide enterprise infrastructure managed service requirements for supporting HUD’s business and do not identify specific software licensing requirements. Accordingly, these officials stated that the department could not associate specific costs with software licenses provided by its contractors since contractors are providing a service at a fixed price. In addition, while HUD could provide cost information for software acquired outside of those contracts, it could not provide any related analysis of software data to inform its investment decisions. Summary of evidence According to HUD officials, the department does not provide software license management training to agency personnel since contractors primarily manage software licenses under the oversight of the Office of the Chief Information Officer. However, no documentation was provided on training received by contactors to manage software licenses. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 12 provides a detailed summary of the results of our assessment of the Department of the Interior’s (Interior) practices for managing software licenses against leading practices. Table 13 provides a detailed summary of the results of our assessment of the Department of Justice’s (Justice) practices for managing software licenses against leading practices. Summary of evidence Justice has a policy on governing the planning, acquisition, security, operation, management and use of IT resources that addresses centralized management. In particular, the policy states that for software purchases, Justice components shall use department enterprise license agreements, blanket purchase agreements, and other authorized contract vehicles, if economically advantageous. However, the policy does not specifically span the management of software licenses through establishing and tracking an inventory, analysis, education and training, goals and objectives, and life- cycle management. Justice’s Office of the Chief Information Officer centrally manages enterprise-wide solutions and services, such as Oracle, Adobe, and Microsoft agreements. However, Justice officials stated that components are not required to use or buy software using these agreements, but they almost always do. According to Justice officials, there is no process to manage all software licenses department-wide and management of IT resources occurs primarily at the component level. To better address centralized management, Justice officials stated that the department plans to develop a vendor management program office and define new related processes in the third and fourth quarters of fiscal year 2014. Justice has centralized inventory information for Oracle, Adobe, and Microsoft enterprise license agreements. However, it does not have a comprehensive inventory representing the majority of software licenses used across the department and the majority of its total software license spending. According to officials, management of IT resources is performed primarily at the component level. Justice annually tracks and manages centralized enterprise license agreement information for products such as Microsoft and Oracle within the Office of Chief Information Officer. However, officials stated that these software data may not capture all of its components’ procured software since these enterprise license agreements are not mandatory and the department does not have an automated tool that incorporates software license management-specific metrics. Justice was unable to provide documentation showing that it analyzed software license data department-wide, such as costs, benefits, usage, and trending data, to inform investment decisions and identify opportunities to reduce costs. While Justice officials stated that personnel have participated in relevant training such as acquisition workshops, the agency was unable to provide documentation of training and stated it does not have a software license management training program. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 14 provides a detailed summary of the results of our assessment of the Department of Labor’s (Labor) practices for managing software licenses against leading practices. Table 15 provides a detailed summary of the results of our assessment of the Department of State’s (State) practices for managing software licenses against leading practices. Summary of evidence State has policies which govern the centralized management of software licenses and tracking software licenses. Specifically, the Bureau of Information Resource Management policy identifies responsibilities for the management of Microsoft and Oracle enterprise license agreements and the tracking of software licenses. However, there are no policies addressing establishing a comprehensive inventory, analyses of software license data, training on management of software licenses, goals and objectives, and consideration of the software license life-cycle phases. According to State officials, enterprise agreements are managed centrally, while the remaining licenses are managed on a bureau-by-bureau basis. Specifically, Microsoft and Oracle enterprise license agreements are managed centrally, and VMware and Adobe have blanket purchase agreements that have cross-bureau participation within the department, which are also managed centrally. Officials noted that the department has established an Enterprise Licensing Steering Committee that plans to create more efficiency through centralization. While the department has an inventory of software applications, including Microsoft licenses, it is not comprehensive. According to State officials, the department is working on establishing a department-wide inventory that will include Oracle, Symantec, and Entrust, but a timeline for implementation is not yet determined. While the department is centrally tracking Microsoft licenses using automated tools, other licenses such as Oracle, Symantec, and Entrust are not being tracked. According to officials, as the tool evolves, State plans to automate many of the reconciliation processes and metrics it uses. In addition, it is unclear at what interval reporting is occurring. While State has conducted analysis using its automated tracking tool, including an analysis of license costs and quantity by location, there is limited evidence showing how it is used to inform investment decision making. State officials said the department plans to begin analyzing software license data to inform investment decisions, but did not provide a time frame for implementation. State has not provided software license management training to employees, but stated that its newly established steering committee is focused on software licenses and will take training into consideration. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 16 provides a detailed summary of the results of our assessment of the Department of Transportation’s (DOT) practices for managing software licenses against leading practices. Summary of evidence DOT has a policy addressing components of centralized management and management of software licenses through the entire life cycle. According to officials, DOT is in the process of updating its policy; however, it is unclear if this update will address establishing an inventory of licenses, regularly tracking licenses using automated tools, analyzing license data to inform investment decision making, providing license management training to personnel, and establishing goals and objectives of the program. DOT officials expect to have this policy in place by December 2014. Summary of evidence DOT manages most of its licenses through a common operating environment deployed to each DOT workstation. However, this does not include software within the Federal Aviation Administration or specialized software. Specifically, according to DOT officials, this accounts for approximately 94 percent of the users within the department (11,177 out of 11,799 users). Officials noted that the 11,799 users do not include any of the users from the Federal Aviation Administration, and DOT is uncertain how many users are within this component. DOT provided an inventory for its common operating environment, but not a department-wide inventory. According to officials, this accounts for approximately 94 percent of the users within DOT, not including users from the Federal Aviation Administration. DOT tracks and maintains all licenses within the common operating environment on a monthly basis. Specifically, reports are run using automated tools, specifically Microsoft’s System Center Configuration Manager, Safeboot Management Console, and Stratusphere. However, the department does not track or maintain comprehensive inventories within the Federal Aviation Administration. While DOT conducted analyses for Microsoft products in 2012 and 2013, it is unclear to what extent the department has done so for other licenses. DOT officials stated that it is conducting analysis as contracts expire. Specifically, this process includes a comparison of current needs with the previous year’s count and occurs during contract renewals. Additionally, according to officials, a survey was conducted last year that resulted in a reduction of Acrobat Pro licenses, but documentation to support this analysis was not available. DOT has not provided software license management training to its employees and it does not have plans to do so, according to officials. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 17 provides a detailed summary of the results of our assessment of the Department of the Treasury’s (Treasury) practices for managing software licenses against leading practices. Summary of evidence Treasury has policies in place addressing the establishment of a comprehensive inventory of software licenses and the analysis of data to inform investment decisions and identify opportunities to reduce costs. However, policies and procedures addressing centralized management, tracking licenses regularly using automated tools, providing software license management education and training to personnel, establishing goals and objectives for the program, and managing licenses throughout their entire life cycle do not exist. Treasury manages licenses in a decentralized manner. Specifically, while Treasury does pursue enterprise software license agreements across the department as part of strategic sourcing, the agreements leave the management of these licenses to the bureaus. According to officials, Treasury does not have a consolidated inventory because the process of managing software licenses occurs at the individual bureaus. However, Treasury did provide an inventory of software licenses from April to June 2013, which was established using an automated tool. The inventory includes counts of licenses for specific applications. According to Treasury officials, the tool collects data on all devices connected to the Treasury network at any given time. The department performs monthly scans of software using an automated tool that looks at hardware, software, usage, number of licenses, and number of licenses installed, but according to officials, the tracking of these licenses using automated tools occurs at the bureau-level and tracking is not conducted department-wide. The department does not exclusively track whether specific software license data have been used to inform investment decisions. Treasury’s Office of the Chief Information Officer does not provide software license management training to its employees. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 18 provides a detailed summary of the results of our assessment of the Department of Veterans Affairs’ (VA) practices for managing software licenses against leading practices. VA centrally manages the software licenses that are procured through an enterprise license agreement. In addition, officials stated they are planning to move toward a more centralized approach to managing the majority of its software licenses, but no time frame for completion was provided. Specifically, VA has established a Technology Innovation Program Office to enhance its capabilities to manage software as an asset. While VA provided an inventory of licenses, it is not comprehensive. VA officials stated that a comprehensive inventory will be achieved over time as the policies and procedures for the Technology Innovation Program Office are established and enforced. VA uses automated tools to track software that accounts for some data and manually tracks information on how many licenses VA owns or is entitled to operate. However, according to officials, the Technology Innovation Program Office is investigating the best methods for compiling an inventory of licenses. While VA has analyzed data on its Microsoft enterprise licenses, it has not done so for other software licenses. Specifically, in 2012, VA conducted an analysis of Microsoft license data that resulted in a reported savings of over $30 million. This was attributed to a recompetition which resulted in all software under this agreement being aggregated as one purchase. However, officials stated they are unclear if this type of analysis is performed on all enterprise license agreements. VA officials stated one of the goals of the Technology Innovation Program Office is to ensure this type of analysis is performed for all future license purchases. VA officials indicated that training has been completed through a contract with Gartner. However, the department did not provide documentation to support that this training has occurred. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 19 provides a detailed summary of the results of our assessment of the Environmental Protection Agency’s (EPA) practices for managing software licenses against leading practices. EPA’s management of software licenses is decentralized and there are no plans to move it to a centralized approach. Specifically, while licenses may be managed centrally within a business unit, this is not managed at the departmental level. While EPA provided an inventory for a portion of licenses managed by one business unit, its Office of Technology and Operations, it is incomplete. Specifically, the inventory includes information on cost per unit and number of licenses for some but not all applications. Additionally, officials stated that it does not have a comprehensive inventory of licenses within EPA and they are uncertain if inventories exist for its other business units. EPA does not regularly track and maintain comprehensive inventories of software licenses using automated tools and metrics. Officials said the Office of Technology and Operations uses spreadsheets to manually manage enterprise software licenses, but the inventory was incomplete. EPA is not analyzing data to inform investment decisions and identify opportunities to reduce costs. Officials attributed this to software not being considered an investment in the same terms as a traditional investment that would undergo capital planning and investment control review. EPA has not provided training in software license management. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 20 provides a detailed summary of the results of our assessment of the General Services Administration’s (GSA) practices for managing software licenses against leading practices. Table 21 provides a detailed summary of the results of our assessment of the National Aeronautics and Space Administration’s (NASA) practices for managing software licenses against leading practices. Table 22 provides a detailed summary of the results of our assessment of the National Science Foundation’s (NSF) practices for managing software licenses against leading practices. Table 23 provides a detailed summary of the results of our assessment of the Nuclear Regulatory Commission’s (NRC) practices for managing software licenses against leading practices. Table 24 provides a detailed summary of the results of our assessment of the Office of Personnel Management’s (OPM) practices for managing software licenses against leading practices. Summary of evidence While OPM has developed a policy relevant to managing software licenses, it has not established how to implement the policy. For example, its July 2009 policy on IT procurement and its April 2013 OPM System Development Life Cycle Policy and Standards combined include centralized management, establishing and tracking an inventory, analysis, education and training, goals and objectives, and life cycle management. OPM manages its software licenses in a partially centralized manner. The agency manages its enterprise license agreements through the Office of the Chief Information Officer. However, the agency officials stated that outside of enterprise license agreements, the Office of the Chief Information Officer does not have visibility into program office software license spending. The OPM Office of the Chief Information Officer has established an inventory of the agency’s enterprise license agreements through multiple spreadsheets. However, agency officials stated that these spreadsheets do not represent a comprehensive agency-wide software license inventory. These officials explained that software purchased from program offices outside of Office of the Chief Information Officer enterprise license agreements are not actively captured through an inventory. However, according to officials, the percentage of software license spending the Office of the Chief Information Officer has visibility into was less than 65 percent for fiscal years 2012 and 2013. The agency’s Office of the Chief Information Officer annually tracks and maintains an inventory of enterprise license agreement software using multiple spreadsheets that are primarily tracked manually and include software counts. In addition, one inventory is partially managed through the use of an automated tool, and multiple inventories have established metrics such as processor usage. While OPM has conducted analysis of its Microsoft enterprise license agreements for fiscal year 2013, it has not analyzed agency-wide data for other licenses. Specifically, to determine whether OPM should renew its Microsoft enterprise license agreement for fiscal year 2013, the agency’s investment review board reviewed its historical and anticipated future maintenance cost information and the agency’s analysis of cost savings. Based on this analysis, the agency determined that not renewing the Microsoft enterprise licensing agreement would cost it, at a minimum, an additional 7 percent, or $182,000, increase in maintenance costs. However, OPM could not illustrate that it analyzed agency-wide software license data, such as costs, benefits, usage, and trending data, to inform investment decisions since it does not have a comprehensive software license inventory. While OPM officials stated it has briefed staff on topics such as enterprise license agreements and the executive order on computer software piracy, the officials stated that no software license management education and training documentation exists. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 25 provides a detailed summary of the results of our assessment of the Small Business Administration’s (SBA) practices for managing software licenses against leading practices. Table 26 provides a detailed summary of the results of our assessment of the Social Security Administration’s (SSA) practices for managing software licenses against leading practices. SSA has policies describing the agency’s roles and responsibilities, and objectives relevant to software license management. However, it does not have policies for identifying and collecting information about software license agreements using automated discovery and inventory tools incorporating metrics, regularly tracking and maintaining software licenses, analysis of software usage and other data, providing training relevant to software license management; and consideration of the software license management life-cycle phases. SSA centrally manages a small percentage of the agency’s total licenses and license spending through its Enterprise Software Engineering Tools Board inventory. SSA officials stated that it manages mainframe and Microsoft desktop software centrally. However, the officials stated that the agency has delegated the responsibility of software license management to component local managers and, as a result, does not centrally manage the majority of the agency’s software licenses. The agency has established an inventory through its Enterprise Software Engineering Tools Board. However, according to officials, this inventory is representative of a small percentage of the agency’s total software license spending and total licenses. In addition, while the agency officials stated that it centrally manages Microsoft licenses and maintenance software, it did not have documentation of any inventory. Overall, SSA officials stated that it does not have a comprehensive inventory representing the majority of its software license spending and total licenses. However, agency officials stated the agency plans to implement a software asset management system to better establish a comprehensive inventory. SSA uses a support tool to track a small percentage of the agency’s total software licenses. However, officials stated that it has no established time frames for reporting on the tool. According to agency officials, since SSA is not fully centralized, the agency does not track comprehensive inventories using automated tools and metrics. To better centralize all of its software licenses, agency officials stated it plans to implement a software asset management system. While SSA has analyzed selected software license data, the agency has not analyzed department-wide software license data to inform investment decisions and identify opportunities to reduce costs. According to SSA officials, the agency analyzes software license data on a contract-by-contract basis to inform investment decisions and identify opportunities to reduce costs. The officials stated that it has reduced ongoing costs of large mainframe contracts as a result of the process. SSA has specifically worked with an independent licensing vendor to analyze the agency’s mainframe usage and portfolio to assist the agency in contract negotiations. In January 2012, the vendor conducted a renewal mainframe analysis where it identified mainframe pricing considerations for SSA. However, outside of the mainframe contracts, SSA was not able to demonstrate that it analyzes software license data agency-wide, such as costs, benefits, usage, and trending data, to inform investment decisions and identify opportunities to reduce costs. SSA has not provided appropriate agency personnel with sufficient software license management training. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the leading practice. ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. Table 27 provides a detailed summary of the results of our assessment of the U.S. Agency for International Development’s (USAID) practices for managing software licenses against leading practices. Summary of evidence USAID’s policy, ADS 547, and its standard operating procedure for a contract with IBM address centralized management, the establishment of a comprehensive inventory, goals and objectives of the software license management program, and the management of licenses throughout the entire life cycle. Officials stated there are plans to conduct analysis to monitor software usage; however, no time frame for implementation was provided. In addition, policies and procedures for tracking software using automated tools and education and training do not exist. USAID has a contract in place with IBM for centrally managing licenses for all of USAID’s operating units. While USAID maintains an inventory of licenses through a contractor, there is no established, documented process for validating and ensuring the accuracy and reliability of the data provided by the contractor. USAID provided an inventory from April 2013 of licenses installed at headquarters and on each mission’s servers. USAID estimates that as of January 2014, this accounted for approximately 95 percent of its software licenses. USAID is using an automated tool, specifically Microsoft’s System Center Configuration Manager, to track and manage software licenses for Microsoft products on an annual basis. However, officials are uncertain how other applications are being tracked and maintained. USAID officials stated that analysis is conducted on an ad-hoc basis. While the agency provided documentation of such analysis capabilities, it did not describe how it was used to inform investment decision making. USAID officials stated that its contractor’s employees receive software license management training, but no documentation was available. ● Fully met—the agency provided evidence that it fully addressed the leading practice. ◐ Partially met—the agency provided evidence that it addressed some, but not all, portions of the ◌ Not met—the agency did not provide any evidence that it addressed the leading practice. leading practice. To ensure the effective management of software licenses, we recommend that the Secretary of Agriculture take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Commerce take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Defense take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Education take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Energy take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Health and Human Services take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Homeland Security take the following five actions: Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Housing and Urban Development take the following four actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of the Interior take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Attorney General take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Labor take the following four actions: Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of State take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Transportation take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of the Treasury take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Secretary of Veterans Affairs take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Administrator of the Environmental Protection Agency take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of its software licenses, we recommend that the Administrator of General Services take the following five actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Administrator of the National Aeronautics and Space Administration take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Director of the National Science Foundation take the following four actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Chairman of the Nuclear Regulatory Commission take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Director of the Office of Personnel Management take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Administrator of the Small Business Administration take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Commissioner of the Social Security Administration take the following six actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Employ a centralized software license management approach that is coordinated and integrated with key personnel for the majority of agency software license spending and/or enterprise-wide licenses. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide departmental software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. To ensure the effective management of software licenses, we recommend that the Administrator of the U.S. Agency for International Development take the following five actions: Develop an agency-wide comprehensive policy for the management of software licenses that addresses the weaknesses we identified. Establish a comprehensive inventory of software licenses using automated tools for the majority of agency software license spending and/or enterprise-wide licenses. Regularly track and maintain a comprehensive inventory of software licenses using automated tools and metrics. Analyze agency-wide software license data, such as costs, benefits, usage, and trending data, to identify opportunities to reduce costs and better inform investment decision making. Provide software license management training to appropriate agency personnel addressing contract terms and conditions, negotiations, laws and regulations, acquisition, security planning, and configuration management. In addition to the contact name above, the following staff also made key contributions to this report: Eric Winter, Assistant Director; Naba Barkakati; Virginia Chanley; Eric Costello; Rebecca Eyler; Dana Pon; and Niti Tandon.
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The federal government plans to spend at least $82 billion on IT products and services in fiscal year 2014, such as software licenses. Federal agencies engage in thousands of licensing agreements annually. Effective management of software licenses can help avoid purchasing too many licenses that result in unused software. GAO was asked to review federal agencies' management of software licenses. GAO (1) assessed the extent to which OMB and federal agencies have appropriate policies on software license management, (2) determined the extent to which agencies adequately manage licenses, and (3) described agencies' most widely used software and extent to which they were over or under purchased. GAO assessed policies from 24 agencies and OMB against sound licensing policy measures. GAO also analyzed and compared agencies' software inventories and management controls to leading practices, and interviewed responsible officials. To identify sound licensing policy measures and leading practices, GAO interviewed recognized private sector and government software license management experts. The Office of Management and Budget (OMB) and the vast majority of agencies that GAO reviewed do not have adequate policies for managing software licenses. While OMB has a policy on a broader information technology (IT) management initiative that is intended to assist agencies in gathering information on their IT investments, including software licenses, it does not guide agencies in developing comprehensive license management policies. Regarding agencies, of the 24 major federal agencies, 2 have comprehensive policies that include the establishment of clear roles and central oversight authority for managing enterprise software license agreements, among other things; 18 have them but they are not comprehensive; and 4 have not developed any. The weaknesses in agencies' policies were due, in part, to the lack of a priority for establishing software license management practices and a lack of direction from OMB. Without an OMB directive and comprehensive policies, it will be difficult for the agencies to consistently and effectively manage software licenses. Federal agencies are not adequately managing their software licenses because they generally do not follow leading practices in this area. The table lists the leading practices and the number of agencies that have fully, partially, or not implemented them. The inadequate implementation of leading practices in software license management was partially due to weaknesses in agencies' policies. As a result, agencies' oversight of software license spending is limited or lacking, and they may miss out on savings. The potential savings could be significant considering that, in fiscal year 2012, one major federal agency reported saving approximately $181 million by consolidating its enterprise license agreements even though its oversight process was ad hoc. Given that agencies lack comprehensive software license inventories that are regularly tracked and maintained, GAO cannot accurately describe the most widely used software applications across the government, including the extent to which they were over and under purchased. Further, the data provided by agencies regarding their most widely used applications had limitations. Specifically, (1) agencies with data provided them in various ways, including by license count, usage, and cost; (2) the data provided by these agencies on the most widely used applications were not always complete; and (3) not all agencies had available data on the most widely used applications. Until weaknesses in how agencies manage licenses are addressed, the most widely used applications cannot be determined and thus opportunities for savings across the federal government may be missed. GAO recommends OMB issue a directive to help guide agencies in managing licenses and that the 24 agencies improve their policies and practices for managing licenses. OMB disagreed with the need for a directive, but GAO believes it is needed, as discussed in the report. Most agencies generally agreed with the recommendations or had no comments.
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In an effort to strengthen homeland security following the September 11, 2001, terrorist attacks on the United States, President Bush issued the National Strategy for Homeland Security in July 2002 and signed legislation creating DHS in November 2002. The strategy set forth the overall objectives, mission areas, and initiatives to prevent terrorist attacks within the United States; reduce America’s vulnerability to terrorism; and minimize the damage and assist in the recovery from attacks that may occur. DHS, which began operations in March 2003, represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. Although the National Strategy for Homeland Security identified that many other federal departments (and other nonfederal stakeholders) are involved in homeland security activities, DHS has the dominant role in implementing the strategy. The strategy identified 6 mission areas and 43 initiatives. DHS was designated as the lead federal agency for 37 of the 43 initiatives, and has activities under way in 40 of the 43 initiatives. The Homeland Security Act of 2002, which created DHS, represented a historic moment of almost unprecedented action by the federal government to fundamentally transform how the nation thinks of homeland security, including how it protects itself from terrorism. Also significant was the fact that many of the 22 departments brought together under DHS were not focused on homeland security missions prior to September 11, 2001. Rarely in the country’s past had such a large and complex reorganization of government occurred or been developed with such a singular and urgent purpose. The creation of DHS represented a unique opportunity to transform a disparate group of agencies with multiple missions, values, and cultures into a strong and effective cabinet department whose goals are to, among other things, protect U.S. borders and infrastructure, improve intelligence and information sharing, and prevent and respond to potential terrorist attacks. Together with this unique opportunity, however, came a significant risk to the nation that could occur if the department’s implementation and transformation efforts were not successful. Mission areas designated as high risk have national significance, while other areas designated as high risk represent management functions that are important for agency performance and accountability. The identified areas can have a qualitative risk that may be detrimental to public health or safety, national security, and economic growth, or a fiscal risk due to the size of the program in question. Examples of high-risk areas include federal governmentwide problems, like human capital management; large programs, like Social Security, Medicaid, and Medicare; and more narrow issues, such as contracting at a specific agency. The DHS transformation is unique in that it involves reorganization, management, and program challenges simultaneously. We first designated DHS’s transformation as high risk in January 2003 based on three factors. First, DHS faced enormous challenges in implementing an effective transformation process, developing partnerships, and building needed management capacity because it had to effectively combine 22 agencies with an estimated 170,000 employees into one department. Second, DHS faced a broad array of operational and management challenges that it inherited from its component legacy agencies. For example, many of the major components that were merged into the department, including the Immigration and Naturalization Service, the Transportation Security Administration, the Customs Service, the Federal Emergency Management Agency, and the Coast Guard, brought with them existing challenges in areas such as strategic human capital, information technology, and financial management. Finally, DHS’s national security mission was of such importance that the failure to effectively address its management challenges and program risks could have serious consequences on our intergovernmental system, our citizens’ health and safety, and our economy. Our prior work on mergers and acquisitions, undertaken before the creation of DHS, found that successful transformations of large organizations, even those faced with less strenuous reorganizations than DHS, can take 5 to 7 years to achieve. On the basis of the need for more progress in its transformation efforts, DHS’s implementation and transformation stayed on our high-risk update for 2005. Further, in November of 2006, we provided the congressional leadership a listing of government programs, functions, and activities that warrant further congressional oversight. Among the issues included were DHS integration and transformation efforts. Managing the transformation of an organization of the size and complexity of DHS requires comprehensive planning, integration of key management functions across the department, and partnering with stakeholders across the public and private sectors. DHS has made some progress in each of these areas, but much additional work is required to help ensure sustainable success. Apart from these integration efforts, however, a successful transformation will also require DHS to follow through on its initial actions of building capacity to improve the management of its financial and information technology systems, as well as its human capital and acquisition efforts. Thorough planning is important for DHS to successfully transform and integrate the management functions of 22 disparate agencies into a common framework that supports the organization as a whole. Our past work has identified progress DHS has made in its planning efforts. For example, the DHS strategic plan addresses five of six Government Performance and Results Act required elements and takes into account its non-homeland security missions, such as responding to natural disasters. Furthermore, several DHS components have developed their own strategic plans or strategic plans for missions within their areas of responsibility. For example, U.S. Immigration and Custom’s Enforcement (ICE) has produced an interim strategic plan that identifies its goals and objectives, and the U.S. Customs and Border Protection (CBP) developed a border patrol strategy and an anti terrorism trade strategic plan. However, deficiencies in DHS’s planning efforts remain. A DHS-wide transformation strategy should include a strategic plan that identifies specific budgetary, human capital, and other resources needed to achieve stated goals. The strategy should also involve key stakeholders to help ensure that resource investments target the highest priorities. DHS’s existing strategic plan lacks these linkages, and DHS has not effectively involved stakeholders in the development of the plan. DHS has also not completed other important planning-related activities. For example, some of DHS’s components have not developed adequate outcome-based performance measures or comprehensive plans to monitor, assess, and independently evaluate the effectiveness of their plans and performance. Integrating core management functions like financial, information technology, human capital, and procurement is also important if DHS is to transform itself into a cohesive, high-performing organization. However, DHS lacks a comprehensive management integration strategy with overall goals, a timeline, and a dedicated team to support its management integration efforts. In 2005, we recommended that DHS establish implementation goals and a timeline for its management integration efforts as part of a comprehensive integration strategy, a key practice to help ensure success for a merger or transformation. Although DHS has issued guidance and plans to assist management integration on a function by function basis, it has not developed a plan that clearly identifies the critical links that should occur across these functions, the necessary timing to make these links occur, how these interrelationships will occur, and who will drive and manage them. In addition, although DHS had established a Business Transformation Office that reported to the Under Secretary for Management to help monitor and look for interdependencies among the individual functional management integration efforts, that office was not responsible for leading and managing the coordination and integration itself. In addition to the Business Transformation Office, we have suggested that Congress should continue to monitor whether it needs to provide additional leadership authorities to the DHS Under Secretary for Management or create a Chief Operating Officer/Chief Management Officer position which could help elevate, integrate, and institutionalize DHS’s management initiatives. Finally, DHS cannot successfully achieve its homeland security mission without working with other entities that share responsibility for securing the homeland. Partnering for progress with other governmental agencies and private sector entities is central to achieving its missions. Since 2005, DHS has continued to form necessary partnerships and has undertaken a number of coordination efforts with private sector entities. These include, for example, partnering with (1) airlines to improve aviation passenger and cargo screening, (2) the maritime shipping industry to facilitate containerized cargo inspection, (3) financial institutions to follow the money trail in immigration and customs investigations, and (4) the chemical industry to enhance critical infrastructure protection at such facilities. In addition, FEMA has worked with other federal, state, and local entities to improve planning for disaster response and recovery. However, partnering challenges continue as DHS seeks to form more effective partnerships to leverage resources and more effectively carry out its homeland security responsibilities. For example, because DHS has only limited authority to address security at chemical facilities, it must continue to work with the chemical industry to ensure that it is assessing vulnerabilities and implementing security measures. Also, while TSA has taken steps to collaborate with federal and private sector stakeholders in the implementation of its Secure Flight program, these stakeholders stated that TSA has not provided them with the information they would need to support TSA’s efforts as they move forward with the program. DHS has made limited improvements in addressing financial management and internal control weaknesses and continues to face significant challenges in these areas. For example, since its creation, DHS has been unable to obtain an unqualified or “clean” audit opinion on its financial statements. The independent auditor’s report cited 10 material weaknesses—i.e., significant deficiencies in DHS’s internal controls— showing no decrease from fiscal year 2005. These weaknesses included financial management oversight, financial reporting, financial systems security, and budgetary accounting. Furthermore, the report found two other reportable conditions and instances of non-compliance with eight laws and regulations, including the Federal Managers’ Financial Integrity Act of 1982, the Federal Financial Management Improvement Act of 1996, and the Federal Information Security Management Act of 2002. While there continue to be material weaknesses in its financial management systems, DHS has made some progress in this area. For example, the independent auditor’s fiscal year 2006 report noted that DHS had made improvements at the component level to improve financial reporting during fiscal year 2006, although many challenges were remaining. Also, DHS and its components have reported developing corrective action plans to address the specific material internal control weaknesses identified. In addition to the independent audits, we have done work to assess DHS’s financial management and internal controls. For example, in 2004, we reviewed DHS’s progress in addressing financial management weaknesses and integrating its financial systems. Specifically, we identified weaknesses in the financial management systems DHS inherited from the 22 component agencies, assessed DHS progress in addressing these weaknesses, identified plans DHS had to integrate its financial management systems, and reviewed whether the planned systems DHS was developing would meet the requirements of relevant financial management improvement legislation. On the basis of our work, we recommended that DHS (1) give sustained attention to addressing previously reported material weaknesses, reportable conditions, and observations and recommendations; (2) complete development of corrective action plans for all material weaknesses, reportable conditions, and observations and recommendations; (3) ensure that internal control weaknesses are addressed at the component level if they were combined or reclassified at the departmentwide level; and (4) maintain a tracking system of all auditor-identified and management-identified control weaknesses. These recommendations are still relevant today. A departmentwide information technology (IT) governance framework— including controls (disciplines) aimed at effectively managing IT-related people, processes, and tools—is vital to DHS’s transformation efforts. These controls and disciplines include having and using an enterprise architecture, or corporate blueprint, as an authoritative frame of reference to guide and constrain IT investments; defining and following a corporate process for informed decision making by senior leadership about competing IT investment options; applying system and software development and acquisition discipline and rigor when defining, designing, developing, testing, deploying, and maintaining systems; establishing a comprehensive information security program to protect its information and systems; having sufficient people with the right knowledge, skills, and abilities to execute each of these areas now and in the future; and centralizing leadership for extending these disciplines throughout the organization with an empowered Chief Information Officer. In early 2006, we testified on DHS’s progress regarding its IT management controls. At the time, we reported that DHS had made efforts during the previous 3 to 4 years, to establish and implement IT management controls and disciplines, but progress in these key areas had been uneven, and more remained to be accomplished. Specifically, DHS had made improvements in its enterprise architecture by establishing departmentwide technology standards. It had also developed and initiated the implementation of a plan to introduce a shared services orientation to the architecture, particularly for information services, such as data centers and e-mail. In addition, to strengthen IT investment management, DHS established an acquisition project performance reporting system, aligned its investment management cycle and associated milestones with the department’s annual budget preparation process, and linked investment management systems to standardize and make consistent the financial data used to make investment decisions. Further, to develop more effective information security management, DHS completed a comprehensive inventory of its major information systems and implemented a departmentwide tool that incorporates the guidance required to adequately complete security certification and accreditation for all systems. We have ongoing work that will update the status of DHS’s IT management controls. Despite these efforts, DHS must do more before each of these management controls and capabilities is fully mature and institutionalized. For example, our reviews of key nonfinancial systems shows that DHS has not consistently employed reliable cost-estimating practices, effective requirements development and test management, meaningful performance measurement, strategic workforce management, and proactive risk management, among other recognized program management best practices. In addition, DHS has not fully implemented a comprehensive information security program; and goals related to consolidating networks and e-mail systems, for example, remain to be fully accomplished. More work also remains in deploying and operating IT systems and infrastructure in support of DHS’s core mission operations. For example, although a system to identify and screen visitors entering the country has been deployed and is operating, a related exit capability largely is not. In addition, the Automated Commercial Environment program has not yet demonstrated that it can accurately measure progress against its commitments because the data it uses are not consistently reliable. DHS must also ensure that the Chief Information Officer is sufficiently empowered to extend management discipline and implement common IT solutions across the department. Until DHS fully establishes and consistently implements the full range of IT management disciplines embodied in its framework and related federal guidance and best practices, it will be challenged in its ability to effectively manage and deliver programs. DHS has made some progress in transforming its human capital systems, but more work remains. Some of the most pressing human capital challenges at DHS include (1) successfully completing its ongoing transformation, (2) forging a unified results-oriented culture across the department (line of sight), (3) linking daily operations to strategic outcomes, (4) rewarding individuals based on individual, team, unit, and organizational results, (5) obtaining, developing, providing incentives to, and retaining needed talent, and (6) most importantly, leadership both at the top, to include a chief operating officer (COO) or chief management officer (CMO). A strategic workforce plan is integral to defining the level of staffing, identifying the critical skills needed to mission achievement, and eliminating gaps to prepare the agency for future needs. In 2005, we reported that DHS had initiated strategic human capital planning efforts and published proposed regulations for a modern human capital management system. We also reported that DHS’s leadership was committed to the human capital system design process and had formed teams to implement the resulting regulations. Since our report, DHS has finalized its human capital regulations, and although certain labor management provisions are the subject of litigation, it is vital that DHS implement its human capital system effectively because strategic human capital management is the centerpiece of any transformation effort. Further, since our 2005 update, DHS has taken some actions to integrate the legacy agency workforces that make up its components. For example, it standardized pay grades for criminal investigators at ICE and developed promotion criteria for investigators and CBP officers that equally recognize the value of the experience brought to ICE and CBP by employees of each legacy agency. DHS also made progress in establishing human capital capabilities for the US-VISIT program, which should help ensure that it has sufficient staff with the necessary skills and abilities to implement the program effectively. CBP also developed training plans that link its officer training to CBP strategic goals. Despite these efforts, however, DHS must still (1) create a clearer crosswalk between departmental training goals and objectives and DHS’s broader organizational and human capital goals, (2) develop appropriate training performance measures and targets for goals and strategies identified in its departmentwide strategic training plan, and (3) address our earlier recommendations that its new human capital system be linked to its strategic plan. We have also made recommendations to specific program offices and organizational entities to help ensure that human capital resources are provided to improve the effectiveness of management capabilities, and that human capital plans are developed that clearly describe how these components will recruit, train, and retain staff to meet their growing demands as they expand and implement new program elements. We are completing an updated review of DHS’s human capital efforts and plan to report on our results soon. This report will discuss information on selected human capital issues at DHS: attrition rates at DHS; senior-level vacancies at DHS; DHS’s use of human capital flexibilities, the Intergovernmental Personnel Act, and personal services contracts; and DHS’s compliance with the Vacancies Reform Act. DHS continues to face challenges in creating an effective, integrated acquisition organization. Since its inception in March 2003, DHS has made progress in implementing a strategic sourcing program to increase the effectiveness of its buying power and in creating a small business program. These programs have promoted an environment in which there is a collaborative effort toward the common goal of an efficient, unified organization. Strategic sourcing allows DHS components to formulate purchasing strategies to leverage buying power and increase savings for a variety of products like office supplies, boats, energy, and weapons, while its small business program works to ensure small businesses can compete effectively for the agency’s contract dollars. However, DHS’s progress toward creating a unified acquisition organization has been hampered by policy decisions. In March 2005, we reported that an October 2004 management directive, Acquisition Line of Business Integration and Management, while emphasizing the need for a unified, integrated acquisition organization, relies on a system of dual accountability between the chief procurement officer and the heads of the departments to make this happen. This situation has created ambiguity about who is accountable for acquisition decisions. We also found that the various acquisition organizations within DHS are still operating in a disparate manner, with oversight of acquisition activities left primarily up to each individual component. Specifically, we reported that (1) there were components exempted from the unified acquisition organization, (2) the chief procurement officer had insufficient staff for departmentwide oversight, and (3) staffing shortages led the office of procurement operations to rely extensively on outside agencies for contracting support. In March 2005, we recommended that, among other things, the Secretary of Homeland Security provide the Office of the Chief Procurement Officer with sufficient resources and enforcement authority to enable effective departmentwide oversight of acquisition policies and procedures, and to revise the October 2004 management directive to eliminate reference to the Coast Guard and Secret Service as being exempt from complying with the directive. Unless DHS addresses these challenges, it is at risk of continuing to exist as a fragmented acquisition organization. Because some of DHS’s components have major, complex acquisition programs—for example, the Coast Guard’s Deepwater program (designed to replace or upgrade its cutters and aircraft) and CBP’s Secure Border Initiative—DHS needs to improve the oversight of contractors and should adhere to a rigorous management review process. DHS continues to face challenges, many of which were inherited from its component legacy agencies, in carrying out its programmatic activities. These challenges include enhancing transportation security, strengthening the management of U.S. Coast Guard acquisitions and meeting the Coast Guard’s new homeland security missions, improving the regulation of commercial trade while ensuring protection against the entry of illegal goods and dangerous visitors at U.S. borders and ports of entry, and improving enforcement of immigration laws, including worksite immigration laws, and the provision of immigration services. DHS must also effectively coordinate the mitigation and response to all hazards, including natural disaster planning, response, and recovery. DHS has taken actions to address these challenges, for example, by strengthening passenger and baggage screening, increasing the oversight of Coast Guard acquisitions, more thoroughly screening visitors and cargo, dedicating more resources to immigration enforcement, becoming more efficient in the delivery of immigration services, and conducting better planning for disaster preparation. However, challenges remain in each of these major mission areas. Despite progress in this area, DHS continues to face challenges in effectively executing transportation security efforts. We have recommended that the Transportation Security Administration (TSA) more fully integrate a risk management approach—including assessments of threat, vulnerability, and criticality—in prioritizing security efforts within and across all transportation modes; strengthen stakeholder coordination; and implement needed technological upgrades to secure commercial airports. DHS has made progress in all of these areas, particularly in aviation, but must expand its security focus more towards surface modes of transportation and continue to seek best practices and coordinated security efforts with the international community. DHS and TSA have taken numerous actions to strengthen commercial aviation security, including strengthening passenger and baggage screening, improving aspects of air cargo security, and strengthening the security of international flights and passengers bound for the United States. For example, TSA increased efforts to measure the effectiveness of airport screening systems through covert testing and other means and has worked to enhance passenger and baggage screener training. TSA also improved its processes for identifying and responding to threats onboard commercial aircraft and has modified airport screening procedures based on risk. Despite this progress, however, TSA continues to face challenges in implementing a program to match domestic airline passenger information against terrorist watch lists, fielding needed technologies to screen airline passengers for explosives, and strengthening aspects of passenger rail security. In addition, TSA has not developed a strategy, as required, for securing the various modes of transportation. As a result, rail and other surface transportation stakeholders are unclear regarding what TSA’s role will ultimately be in establishing and enforcing security requirements within their transportation modes. We have recommended that TSA more fully integrate risk-based decision making within aviation and across all transportation modes, strengthen passenger prescreening, and enhance rail security efforts. We have also recommended that TSA work to develop sustained and effective partnerships with other government agencies, the private sector, and international partners to coordinate security efforts and seek potential best practices, among other efforts. The Coast Guard needs to improve the management of its acquisitions and continue to enhance its security mission while meeting other mission responsibilities. We recommended that the Coast Guard improve its management of the Deepwater program by strengthening key management and oversight activities, implementing procedures to better ensure contractor accountability, and controlling future costs by promoting competition. In April 2006, we reported the Coast Guard had made some progress in addressing these recommendations. For example, the Coast Guard has addressed our recommendation to ensure better contractor accountability by providing for better input from U.S. Coast Guard performance monitors. However, even with these improvements, some Deepwater assets have recently experienced major setbacks due to design concerns in two classes of replacement cutters. Further, other Coast Guard acquisition programs—such as the Rescue 21 emergency distress and communications system—have experienced major cost increases, schedule delays, and performance shortfalls. The Coast Guard has made progress in balancing its homeland security and traditional missions. The Coast Guard is unlike many other DHS components because it has substantial missions not related to homeland security. These missions include maritime navigation, icebreaking, protecting the marine environment, marine safety, and search and rescue for mariners in distress. Furthermore, unpredictable natural disasters, such as Hurricane Katrina, can place intense demands on all Coast Guard resources. The Coast Guard must continue executing these traditional missions and balance those responsibilities with its homeland security obligations, which have increased significantly since September 11. DHS has made some progress but still faces an array of challenges in securing the border while improving the regulation of commercial trade. Since 2005, DHS agencies have made some progress in implementing our recommendations to refine the screening of foreign visitors to the United States, target potentially dangerous cargo, and provide the personnel necessary to effectively fulfill border security and trade agency missions. As of January 2006, DHS had a pre-entry screening capability in place in overseas visa issuance offices, and an entry identification capability at 115 airports, 14 seaports, and 154 land ports of entry. Furthermore, the Secretary of Homeland Security has made risk management at ports and all critical infrastructure facilities a key priority for DHS. In addition, DHS developed performance goals and measures for its trade processing system and implemented a testing and certification process for its officers to provide better assurance of effective cargo examination targeting practices. However, efforts to assess and mitigate risks of DHS’s and the Department of State’s implementation of the Visa Waiver Program remain incomplete, increasing the risk that the program could be exploited by someone who intends harm to the United States. Further, many of DHS’s border-related performance goals and measures are not fully defined or adequately aligned with one another, and some performance targets are not realistic. For example, CBP has not yet put key controls in place to provide reasonable assurance that its screening system is effective at targeting oceangoing cargo containers with the highest risk of containing smuggled weapons of mass destruction, nor has it found a way to incorporate inspection results back into the targeting system. Other trade and visitor screening systems have weaknesses that must be overcome to better ensure border and trade security. For example, deficiencies in the identification of counterfeit documentation at land border crossings into the United States create vulnerabilities that terrorists or others involved in criminal activity could exploit. We also reported that DHS’s Container Security Initiative to target and inspect high-risk cargo containers at foreign ports before they leave for the United States has not achieved key goals because of staffing imbalances, the lack of minimum technical requirements for inspection equipment used at foreign ports, and insufficient performance measures to assess the effectiveness of targeting and inspection activities. DHS has taken some actions to improve enforcement of immigration laws, including worksite immigration laws, but the number of resources devoted to enforcing immigration laws is limited given that there are an estimated 12 million illegal aliens residing in the United States. DHS has strengthened some aspects of immigration enforcement, including allocating more investigative work years to immigration functions than the Immigration and Naturalization Service did prior to the creation of DHS. Nevertheless, effective enforcement will require more attention to efficient resource use and updating outmoded management systems. In April 2006, ICE announced an interior enforcement strategy to bring criminal charges against employers who knowingly hire unauthorized workers. ICE has also reported increases in the number of criminal arrests and indictments for these violations since fiscal year 2004. In addition, ICE has plans to shift responsibility for identifying incarcerated criminal aliens eligible for removal from the United States from the Office of Investigations to its Office of Detention and Removal, freeing those investigative resources for other immigration and customs investigations. ICE has also begun to introduce principles of risk management into the allocation of its investigative resources. However, enforcement of immigration enforcement laws needs to be strengthened and significant management challenges remain. DHS’s ability to locate and remove millions of aliens who entered the country illegally or overstayed the terms of their visas is questionable, and implementing an effective worksite enforcement program remains an elusive goal. ICE’s Office of Investigations has not conducted a comprehensive risk assessment of the customs and immigration systems to determine the greatest risks for exploitation by criminals and terrorists. This office also lacks outcome-based performance goals that relate to its objective of preventing the exploitation of systemic vulnerabilities in customs and immigration systems, and it does not have sufficient systems in place to help ensure systematic monitoring and communication of vulnerabilities discovered during its investigations. Moreover, the current employment verification process used to identify workers ineligible for employment in the United States has not fundamentally changed since its establishment in 1986, and ongoing weaknesses have undermined its effectiveness. We have recommended that DHS take actions to help address these weaknesses and to strengthen the current process by issuing final regulations on changes to the employment verification process which will reduce the number of documents suitable for proving eligibility to work in the United States. Some other countries require foreign workers to present work authorization documents at the time of hire and require employers to review these documents and report workers’ information to government agencies for collecting taxes and social insurance contributions, and conducting worksite enforcement actions. Although DHS has made progress in reducing its backlog of immigration benefit applications, improvements are still needed in the provision of immigration services, particularly by strengthening internal controls to prevent fraud and inaccuracy. Since 2005, DHS has enhanced the efficiency of certain immigration services. For example, U.S. Citizenship and Immigration Services (USCIS) estimated that it had reduced its backlog of immigration benefits applications from a peak of 3.8 million cases to 1.2 million cases from January 2004 to June 2005. USCIS has also established a focal point for immigration fraud, outlined a fraud control strategy that relies on the use of automation to detect fraud, and is performing fraud assessments to identify the extent and nature of fraud for certain benefits. However, DHS still faces significant challenges in its ability to effectively provide immigration services while at the same time protecting the immigration system from fraud and mismanagement. USCIS may have adjudicated tens of thousands of naturalization applications without alien files, and adjudicators were not required to record whether the alien file was available when they adjudicated the application. Without these files, DHS may not be able to take enforcement action against an applicant and could also approve an application for an ineligible applicant. In addition, USCIS has not implemented important aspects of our internal control standards or fraud control best practices identified by leading audit organizations. Such best practices would include (1) a comprehensive risk management approach, (2) mechanisms for ongoing monitoring during the course of normal activities, (3) clear communication agencywide regarding how to balance production-related goals with fraud-prevention activities, and (4) performance goals for fraud prevention. We have reported that DHS needs to more effectively coordinate disaster preparedness, response, and recovery efforts. Since FEMA became part of DHS in March 2003, its responsibilities have been dispersed and its role has continued to evolve. Hurricane Katrina severely tested disaster management at the federal, state, and local levels and revealed weaknesses in the basic elements of preparing for, responding to, and recovering from any catastrophic disaster. Our analysis showed the need for (1) clearly defined and understood leadership roles and responsibilities; (2) the development of the necessary disaster capabilities; and (3) accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. In September 2006, we recommended that Congress give federal agencies explicit authority to take actions to prepare for all types of catastrophic disasters when there is warning. We also recommended that DHS (1) rigorously re-test, train, and exercise its recent clarification of the roles, responsibilities, and lines of authority for all levels of leadership, implementing changes needed to remedy identified coordination problems; (2) direct that the National Response Plan (NRP) base plan and its supporting Catastrophic Incident Annex be supported by more robust and detailed operational implementation plans; (3) provide guidance and direction for federal, state, and local planning, training, and exercises to ensure such activities fully support preparedness, response, and recovery responsibilities at a jurisdictional and regional basis; (4) take a lead in monitoring federal agencies’ efforts to prepare to meet their responsibilities under the NRP and the interim National Preparedness Goal; and (5) use a risk management approach in deciding whether and how to invest finite resources in specific capabilities for a catastrophic disaster. DHS has made revisions to the NRP and released its Supplement to the Catastrophic Incident Annex—both designed to further clarify federal roles and responsibilities and relationships among federal, state and local governments and responders. However, these revisions have not been tested. DHS has also announced a number of actions intended to improve readiness and response based on our work and the work of congressional committees and the Administration. For example, DHS is currently reorganizing FEMA as required by the fiscal year 2007 DHS appropriations act. DHS has also announced a number of other actions to improve readiness and response. However, there is little information available on the extent to which these changes are operational. Finally, in its desire to provide assistance quickly following Hurricane Katrina, DHS was unable to keep up with the magnitude of needs to confirm the eligibility of victims for disaster assistance, or ensure that there were provisions in contracts for response and recovery services to ensure fair and reasonable prices in all cases. We recommended that DHS create accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. We also recommended that DHS provide guidance on advance procurement practices (pre-contracting) and procedures for those federal agencies with roles and responsibilities under the NRP so that these agencies can better manage disaster-related procurement, and establish an assessment process to monitor agencies’ continuous planning efforts for their disaster-related procurement needs and the maintenance of capabilities. For example, we identified a number of emergency response practices in the public and private sectors that provide insight into how the federal government can better manage its disaster-related procurements. These include both developing knowledge of contractor capabilities and prices and establishing vendor relationships prior to the disaster and establishing a scalable operations plan to adjust the level of capacity to match the response with the need. To be removed from our high-risk list, agencies need to develop a corrective action plan that defines the root causes of identified problems, identifies effective solutions to those problems, and provides for substantially completing corrective measures in the near term. Such a plan should include performance measures, metrics and milestones to measure their progress. Agencies should also demonstrate significant progress in addressing the problems identified in their corrective action plan. This should include a program to monitor and independently validate progress. Finally, agencies, in particular top leadership, must demonstrate a commitment to sustain initial improvements. This would include a strong commitment to address the risk(s) that put the program or function on the high-risk list and provide for the allocation of sufficient people and resources (capacity) to resolve the risk(s) and ensure that improvements are sustainable over the long term. In the spring of 2006, DHS provided us a draft corrective action plan for addressing its transformation challenges. This plan addressed major management areas we had previously identified as key to DHS’s transformation—management integration through the DHS management directorate and financial, information, acquisition, and human capital management. The plan identified an overall goal to develop and implement key department wide processes and systems to support DHS’s transformation into a department capable of planning, operating, and managing as one effective department. In the short term, the plan sought to produce significant improvements over the next 7 years that further DHS’s ability to operate as one department. Although the plan listed accomplishments and general goals for the management functions, it did not contain (1) objectives linked to those goals that are clear, concise, and measurable; (2) specific actions to implement those objectives; (3) information linking sufficient people and resources to implement the plan; or (4) an evaluation program to monitor and independently validate progress toward meeting the goals and measuring the effectiveness of the plan. In addition to developing an effective corrective action plan, agencies must show that significant progress has taken place in improving performance in the areas identified in its corrective action plan. While our work has noted progress at DHS, for us to remove the DHS implementation and transformation and from our high-risk list, we need to be able to independently assure ourselves and Congress that DHS has implemented many of our past recommendations, or has taken other corrective actions to address the challenges we identified. However, DHS has not made its management or operational decisions transparent enough so that Congress can be sure it is effectively, efficiently, and economically using the billions of dollars in funding it receives annually, and is providing the levels of security called for in numerous legislative requirements and presidential directives. Our work for Congress assessing DHS’s operations has been significantly hampered by long delays in granting us access to program documents and officials, or by questioning our access to information needed to conduct our reviews. We are troubled by the impact that DHS’s processes and internal reviews have had on our ability to assess departmental programs and operations. Given the problems we have experienced in obtaining access to DHS information, it will be difficult for us to sustain the level of oversight that Congress has directed and that is needed to effectively oversee the department, including the level of oversight needed to assess DHS’s progress in addressing the existing transformation, integration, and programmatic challenges identified in this statement. Finally, to be removed from our high-risk list, any progress that occurs must be sustainable over the long term. DHS’s leaders need to make and demonstrate a commitment to implementing a transformed organization. The Secretary has stated such a commitment, most prominently as part of his “second stage review” in the summer of 2005, and more recently in remarks made at George Washington University’s Homeland Security Policy Institute. However, appropriate follow-up is required to assure that transformation plans are effectively implemented and sustained, to include the allocation of adequate resources to support transformation efforts. In this regard, we were pleased when DHS established a Business Transformation Office, but we believe that the office’s effectiveness was limited because the department did not give it the authority and responsibility needed to be successful. We understand that this office has recently been eliminated. Further, department leaders can show their commitment to transforming DHS by acting on recommendations made by the Congress, study groups, and accountability organizations such as its Office of the IG and GAO. Although we have also seen some progress in this area, it is not enough for us to conclude that DHS is committed to and capable of quickly incorporating corrective actions into its operations. Therefore, until DHS produces an acceptable corrective action plan, demonstrates progress reforming its key management functions, and dedicates the resources necessary to sustain this progress, it will likely remain on our high-risk list. Mr. Chairman and members of the committee, this completes my prepared statement. I would be happy to respond to any questions that you or other members of the committee may have at this time. For information about this testimony, please contact Norman Rabkin, Managing Director, Homeland Security and Justice Issues, at (202) 512-8777, or [email protected]. Other individuals making key contributions to this testimony include Cathleen Berrick, Paul Jones, Christopher Conrad, Anthony DeFrank, Nancy Briggs, and Aaron Stern. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. Homeland Security: DHS Is Addressing Security at Chemical Facilities, but Additional Authority Is Needed. GAO-06-899T. Washington, D.C.: June 21, 2006. Homeland Security: Guidance and Standards Are Needed for Measuring the Effectiveness of Agencies’ Facility Protection Efforts. GAO-06-612. Washington, D.C.: May 31, 2006. Homeland Security: DHS Needs to Improve Ethics-Related Management Controls for the Science and Technology Directorate. GAO-06-206. Washington, D.C.: December 22, 2005. Critical Infrastructure Protection: Department of Homeland Security Faces Challenges in Fulfilling Cybersecurity Responsibilities. GAO-05-434. Washington, D.C.: May 26, 2005. Homeland Security: Overview of Department of Homeland Security Management Challenges. GAO-05-573T. Washington, D.C.: April 20, 2005. Results-Oriented Government: Improvements to DHS’s Planning Process Would Enhance Usefulness and Accountability. GAO-05-300. Washington, D.C.: March 31, 2005. Department of Homeland Security: A Comprehensive and Sustained Approach Needed to Achieve Management Integration. GAO-05-139. Washington, D.C.: March 16, 2005. Homeland Security: Further Actions Needed to Coordinate Federal Agencies’ Facility Protection Efforts and Promote Key Practices. GAO-05-49. Washington, D.C.: November 30, 2004. Highlights of a GAO Forum: Mergers and Transformation: Lessons Learned for a Department of Homeland Security and Other Federal Agencies. GAO-03-293SP. Washington, D.C.: November 14, 2002. Determining Performance and Accountability Challenges and High Risks. GAO/OGC-00-12. Washington, D.C.: August 2000. Financial Management Systems: DHS Has an Opportunity to Incorporate Best Practices in Modernization Efforts. GAO-06-553T. Washington, D.C.: March 29, 2006. Financial Management: Department of Homeland Security Faces Significant Financial Management Challenges. GAO-04-774. Washington, D.C.: July 19, 2004. Information Technology: Customs Has Made Progress on Automated Commercial Environment System, but It Faces Long-Standing Management Challenges and New Risks. GAO-06-580. May 31, 2006. Information Sharing: DHS Should Take Steps to Encourage More Widespread Use of Its Program to Protect and Share Critical Infrastructure Information. GAO-06-383. Washington, D.C.: April 17, 2006. Homeland Security: Progress Continues, but Challenges Remain on Department’s Management of Information Technology. GAO-06-598T. Washington, D.C.: March 29, 2006. Information Technology: Management Improvements Needed on Immigration and Customs Enforcement’s Infrastructure Modernization Program. GAO-05-805. Washington, D.C.: September 7, 2005. Information Technology: Federal Agencies Face Challenges in Implementing Initiatives to Improve Public Health Infrastructure. GAO-05-308. Washington, D.C.: June 10, 2005. Information Technology: Customs Automated Commercial Environment Program Progressing, but Need for Management Improvements Continues. GAO-05-267. Washington, D.C.: March 14, 2005. Border Security: Stronger Actions Needed to Assess and Mitigate Risks of the Visa Waiver Program. GAO-06-854. Washington, D.C.: July 28, 2006. Information on Immigration Enforcement and Supervisory Promotions in the Department of Homeland Security’s Immigration and Customs Enforcement and Customs and Border Protection. GAO-06-751R. Washington, D.C.: June 13, 2006. Homeland Security: Visitor and Immigrant Status Program Operating, but Management Improvements Are Still Needed. GAO-06-318T. Washington, D.C.: January 25, 2006. Department of Homeland Security: Strategic Management of Training Important for Successful Transformation. GAO-05-888. Washington, D.C.: September 23, 2005. Homeland Security: Challenges in Creating an Effective Acquisition Organization. GAO-06-1012T. Washington, D.C.: July 27, 2006. Homeland Security: Success and Challenges in DHS’s Efforts to Create an Effective Acquisition Organization. GAO-05-179. Washington, D.C.: March 29, 2005. Homeland Security: Further Action Needed to Promote Successful Use of Special DHS Acquisition Authority. GAO-05-136. Washington, D.C.: December 15, 2004. Transportation Security Administration: Oversight of Explosive Detection Systems Maintenance Contracts Can Be Strengthened. GAO-06-795. Washington, D.C.: July 31, 2006. Aviation Security: TSA Oversight of Checked Baggage Screening Procedures Could Be Strengthened. GAO-06-869. Washington, D.C.: Jul. 28, 2006. Rail Transit: Additional Federal Leadership Would Enhance FTA’s State Safety Oversight Program. GAO-06-821. Washington, D.C.: July 26, 2006. Aviation Security: Management Challenges Remain for the Transportation Security Administration’s Secure Flight Program. GAO-06-864T. Washington, D.C.: June 14, 2006. Aviation Security: Enhancements Made in Passenger and Checked Baggage Screening, but Challenges Remain. GAO-06-371T. Washington, D.C.: April 4, 2006. Aviation Security: Progress Made to Set Up Program Using Private- Sector Airport Screeners, but More Work Remains. GAO-06-166. Washington, D.C.: March 31, 2006. Aviation Security: Significant Management Challenges May Adversely Affect Implementation of the Transportation Security Administration’s Secure Flight Program. GAO-06-374T. Washington, D.C.: February 9, 2006. Aviation Security: Federal Air Marshal Service Could Benefit from Improved Planning and Controls. GAO-06-203. Washington, D.C.: November 28, 2005. Aviation Security: Federal Action Needed to Strengthen Domestic Air Cargo Security. GAO-06-76. Washington, D.C.: October 17, 2005. Passenger Rail Security: Enhanced Federal Leadership Needed to Prioritize and Guide Security Efforts. GAO-05-851. Washington, D.C.: September 9, 2005. Aviation Security: Flight and Cabin Crew Member Security Training Strengthened, but Better Planning and Internal Controls Needed. GAO-05-781. Washington, D.C.: September 6. 2005. Aviation Safety: Oversight of Foreign Code-Share Safety Program Should Be Strengthened. GAO-05-930. Washington, D.C.: August 5, 2005. Homeland Security: Agency Resources Address Violations of Restricted Airspace, but Management Improvements Are Needed. GAO-05-928T. Washington, D.C.: July 21, 2005. Aviation Security: Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System Is Further Developed. GAO-05-356. Washington, D.C.: March 28, 2005. Aviation Security: Systematic Planning Needed to Optimize the Deployment of Checked Baggage Screening Systems. GAO-05-365. Washington, D.C.: March 15, 2005. United States Coast Guard: Improvements Needed in Management and Oversight of Rescue System Acquisition. GAO-06-623. Washington, D.C.: May 31, 2006. Coast Guard: Changes to Deepwater Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring is Warranted. GAO-06-546. Washington, D.C.: April 28, 2006. Risk Management: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington, D.C.: December 15, 2005. Maritime Security: Enhancements Made, but Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Cargo Security: Partnership Program Grants Importers Reduced Scrutiny with Limited Assurance of Improved Security. GA0-05-404. Washington, D.C.: March 11, 2005. Coast Guard: Station Readiness Improving, but Resource Challenges and Management Concerns Remain. GAO-05-161. Washington, D.C.: January 31, 2005. Contract Management: Coast Guard’s Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380. Washington, D.C.: March 9, 2004. Border Security: US-VISIT Program Faces Strategic, Operational, and Technological Challenges at Land Ports of Entry. GAO-07-248. Washington, D.C.: December 6, 2006. Border Security: Stronger Actions Needed to Assess and Mitigate Risks of the Visa Waiver Program. GAO-06-854. Washington, D.C.: July 28, 2006. Information Technology: Customs Has Made Progress on Automated Commercial Environment System, but It Faces Long-Standing Management Challenges and New Risks. GAO-06-580. Washington, D.C.: May 31, 2006. Border Security: Key Unresolved Issues Justify Reevaluation of Border Surveillance Technology Program. GAO-06-295. Washington, D.C.: February 22, 2006. Homeland Security: Recommendations to Improve Management of Key Border Security Program Need to Be Implemented. GAO-06-296. Washington, D.C.: February 14, 2006. Border Security: Strengthened Visa Process Would Benefit from Improvements in Staffing and Information Sharing. GAO-05-859. Washington, D.C.: September 13, 2005. Border Security: Opportunities to Increase Coordination of Air and Marine Assets. GAO-05-543. Washington, D.C.: August 12, 2005. Border Security: Actions Needed to Strengthen Management of Department of Homeland Security’s Visa Security Program. GAO-05-801. Washington, D.C.: July 29, 2005. Border Patrol: Available Data on Interior Checkpoints Suggest Differences in Sector Performance. GAO-05-435. Washington, D.C.: July 22, 2005. Immigration Enforcement: Weaknesses Hinder Employment Verification and Worksite Enforcement Efforts. GAO-06-895T. Washington, D.C.: June 19, 2006. Information on Immigration Enforcement and Supervisory Promotions in the Department of Homeland Security’s Immigration and Customs Enforcement and Customs and Border Protection. GAO-06-751R. Washington, D.C.: June 13, 2006. Homeland Security: Contract Management and Oversight for Visitor and Immigrant Status Program Need to Be Strengthened. GAO-06-404. Washington, D.C.: June 9, 2006. Homeland Security: Better Management Practices Could Enhance DHS’s Ability to Allocate Investigative Resources. GAO-06-462T. Washington, D.C.: March 28, 2006. Immigration Enforcement: Weaknesses Hinder Employment Verification and Worksite Enforcement Efforts. GAO-05-813. Washington, D.C.: August 31, 2005. Immigration Benefits: Additional Efforts Needed to Help Ensure Alien Files Are Located when Needed. GAO-07-85. Washington, D.C.: October 27, 2006. Immigration Benefits: Additional Controls and a Sanctions Strategy Could Enhance DHS’s Ability to Control Benefit Fraud. GAO-06-259. Washington, D.C.: March 10, 2006. Immigration Benefits: Improvements Needed to Address Backlogs and Ensure Quality of Adjudications. GAO-06-20. Washington, D.C.: November 21, 2005. Immigration Services: Better Contracting Practices Needed at Call Centers. GAO-05-526. Washington, D.C.: June 30, 2005. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. Disaster Relief: Governmentwide Framework Needed to Collect and Consolidate Information to Report on Billions in Federal Funding for the 2005 Gulf Coast Hurricanes. GAO-06-834. Washington, D.C.: September 6, 2006. Disaster Preparedness: Limitations in Federal Evacuation Assistance for Health Facilities Should be Addressed. GAO-06-826. Washington, D.C.: July 20, 2006. Expedited Assistance for Victims of Hurricanes Katrina and Rita: FEMA’s Control Weaknesses Exposed the Government to Significant Fraud and Abuse. GAO-06-655. Washington, D.C.: June16, 2006. Hurricane Katrina: Comprehensive Policies and Procedures Are Needed to Ensure Appropriate Use of and Accountability for International Assistance. GAO-06-460. Washington, D.C.: April 6, 2006. Continuity of Operations: Agency Plans Have Improved, but Better Oversight Could Assist Agencies in Preparing for Emergencies. GAO-05-577. Washington, D.C.: April 28, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Department of Homeland Security (DHS) plays a key role in leading and coordinating--with stakeholders in the federal, state, local, and private sectors--the nation's homeland security efforts. GAO has conducted numerous reviews of DHS management functions as well as programs including transportation and border security, immigration enforcement and service delivery, and disaster preparation and response. This testimony addresses: (1) why GAO designated DHS's implementation and transformation as a high-risk area, (2) management challenges facing DHS, (3) programmatic challenges facing DHS, and (4) actions DHS should take to strengthen its implementation and transformation efforts. GAO designated implementing and transforming DHS as high risk in 2003 because DHS had to transform 22 agencies--several with existing program and management challenges--into one department, and failure to effectively address its challenges could have serious consequences for our homeland security. Despite some progress, this transformation remains high risk. Managing the transformation of an organization of the size and complexity of DHS requires comprehensive planning and integration of key management functions. DHS has made some progress in these areas, but much additional work is required to help ensure success. While DHS has developed a strategic plan, the plan does not link resource requirements to goals and objectives, and its creation did not involve key stakeholders to ensure resource investments target the highest priorities. DHS has also issued guidance and plans to assist management integration on a function by function basis, but lacks a comprehensive management integration strategy with overall goals, a timeline, and a dedicated team to support its integration efforts. The latest independent audit of DHS's financial statements revealed 10 material internal control weaknesses and confirmed that DHS's financial management systems still do not conform to federal requirements. DHS has also not institutionalized an effective strategic framework for information management, and its human capital--the centerpiece of its transformation efforts--and acquisition systems will require continued attention to ensure that DHS allocates its resources efficiently and effectively. Since GAO's January 2005 high-risk update, DHS has taken actions to strengthen program activities. However, DHS continues to face programmatic and partnering challenges. To help ensure that its missions are achieved, DHS must overcome continued challenges related to cargo, transportation, and border security; systematic visitor tracking; efforts to combat the employment of illegal aliens; and outdated Coast Guard asset capabilities. Further, DHS and the Federal Emergency Management Agency need to continue to develop clearly defined leadership roles and responsibilities; necessary disaster response capabilities; accountability systems to provide effective services while protecting against waste, fraud, and abuse; and the ability to conduct advanced contracting for goods and services necessary for emergency response. DHS has not produced a final corrective action plan specifying how it will address its existing management challenges. Such a plan should define the root causes of known problems, identify effective solutions, have management support, and provide for substantially completing corrective measures in the near term. It should also include performance metrics and milestones, as well as mechanisms to monitor progress. It will also be important for DHS to become more transparent and minimize recurring delays in providing access to information on its programs and operations so that Congress, GAO, and others can independently assess its efforts.
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If done correctly, investments in IT have the potential to make organizations more efficient in fulfilling their missions. For example, Department of Defense (DOD) officials recently reported that an IT system supporting military logistics has improved the organization’s performance by providing real-time information about road conditions, construction, incidents, and weather to facilitate rapid deployment of military assets. Also, Federal Aviation Administration officials reported that an IT system supporting weather data processing has improved aviation operations by integrating terminal and aircraft sensor data with forecast data from the National Weather Service, and providing it to air traffic controllers. These officials estimated that the system allows them to increase airspace capacity by 25 percent in certain weather conditions. However, as we have previously reported, federal IT projects too frequently incur cost overruns and schedule slippages while contributing little to mission-related outcomes. For example, in May 2010, we reported that after spending $127 million over 9 years on an outpatient scheduling system, the Department of Veterans Affairs has not implemented any of the system’s capabilities and was essentially starting over. Further, in May 2012, we reported that while IT should enable government to better serve the American people, the federal government had not achieved expected productivity improvements—despite spending more than $600 billion on IT over the past decade. OMB plays a key role in overseeing how federal agencies manage their IT investments by working with them to better plan, justify, and determine how to manage them. Each year, OMB and federal agencies work together to determine how much the government plans to spend on IT projects and how these funds are to be allocated. OMB also guides agencies in developing sound business cases for IT investments and establishing management processes for overseeing these investments throughout their life cycles. The scope of this undertaking is quite large: in planning for fiscal year 2014, 27 federal agencies reported plans to spend about $76.5 billion on 8,142 IT investments. Over the last three decades, Congress has enacted several laws to assist agencies and the federal government in managing IT investments. For example, the Paperwork Reduction Act of 1995 specifies OMB and agency responsibilities for managing IT. Among its provisions, this law establishes agency responsibility for maximizing the value and assessing It also and managing the risks of major information systems initiatives.requires that OMB develop and oversee policies, principles, standards, and guidelines for federal agency IT functions, including periodic evaluations of major information systems. In addition, to assist agencies in managing their investments, Congress enacted the Clinger-Cohen Act of 1996. This law requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by federal agencies. It also requires that OMB report to Congress on the net program performance benefits achieved as a result of these investments. As set out in these laws, OMB is to play a key role in helping federal agencies manage their investments by working with them to better plan, justify, and determine how much they need to spend on projects and how to manage approved projects. Within OMB, the Office of E-government and Information Technology, headed by the Federal Chief Information Officer (CIO), directs the policy and strategic planning of federal IT investments and is responsible for oversight of federal technology spending. Agency CIOs are also expected to have a key role in IT management. Federal law, specifically the Clinger-Cohen Act, has defined the role of the CIO as the focal point for IT management, requiring agency heads to designate CIOs to lead reforms that would help control system development risks; better manage technology spending; and achieve real, measurable improvements in agency performance. In September 2011, we reported that federal CIOs are not consistently responsible for all of the areas assigned by law or identified as critical to effective IT management. For example, although most of the CIOs were responsible for capital planning and investment management, we found that CIOs are less frequently responsible for information management duties such as records management and privacy requirements. In an August 2011 memo, OMB reiterated the primary areas of responsibility for agency CIOs. This memo detailed four areas in which the CIO should have a lead role: IT governance, program management, commodity services, and information security. It emphasized the role of the CIO in driving the investment review process, including TechStats, and the CIO’s responsibility over the entire IT portfolio for an agency. To help carry out its oversight role and further improve the transparency into and oversight of agencies’ IT investments, in June 2009 OMB publicly deployed a website, known as the IT Dashboard. The Dashboard displays federal agencies’ cost, schedule, and performance data for over 700 major federal IT investments at 27 federal agencies that comprise about $40 billion of the federal budget. According to OMB, these data are intended to provide both a historical and a near-real-time perspective on the performance of these investments. OMB analysts are expected to use the Dashboard to identify IT investments that are experiencing performance problems. Using data drawn from federal agency budget submissions, the IT Dashboard provides information on an IT investment’s primary function, as defined by the Federal Enterprise Architecture. For fiscal year 2012 submissions, agencies were required to select a primary function from categories within the Federal Enterprise Architecture business reference models. The primary functions available for IT investments in fiscal year 2012 submissions were: administrative management community and social services controls and oversight correctional activities defense and national security disaster management economic development education energy environmental management financial management general government general science and innovation health homeland security human resource management information and technology management intelligence operations internal risk management and mitigation international affairs and commerce law enforcement legislative relations litigation and judicial activities natural resources planning and budgeting public affairs workforce management regulatory development revenue collection supply chain management transportation The Dashboard visually presents performance ratings for individual investments using metrics that OMB has defined—cost, schedule, and the CIO’s evaluation of risk. To develop the CIO’s risk evaluation, OMB instructed agency CIOs to assess their IT investments against a set of six evaluation factors, including risk management, requirements management, contractor oversight, historical performance, and human capital. The CIO assigns a rating of 1 to 5 based on his or her best judgment of the level of risk facing the investment. OMB then translates the agency CIO’s numerical assignment for an investment into a color for depiction on the Dashboard, with green signifying low or moderately low risk, yellow signifying medium risk, and red signifying moderately high or high risk (see table 1). In January 2010, OMB began conducting TechStats to enable the federal government to intervene to turnaround, halt, or terminate IT projects that are failing or are not producing results. TechStats are face-to-face, evidence-based reviews of an at-risk IT investment. OMB used CIO ratings from the IT Dashboard, among other sources, to select at-risk investments for the TechStats it conducted from 2010 through 2011. Subsequently, as part of the Federal CIO’s 25-point IT Reform Plan,OMB empowered agency CIOs to hold their own TechStat sessions within their respective agencies, and required federal agencies to hold at least one TechStat by March 2011. The IT Reform Plan also required agencies to roll the TechStat model out to its component-level agencies and bureaus (bureaus) by June 2012. To do this, agencies were required to make agency CIOs responsible for deploying the necessary tools and training on how to conduct TechStat reviews and have at least one bureau conduct TechStat reviews by June 2012. In August 2011, OMB required agency CIOs to continue holding TechStat sessions. In establishing and rolling out the TechStat sessions, OMB stated that it expects that the sessions will help strengthen IT governance, improve line-of-sight between project teams and senior executives, increase the precision of ongoing measurement of IT program health, and boost the quality and timing of interventions to keep projects on track. We have found that the TechStat model is consistent with government and industry best practices for overseeing IT investments, including our own guidance on IT investment management processes. by focusing management attention on troubled projects and establishing clear action items to turn the projects around or terminate them. GAO, Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity, GAO-04-394G (Washington, D.C.: Mar. 2004). deficiencies and use that list to report to Congress on progress made in correcting high-risk problems. As a result, OMB started publicly releasing aggregate data on its internal list of mission-critical projects that needed to improve (called its Management Watch List) and disclosing the projects’ deficiencies. The agency also established a High-Risk List, which consisted of projects identified as requiring special attention from oversight authorities and the highest levels of agency management. In June 2009, OMB replaced the Management Watch List and the High-Risk List when it deployed a public website—the IT Dashboard—to further improve the transparency and oversight of agencies’ IT investments. In 2010 and 2011, we reported that while the Dashboard was an important tool for monitoring major IT projects, the cost and schedule ratings were not always accurate for selected agencies.recommendations to improve the accuracy of the data and, more recently, found that the accuracy had improved. In April 2012, we reported on the progress of OMB and selected federal agencies on action items in OMB’s IT Reform Plan. We found that, of 10 selected action items, agencies had completed 3 and made progress on the other 7. However, we found that agencies lacked time frames for completing 5 of those 7 in-progress action items, and only had performance measures for 4 of the 10 selected action items. Thus, we recommended, among other things, that OMB ensure that action items are completed prior to the IT Reform Plan’s June 2012 deadline and establish time frames and performance measures for the action items. OMB agreed with our recommendations to complete action items and provide deadlines, but disagreed with our recommendation to establish performance measures. OMB has made progress with completing incomplete action items, but more remains to be done. For example, one action item involved issuing contracting guidance to support modular development and OMB completed this action in June 2012. However, another action item involved ensuring agency data center consolidation plans were in place so agencies could close 800 data centers by 2015, and we recently reported that all but 1 of the 24 agencies’ plans were incomplete. Most recently, in October 2012, we reported specifically on the CIO rating portion of the IT Dashboard at six selected agencies. CIOs at six federal agencies rated the majority of their IT investments as low risk, and that many ratings remained constant over time. For ratings that did change, we found two agencies reported more investments with reduced risk compared to earlier risk ratings; the other four agencies reported more investments with increased risk. In addition, we reported instances where the CIO ratings did not appropriately reflect significant cost, schedule, and performance issues reported by GAO and others. We recommended that the Federal CIO analyze agency trends reflected in Dashboard CIO ratings, and report the results of this analysis in future budget submissions. OMB agreed with the recommendation and recently released some information on trends as part of the 2014 budget. We have work under way to evaluate this information. GAO, Information Technology Dashboard: Opportunities Exist to Improve Transparency and Oversight of Investment Risk at Select Agencies, GAO-13-98 (Washington, D.C.: Oct. 16, 2012). OMB and the four selected agencies have held multiple TechStats on IT investments that varied in terms of function, significance, amount spent to date, and risk level. Specifically, from January 2010 through April 2013, OMB reported leading 79 TechStat sessions, which focused on 55 IT investments at 23 federal agencies. These investments covered 21 functional areas (such as information and technology management, law enforcement, and health), and consist of 45 major, 8 non-major, and 2 unrated investments. For the 45 major investments that OMB reviewed, almost 70 percent had a CIO rating of medium to high risk at the time of the TechStat review. The four agencies selected for our review—Agriculture, Commerce, DHS, and HHS—held a total of 37 TechStat sessions covering 28 investments from January 2011 through March 2013. Most of the investments underwent a TechStat session at the agency level, but 8 underwent a TechStat review at the bureau level, and 2 underwent TechStat reviews at both. The agency-led TechStats covered 14 functional areas, and consist of 21 major and 7 non-major investments. For the 21 major investments, about 76 percent of the agency-led TechStats were on investments that had a CIO rating of medium- to high-risk. While both OMB and agencies have made progress in holding TechStat sessions, there is more that could be done. Specifically, the number of TechStats held to date is relatively small compared to the total number of medium- and high-risk IT investments. Further, there are multiple high- risk IT investments spending millions of dollars that have not yet been assessed. Two of the selected agencies—Agriculture and Commerce— had reviewed all of their high-risk investments, and DHS has plans to review its remaining high-risk investments. However, HHS has not yet established plans to review all of its high-risk investments. Also, OMB does not have plans or schedules for assessing the other high-risk IT investments. Until OMB and agencies intervene to turn around these at- risk projects, the government will continue to spend limited IT investment dollars on underperforming projects. As of April 2013, OMB reported conducting 79 TechStat reviews, with 59 reviews occurring in 2010, 8 in 2011, 11 in 2012, and 1 so far in 2013. OMB conducted fewer TechStats in recent years because it expected the agencies to increase the number of agency-led TechStats. Most of the OMB-led TechStats were at DHS and DOD. OMB has conducted at least one TechStat at 23 agencies (including the Office of the Director of National Intelligence). It has not held a TechStat at the Department of Labor, the National Aeronautics and Space Administration, the National Science Foundation, the Nuclear Regulatory Commission, or the Smithsonian Institution. Figure 1 shows the total number of reported OMB-led TechStats at each agency as of April 2013. These 79 TechStat reviews included 55 IT investments from 23 federal agencies. OMB also reported leading follow-up sessions for many of these investments. For example, OMB led 4 TechStats on a DHS investment called the Federal Emergency Management Agency— National Flood Insurance Program Information Technology Systems and Services. Table 2 identifies the investments for which OMB led TechStats, the date of the first session, and the total number of sessions that OMB has held on that investment. These 55 investments span 21 primary functional areas.common functional area was information and technology management, followed by homeland security and human resource management. Figure 2 provides a numerical depiction of the functions of those investments that were subject to a TechStat. OMB held most of its TechStats on major IT investments, with 45 of its 55 investments rated as major investments. OMB also held 8 TechStats on non-major investments and 2 on investments lacking a major/non-major designation. Figure 3 shows the breakdown of major and non-major investments. Thirty-eight of the 45 major investments that underwent an OMB-led TechStat have reportedly cost the federal government about $16 billion through fiscal year 2012. DHS’s investments that were the subject of a TechStat session accounted for most of the cost, with a reported $4.9 billion spent. DOT follows with investments that have reportedly cost $2.8 billion through September 2012. The reported cost of individual investments ranged from $4.18 million to $3.2 billion. Table 3 details how much each agency has spent on its major investment. Of the 45 major IT investments that were subject to a TechStat, 67 percent were considered medium- to high-risk investments at the time they were chosen for a TechStat. Specifically, 9 had high- or moderately high-risk (red) CIO ratings on the IT Dashboard, 21 had medium-risk (yellow) ratings, and 9 had low- or moderately low-risk (green) ratings. In addition, 6 investments’ risk levels were not identified. Table 4 shows the Dashboard ratings for the major IT investments that underwent a TechStat. From January 2011 through March 2013, the four selected agencies— Agriculture, Commerce, DHS, and HHS—held 37 TechStats that covered 28 different investments. Commerce held the most, with 15 TechStat sessions, followed by DHS, HHS, and Agriculture, with 8, 7, and 7 sessions, respectively. Table 5 lists the investments, the date of the first TechStat session, and the total number of TechStats by agency. Although most of the agency-led TechStat reviews were held at the agency level, three of the agencies in our review have also been holding them at the bureau or component agency level. Specifically, of the agencies in our review, 18 of the 28 investments underwent at least one TechStat review at the agency level, 8 underwent a TechStat review at the bureau level, and 2 underwent TechStat reviews at both. Of the selected agencies, Agriculture had not held a bureau-level TechStat (see fig. 4). Like the OMB-led reviews, the investments selected by agencies for TechStat reviews had diverse primary functional areas. Specifically, 25 of the investments that underwent agency-led TechStats at the four selected agencies cover 14 different functional areas. The most common area was information and technology management (6 investments), followed by environmental management (4 investments) (see fig. 5). Most of the investments that underwent a TechStat review at the four agencies were major investments, with a quarter of the sessions focusing on non-major investments (see fig. 6). The four agencies reported spending $7.8 billion through the end of fiscal year 2012 on 20 of the 21 major investments that underwent an agency- led review.for a new Commerce investment to $3.7 billion for a DHS investment. Table 6 provides a summary of the amount spent on major investments through September 2012. The four selected agencies are generally conducting TechStats in accordance with OMB guidance. In 2011, when OMB decided to move beyond conducting its own TechStats and to have agencies conduct them too, OMB provided agencies guidance through the IT Reform Plan, a memorandum, and the TechStat Toolkit, which is available on the CIO Council’s website. These documents include 15 key requirements, including when TechStats should be implemented by the agencies, what participants should be included, how at-risk investments should be chosen, and how outcomes should be tracked and reported. The requirements can be grouped into four broad categories: scope, governance, process, and outcomes. Table 10 shows key requirements for TechStat reviews. The four selected agencies implemented most of OMB’s 15 key requirements. Specifically, DHS implemented all 15 requirements, Commerce fully implemented 14 requirements and partially implemented 1 requirement, HHS fully implemented 11 of the requirements and partially implemented 4 requirements, and Agriculture fully implemented 10 of the requirements, partially implemented 3 requirements, and did not implement 2 requirements. All four agencies fully implemented eight of OMB’s requirements: (1) the appropriate people are invited to the TechStat meetings, (2) sessions are led by the CIO, (3) the preparation for the TechStat is performed by the TechStat team and the CIO, (4) investments selected by TechStats are done so by the prescribed criteria, (5) all action items are tracked in a consolidated repository, (6) each investment is tracked into an outcome, (7) outcomes are shared with OMB, and (8) results are published in an collaborative tool. The requirement with the least implementation involves documenting action items, deadlines, and responsible parties in a memorandum following each TechStat. Table 11 provides details regarding the agencies’ implementation of OMB guidance on TechStats. While the four selected agencies have largely implemented OMB’s guidance on conducting TechStats, three agencies have selected areas where they can improve. For example, Agriculture created memorandums following a TechStat, but did not consistently include responsible parties; Commerce created memorandums, but did not include deadlines; and HHS did not always create memorandums or monitor all of its action items to closure. Agency officials noted several reasons for not fully implementing OMB’s guidance. Specifically, Agriculture officials noted that they are updating their capital planning guidance to include TechStat reviews, but that this guidance is in the process of being reviewed and approved. Also, Commerce and HHS officials noted that OMB gave agencies flexibility in exactly how to implement their guidance. While OMB did provide agencies flexibility in selecting investments for TechStat reviews and conducting those reviews, the requirements are clearly delineated in OMB instructions and training. Fully implementing OMB’s TechStat guidance could better position the agencies to realize the benefits of the TechStat initiative—including strengthening overall IT governance and oversight, and proactively identifying and resolving problems before investments experience delays or cost overruns. The IT Reform Plan and related OMB guidance instructed agencies to track and report on the outcomes of their TechStat sessions (including improved governance, accelerated deliveries, and terminated projects), and on any associated cost implications (such as cost savings or cost avoidances). OMB and the four agencies we reviewed have tracked and reported positive results from TechStats, with most resulting in improved governance or accelerated deliveries. OMB also reported that federal agencies achieved over $3 billion in cost savings or avoidances as a result of the OMB-led TechStats in 2010 and $900 million from agency- led TechStats in 2011. Using a different calculation formula, OMB also reported that TechStats resulted in $63.5 million in cost implications in 2012. However, we were unable to validate the reported outcomes and associated savings because OMB did not provide supporting artifacts or demonstrate the steps that OMB analysts took to verify the agencies’ data. Without documentation or an explanation of its method in validating agencies’ reported results and cost savings, it will be difficult for OMB to provide a sufficient level of confidence to Congress and the public that the information it has presented is credible. Both OMB and agencies reported achieving positive results from their respective TechStat sessions. Specifically, in 2011 OMB staff reported achieving a variety of positive outcomes from the OMB-led TechStat sessions, including 11 investments being reduced in scope, four investments that were cancelled, and multiple investments with accelerated program delivery. We also identified four investments that were the focus of an OMB-led TechStat that were subsequently terminated and two other investments that were split into multiple smaller investments to improve governance and accelerate the delivery of discrete capabilities. Further, we previously found that the June 2010 TechStat on the National Archives and Records Administration’s Electronic Records Archives investment resulted in six corrective actions, including halting fiscal year 2012 development funding pending the completion of a strategic plan.likely experience cost overruns of between $205 and $405 million if the agency completed the program as originally designed. We estimated that the program would Seeking to improve the reporting of outcomes, OMB instructed federal agencies to track the results of each agency-led TechStat session into one of six outcomes: accelerated delivery, improved governance, reduced scope, eliminated duplication, halted, or terminated. In December 2011, OMB reported a summary of the outcomes of 294 agency-led TechStats across the federal government. Specifically, OMB reported the following outcomes: 49 percent resulted in accelerated delivery, 42 percent resulted in improved governance, 3 percent did not report results, 2 percent resulted in terminations, 1 percent resulted in reducing the scope, 1 percent eliminated duplication, and 1 percent halted the investment. In addition, the four agencies in our review reported on the results of their agency-led TechStats, with the majority resulting in improved governance. Specifically, out of 36 TechStat reviews, 28 resulted in improved governance, 4 in accelerated delivery, 2 in terminations, and 2 in a reduced scope. Table 12 provides a summary of reported results, by agency. In conjunction with the reported outcomes of agency-led TechStats, OMB instructed agencies to provide information on the cost implications of the outcomes. These implications could include cost savings (a reduction in actual expenditures) or cost avoidances (an action taken immediately that will reduce costs in the future). In addition, OMB’s guidance on performance reporting notes that performance data should be appropriately accurate and reliable for their intended use. This guidance further describes verification and validation techniques that OMB encourages agencies to use in internal assessments, including ensuring that supporting documentation is maintained and readily available, data are verified as appropriate to the needed level of accuracy, and data limitations are explained and documented. OMB has reported cost savings and avoidances from OMB- and agency- led TechStat reviews. Specifically, OMB has reported that federal agencies achieved about $3 billion in cost savings or avoidances as a result of the OMB-led TechStats held in 2010 and 2011, and $900 million from agency-led TechStats in 2011. See figure 7 for the reported cost implications for both OMB-led and agency-led TechStats as of November 2011. In addition, OMB reported that the cost savings and avoidances for the agency-led TechStat reviews, as of November 2011, came from 10 of the 27 agencies under their purview. Department of Transportation had the most cost implications, with $510 million. See figure 8 for a depiction of the cost implications by agency. Two of the agencies in our review—DHS and HHS—reported $23 million in cost implications from three agency-led TechStats: DHS reported a $14 million cost avoidance after deciding to decommission one part of the Federal Protective Service’s Risk Assessment and Management Program; HHS reported saving $8.2 million by reengineering redundant business processes supporting the Food and Drug Administration’s Mission Accomplishment and Regulatory Compliance Service project; and HHS reported $800,000 in cost implications associated with improving governance and reducing the scope of the One Stop Service Solution project (now called GovZone). More recently, OMB has been reporting cost savings from agency-led TechStat reviews in quarterly reports to Congress. From December 2011 through December 2012, OMB identified a total of $63.5 million in cost implications from agency-led TechStats. OMB staff stated that they are calculating the cost savings in these quarterly reports differently than their prior reports on cost savings, and thus the costs should not be compared. When collecting data, it is important to have assurance that the data are accurate. Best practices in implementing the Government Performance and Results Act of 1993 emphasize the need for agencies, when providing information, to explain the procedures used to verify or validate their data. Specifically, agencies should ensure that reported data are sufficiently complete, accurate, and consistent, and also identify any significant data limitations. Explaining the limitations of the information can provide a context for understanding and assessing the challenges agencies face in gathering, processing, and analyzing needed data. Such a presentation of data limitation can also help identify the actions needed to improve the agency’s ability to measure its performance. More recently, we have reiterated the importance of providing OMB with complete and accurate data. DHS and HHS, the two agencies in our review that reported cost savings and avoidances, generally perform analyses to establish these estimates. DHS provided supporting documentation for how the cost implications for its investment were calculated and HHS provided supporting documentation for its larger investment. We were unable to validate the cost savings for HHS’s smaller investment because the agency was unable to provide supporting documentation. From a governmentwide perspective, OMB staff explained that they review agencies’ cost implication data for completeness and quality. However, we were unable to validate OMB’s reported outcomes and almost $4 billion in cost implications because OMB did not provide documentation on any steps that it or the agencies took to ensure the validity of the agencies’ outcome and cost data. For example, OMB staff did not provide memorandums documenting action items from the OMB- led TechStats, the outcomes identified for OMB- and agency-led TechStats, documentation identifying which investments resulted in cost savings, documentation demonstrating the methodology used to calculate the cost savings, or a summary of steps the agencies took to validate reported cost savings. Moreover, OMB does not require agencies to report on what steps they took to verify their reported outcomes and cost savings. By not requiring agencies to report on their efforts to validate reported outcomes and cost savings, it is not evident that OMB is following its own guidance for ensuring that performance data are reliable and accurate. Moreover, OMB is not providing reasonable assurance to Congress and the public that the information it has presented is credible. One entity that was formed to assist OMB in its oversight of the TechStat results was the CIO Council’s subcommittee on IT Governance and TechStats, but according to OMB and agency officials this subcommittee has already been dissolved. The CIO Council’s Management Best Practices Committee formed the subcommittee to report on the outcomes and lessons learned from implementing the TechStat process. This subcommittee was to play a key role in continuing to mature the TechStat process. However, in 2012, the CIO Council dissolved the subcommittee because the committee chairs determined that it was no longer needed. Consistent with government and industry best practices for overseeing IT investments, TechStat sessions hold value by focusing management attention on troubled projects and establishing clear action items to turn the projects around or terminate them. While OMB and agencies are reporting positive results from holding TechStat sessions, neither are doing enough to ensure that at-risk investments are undergoing review, sound processes are in place, and reported results are valid. Specifically, agencies are reviewing only about a third of their at-risk IT investments. Until OMB and agencies develop plans and schedules for addressing these at-risk investments, the investments will likely remain at risk. The four agencies we reviewed had implemented most of the OMB- required TechStat processes, but three had shortfalls in selected processes. For example, Agriculture had not yet incorporated TechStats in its investment management processes, Commerce had not consistently included deadlines for action items in its TechStat memoranda, and HHS had not consistently created action item memoranda following TechStats or tracked its action items to completion. Addressing these shortfalls could better position these agencies to realize the full benefits that TechStats offer. OMB regularly reports on cost savings associated with TechStats, but it has not taken basic steps to provide reasonable assurance to Congress and the public that these data are valid. Until OMB requires agencies to report on what they did to validate cost savings data and shares this information, neither Congress nor the public can be assured that TechStats are as effective as reported. While the CIO Council recently dissolved its subcommittee responsible for reviewing TechStats, the council is one entity that is uniquely positioned to assist OMB in its oversight of the TechStat results. To ensure that TechStat sessions are having the appropriate impact in the oversight of underperforming projects, we are making three recommendations to OMB. Specifically, we recommend that the Director of the Office of Management and Budget direct the Federal Chief Information Officer to require agencies to conduct TechStats for each IT investment rated with a moderately high- or high-risk CIO rating on the IT Dashboard, unless there is a clear reason for not doing so; require agencies to report to OMB on efforts to validate the outcomes, cost savings, and cost avoidances resulting from TechStat sessions; this information should be summarized when OMB reports on governmentwide outcomes; and direct the Federal CIO Council to track the outcome of TechStat sessions and to support OMB’s efforts to validate the resulting cost savings it reports to Congress. In addition, we are making a recommendation to the Secretaries of Agriculture and Commerce to address the weaknesses in agency- and bureau-led TechStat processes and management outlined in this report. We are also making two recommendations to the Secretary of Health and Human Services to establish a plan and schedule for addressing each IT investment rated with a moderately high- or high-risk CIO rating on the IT Dashboard; such a plan could include conducting a TechStat session, and address the weaknesses in agency- and bureau-led TechStat processes and management outlined in this report. We requested comments from OMB, Agriculture, Commerce, DHS, and HHS on a draft of our report. In that draft report, we had made recommendations to the Secretaries of Agriculture, Commerce, and DHS to establish a plan and schedule for addressing their high-risk investments that had not yet undergone TechStat reviews. However, these agencies completed these steps prior to the issuance of this report. Therefore, we removed the applicable recommendations. OMB and three agencies provided comments on our draft report. OMB generally agreed with our recommendations; Commerce agreed with our recommendation; and Agriculture and HHS did not agree or disagree with our recommendations. DHS declined to provide comments. Each agency’s comments are discussed in more detail below: In comments provided via e-mail, staff from OMB’s Office of E- Government and Information Technology generally concurred with our findings and recommendations and stated that OMB and the agencies are currently taking appropriate steps to meet the recommendations. OMB provided additional details as follows: In commenting on our finding that it did not ensure the validity of the outcomes and savings it reported, OMB noted that it is confident in the agency validation of cost-savings and avoidances through the TechStat sessions, and that it was speculative to conclude that the reported cost savings data were not valid because we could not actually assess these figures. OMB did not provide supporting documentation for the cost savings calculations and explained that the process used to validate the cost figures was deliberative. However, part of a sound process for ensuring validity involves documenting the procedures used to verify or validate the data; as such, we were unable to validate OMB’s reported outcomes and almost $4 billion in cost implications from 2010 and 2011 because OMB did not provide documentation on any steps that it or the agencies took to ensure the validity of the agencies’ outcome and cost data. For example, OMB staff did not provide memorandums documenting action items from the OMB-led TechStats, the outcomes identified for OMB- and agency-led TechStats, documentation identifying which investments resulted in cost savings, documentation demonstrating the methodology used to calculate the cost savings, or a summary of steps the agencies took to validate reported cost savings. Moreover, OMB did not require agencies to report on what steps they took to verify their reported outcomes and cost savings. Without disclosing the steps it took to validate the outcomes and cost savings, OMB has not provided reasonable assurance to Congress and the public that the information it has presented is credible. OMB also noted that since June 2012, OMB and agencies have validated and transmitted cost-savings and avoidance data associated with TechStat sessions to Congress on a quarterly basis through the Integrated, Efficient, and Effective Use of IT Report. These reports summarize the validation methods OMB and agencies undertake. We acknowledge that these reports summarize methods through which the costs savings and avoidances were documented; however, due to a lack of supporting documentation, we could only validate $22.2 million of the $63.5 million cost savings and avoidances OMB recently reported. In written comments, the Department of Agriculture’s Chief Information Officer partially agreed with our assessment of the agency’s TechStat process but did not specify the part of the assessment with which she disagreed. The department stated that it would continue to conduct periodic reviews of its IT investments to ensure a review of all major IT investments. In addition, the department stated that IT Dashboard ratings alone are not true indicators that an investment is poorly performing or underperforming and that it takes into consideration other factors, such as earned value management data, when determining an investment’s performance. We agree that the CIO rating should reflect the CIO’s assessment of the risk and should use many factors in determining the rating. The department’s written comments are provided in appendix II. In written comments, the Department of Commerce’s Acting Secretary concurred with our recommendation and stated that the department is in full compliance with the recommendation. The department plans to ensure that all TechStat memos have a specific point of contact and a specific due date. The department’s written comments are provided in appendix III. In comments provided via e-mail, a management analyst within the Department of Health and Human Services’ Office of the Assistant Secretary for Legislation stated that the department had no general comments. The department provided technical comments, which we have incorporated as appropriate. In its technical comments, HHS commented on our finding that the agency did not satisfy OMB’s requirement to hold its first TechStat session by March 2011. The HHS officials stated that the agency had appropriately initiated the process for holding a TechStat prior to OMB’s March 2011 deadline. While we acknowledge that the agency initiated the process prior to the deadline, the actual session was held after the deadline. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to (1) identify key characteristics of TechStat Accountability Sessions (TechStats) conducted by the Office of Management and Budget (OMB) and selected agencies, (2) evaluate whether selected agencies are conducting TechStats in accordance with OMB guidance, and (3) analyze the extent to which reported results from TechStat review sessions are documented, tracked, and validated. In conducting our review, we selected four agencies based on two factors: the number of investments with medium-, moderately high-, and high-risk Chief Information Officer (CIO) ratings on the information technology (IT) Dashboard as of August 2012, and a determination on whether the agency had led its own TechStats in 2011. The four agencies we selected—the Departments of Agriculture (Agriculture), Commerce (Commerce), Health and Human Services (HHS), and Homeland Security (DHS)—had the highest number of medium-, moderately high-, and high- risk investments. In addition, in December 2011, the CIO Council reported We that all four agencies had held their own TechStat sessions in 2011.assessed the reliability of the IT Dashboard data and the data on agency- led TechStats by comparing them to agency documents, and found that the data were sufficient for our purpose of selecting agencies for further review. We reviewed exhibit 300 and 53 data linked on the IT Dashboard as of the last update in August 2012. data for each of these investments. We also interviewed OMB, Agriculture, Commerce, DHS, and HHS officials regarding the TechStat sessions. We assessed the reliability of OMB’s and the four agencies’ lists of reported TechStat sessions by seeking corroboration for the sessions held at our selected agencies. We determined that OMB’s and the four agencies’ lists were sufficient for our purposes. To address the second objective, we analyzed OMB’s guidance to agencies on conducting TechStat reviews and identified15 key requirements. We then compared these requirements to the selected agencies’ documentation, including capital planning and investment control plans and guidance, agency-specific TechStat guidance and training materials, meeting minutes from investment review board meetings, and electronic submissions from the agency to OMB regarding the TechStat sessions. To identify whether agencies were documenting, tracking, and monitoring action items—one of the 15 key requirements— we conducted a random sample of 10 percent of each agency’s action items and sought documentation from each of the agencies to support the status of the selected action items. This sample is not generalizable to the entire population of action items from each agency, but we determined it was sufficiently reliable for our purposes of determining whether the agencies were tracking and monitoring action items. We also interviewed officials from OMB and our four selected agencies about their respective TechStat processes. To address the third objective, we identified OMB’s guidance to agencies on reporting the results of agency-led TechStat sessions. We analyzed the selected agencies’ and OMB’s reported results in each of OMB’s outcome categories and attempted to validate OMB’s and the agencies’ reported cost implications. We also reviewed quarterly reports from OMB to Congress to identify additional cost implication information. As noted in the body of this report, we were unable to determine the reliability of the reported cost implications because OMB did not provide artifacts demonstrating how it validated the data or evidence that it obtained agency validation of the data. We conducted this performance audit from September 2012 to June 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, individuals making contributions to this report included Colleen Phillips (Assistant Director), Rebecca Eyler, Kate Feild, and Jessica Waselkow.
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While IT investments have the potential to make organizations more efficient, many federal IT projects experience cost overruns, schedule delays, and performance shortfalls. To help address these shortfalls, OMB established TechStats--face-to-face meetings to terminate or turnaround IT investments that are failing or are not producing results. GAO was asked to evaluate the implementation of TechStats. GAO's objectives were to (1) identify key characteristics of TechStats held to date; (2) evaluate whether selected agencies are conducting TechStats in accordance with OMB guidance, and (3) analyze the extent to which reported TechStat results are tracked and validated. To do so, GAO selected four agencies--Agriculture, Commerce, HHS, and DHS--because these were the agencies with the highest number of at-risk investments. GAO analyzed OMB and agency documentation, compared agency processes to TechStat guidance, compared efforts to validate reported outcomes to leading practices, and interviewed OMB and agency officials. Since January 2010, the Office of Management and Budget (OMB) and selected agencies have held multiple TechStat Accountability Sessions (TechStats) on information technology (IT) investments that varied in terms of function, significance, and risk. As of April 2013, OMB reported conducting 79 TechStats, which focused on 55 investments at 23 federal agencies. The four agencies conducted 37 TechStats covering 28 investments. About 70 percent of the OMB- and 76 percent of agency-led TechStats on major investments were considered medium- to high-risk at the time of the TechStat. However, the number of at-risk TechStats held to date is relatively small compared to the current number of medium- and high-risk IT investments. Until OMB and agencies develop plans to address these investments, the investments will likely remain at risk. The selected agencies are generally conducting TechStats in accordance with OMB guidance. OMB's TechStat guidance includes 15 key requirements, such as when TechStats should be implemented, what participants should be included, and how outcomes should be tracked and reported. DHS implemented all of the TechStat requirements. Commerce, HHS, and Agriculture implemented a majority of the requirements, but each had shortcomings. For example, these agencies did not consistently create memorandums with responsible parties and due dates for action items. Fully implementing OMB's guidance could better position agencies to effectively manage and resolve problems on IT investments. OMB and selected agencies have tracked and reported positive results from TechStats, with most resulting in improved governance. OMB also reported in 2011 that federal agencies achieved almost $4 billion in life-cycle cost savings as a result of TechStat sessions. However, GAO was unable to validate OMB's reported results because OMB did not provide artifacts showing that it ensured the results were valid. From GAO's selected agencies, three investments had cost implications. Agencies provided supporting documentation for about $22.2 million in cost savings and avoidances. Until OMB obtains and shares information on the methods used to validate reported results, it will be difficult for the results to be independently validated and for OMB to provide assurance to Congress and the public that TechStats are achieving their intended impact. GAO is making recommendations to OMB to require agencies to address high-risk investments and to report on how they validated the outcomes. GAO is also making recommendations to selected agencies to address weaknesses in following OMB's TechStat guidance. OMB and Commerce officials generally agreed with GAO's recommendations. Agriculture partially agreed with GAO's assessment; neither it nor HHS commented on the recommendations.
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DOD has for many years augmented its internally owned and operated satellite communications capability by leasing additional external telecommunications capacity on commercially owned and operated satellites. Demand has been increasing in recent years, as the military has come to rely more heavily on commercial satellite communications to plan and support operations and move toward a network-centric warfare environment. According to industry sources, DOD’s current estimated $300-400 million spending on such services has made it the satellite communications industry’s biggest customer. DOD leases commercial satellite bandwidth services primarily through DISA and its Defense Information Technology Contracting Organization (DITCO). DISA does not acquire commercial bandwidth directly from satellite service providers. Instead it procures bandwidth through several competitively selected vendors, which in turn compete work among individual bandwidth service providers. There are two primary contract structures through which DISA procures bandwidth through these vendors. The first is known as the Managed Transponder Contract (MTC). It was competitively awarded in 1995 to one vendor, and served as the primary acquisition vehicle for several years. The second is an indefinite-delivery, indefinite-quantity (IDIQ) multiple-award contract structure known as the Defense Information Systems Network Satellite Transmission Services-Global (DSTS-G) contracts. They were awarded competitively in February 2001, after users found the MTC contract to be inflexible, too costly, and limited in terms of the breadth of services it could provide. Awards were made to three small business vendors that acquire bandwidth for DISA from the ultimate service providers. Recently, DISA has been relying more on this second contract structure. The agency placed 48 orders for bandwidth under the DSTS-G contracts through June 2003 versus only 5 new orders under the MTC contract from March 2000 through June 2003. DISA’s vendors obtain satellite services from a commercial satellite industry market segment that has been growing at a high rate. The commercial satellite industry is a global industry that includes many foreign-owned businesses as well as partnerships between U.S. and foreign corporations. Table 1 lists major global and regional satellite bandwidth providers. While there are 10 companies listed, only 6 of them have provided needed bandwidth through the DISA acquisition process during recent years. The acquisition process that DISA uses to determine user requirements and acquire bandwidth is similar to the process it uses to acquire other telecommunications services for its customers. Generally, the process begins with users identifying a need and contacting DISA to fulfill that need. Technical experts within DISA assist users in engineering a potential solution. Other offices within DISA decide how the service should be procured and prepare a request for the vendors to propose solutions. Once DISA has determined which contract structure to use and has asked for proposed solutions, an evaluation team within DISA reviews the proposals and awards a task order or delivery order under the winning vendor’s contract. Figure 1 and table 2 further detail this process. If circumstances dictate, users can request a waiver through DOD’s Global Information Grid (GIG) Waiver Panel to use an alternative network and alternative acquisition process instead of the DISA process. A business case must be made for the requested waiver and there must be plans outlined to migrate the outlying network back under the telecommunications infrastructure and to bring the resulting contract under the control of DITCO. After a waiver is approved, the user’s procurement organization takes steps to procure the bandwidth. DOD’s process through DISA for acquiring commercial fixed satellite service bandwidth is fair to both its vendors and their subcontractors, which are the ultimate commercial satellite bandwidth providers. The majority of bandwidth orders in recent years have been made under the DSTS-G contracts, where competition exists at both the vendor and service provider levels. Only five orders have been placed under the MTC contract, which by its nature is not as competitive as the DSTS-G contract, since it was designed to obtain service through one vendor. The Federal Acquisition Regulation (FAR), as supplemented by DOD and DISA, requires DITCO to provide a fair opportunity to the three DSTS-G vendors at the prime contract level. Generally, this entails writing broad, needs-based requirements able to be satisfied by multiple vendors rather than only one; providing notice and opportunity to be considered to each of the vendors; giving notice of the evaluation criteria to be used to select a winning evaluating proposals, conducting discussions, and awarding delivery orders or task orders in accordance with the evaluation criteria stated. We analyzed 48 task orders that were awarded under the DSTS-G contract from its inception in February 2001 through June 2003 to determine whether these criteria were generally followed. We found that the acquisition process employed by DISA and DITCO generally met FAR criteria, as supplemented, and was fair to competing vendors under the DSTS-G contracts. Though we found some orders awarded under exceptions established in FAR, the rationale for these exceptions was documented in each task order file. The common set of technical questions that users are required to answer when submitting their bandwidth requests helps not only to document their technical environment but also to preclude writing an overly narrow or restrictive requirement. While a few valid user situations demanded a repeat solution or narrowed the range of possible solutions, they did not unduly impair the vendors’ fair opportunity to compete. Of the 48 task orders for bandwidth, 41 were competed among the three vendors; six were renewals of previously competed task orders; and only one was sole-source, awarded without vendor competition. Documentation justifying the one sole-source action was included in the task order file, as required. The distribution of task order awards among the three vendors is illustrated in table 3. The table shows the number and percentage of the 48 task orders awarded to each of the three vendors under their respective DSTS-G contracts along with the associated dollar values and percentages. The evaluation criteria DISA used to select a winning vendor were contained in each inquiry that was competed. Evaluation of the proposals, discussions, and the award of task orders complied with the stated evaluation and selection criteria. DISA used the following two selection frameworks to evaluate proposals: DISA awarded 18 of the 41 competitive task orders worth $54,255,114 under a source selection process called “best value,” using a cost/technical trade-off process. Under this approach, the selection official trades off cost and non-cost factors, identified in the inquiry, in determining award decisions. In some cases, greater weight may be placed on a contractor’s technical approach resulting in the selection of what may not be the lowest priced proposal. DISA awarded the remaining 23 competitive task orders worth $78,645,239 under the “lowest price technically acceptable” framework. Under this approach, the technical solution proposals are all evaluated by DISA’s Commercial Satellite Communications Branch and its supporting contractor and placed in either a “technically sufficient” category or “not technically sufficient” category. The winner is that proposal in the “technically sufficient” category with the lowest total evaluated cost. While both evaluation methods are common under FAR procurements, best value with tradeoffs is more suitable where the risk of potential substandard performance does not leave room for errors or service degradation. Either method of evaluation requires a high level of technical expertise to effectively evaluate proposed solutions. At the subcontract level where the FAR criteria regarding fair opportunity generally do not apply to the business arrangements among commercial companies, we also found that commercial satellite service providers have had ample and fair chances to team with the three DSTS-G vendors to create solutions and to compete for and win subcontracts. All three vendors stated that they are motivated by competition to find technically sufficient and low-cost solutions to DOD’s needs and to involve all feasible service providers in doing so. Further, the vendors are also required by a FAR clause in their DISA contracts to select their subcontractors on a competitive basis. To determine which service providers are potentially capable of fulfilling a given DISA requirement, the vendors told us they consider many factors, such as location of satellites, “look angle” at the desired location, power, bandwidth, age and condition of satellites, available capacity on satellites, and other factors, such as meeting schedule, acceptance of government terms and conditions, business relationships, and prices. Our analysis showed that six different service providers have won subcontracts from one or more of the DSTS-G vendors. Each vendor has won task orders using at least four of the six providers, although more than 70 percent of the wins have been with just two providers. The distribution of task order awards to vendors and the service providers with which they teamed for each of the 48 task orders is illustrated in table 4. Another indicator of participation among service providers and access to the DSTS-G vendors is the opportunity to propose a solution for a DISA requirement. We determined that there were 211 bandwidth solutions proposed to DISA for the 48 task orders, or approximately 4.4 per task order. Removing the seven instances where there was only one proposed solution (because they were renewals of previously competed requirements or sole-source), the average number of proposed solutions per competitive task order was 4.9, with a range from 2 to 15. Moreover, there were several additional potential teaming proposals considered by at least one of the vendors, but not ultimately submitted to DISA. Table 5 illustrates the teaming arrangements in the 211 proposed solutions. We noted that the top two service providers in terms of proposals submitted, labeled B and C in table 5, had more than 70 percent of the total proposals submitted. According to the vendors, this was because those two providers had large numbers of satellites located in the areas of interest to DOD over the past 2 years, were willing to offer multiple solutions, and had low prices for bandwidth. Some service providers did not always see DOD as a preferred customer, did not always have available capacity in the required areas, or declined to propose because they knew they did not have the best coverage or prices. All six of the service providers that won subcontracts had very similar percentages of winning proposals, all between 21 and 28 percent. Despite the involvement of a number of competitors at the subcontractor level in the DISA acquisition process, we found several occasions where DISA directed and justified the use of a specific service provider. This occurred in 15 of the 41 competitive DSTS-G task orders. In all 15 of those cases, however, the acquisition team had adequate justifications in files to explain the need for directing that subcontract. Specifically, in 11 of the justifications, users or DISA technical staff determined that only one particular satellite could adequately satisfy certain technical parameters contained in the requirement. In three cases, customers explained that any deviation from the existing satellite provider could cause an interruption of service and could potentially cause loss of life. In the remaining case, both justifications applied. These requirements were submitted by responsible officials in the combatant commands or military services and concurred in by the DISA provisioners, the DISA Commercial Satellite Communications Branch engineers, and the DITCO contracting officer. Directed subcontracts were justified for three different service providers, with none getting a disproportionately large share. The MTC contract was structured to award delivery orders to one vendor, thus competition, after the initial competition to select a vendor, has been limited. From March 2000 to June 2003, DISA awarded only five new delivery orders for bandwidth under the MTC contract. All were awarded directly to the incumbent contractor that had previously won a competition among four companies in 1995 to manage this contract for up to 10 years. These five new orders totaled $17.8 million. There was also limited competition at the subcontract level. Three orders were awarded directly to service providers without competition. The remaining two orders were competed between two providers. Some major users of commercial satellite bandwidth services are dissatisfied with the DISA process. In particular, they view the process as being too lengthy and costly. They also believe that the process results in contracts that are often too inflexible. As a result, some users have bypassed the process, either by formally requesting a waiver or by procuring services without a waiver. For fiscal year 2002, we determined that, at a minimum, nearly 20 percent of DOD’s reported spending on services occurred outside the process, and one DOD official stated that the true percentage is probably much higher. According to some major users, DISA’s process takes too long to meet their needs, particularly for time-critical operations. Our analysis showed that on average from submittal of a request for service to the award of a task order under the DSTS-G contract took 79 days—more than a month longer than the average of 42 to 45 days advertised by DISA. Moreover, as table 6 shows, only 18 of the 48 task orders we reviewed were awarded in less than a month. In addition, only 29 were awarded within the DISA advertised time frame of 45 days. Further, users told us they have to spend additional time before a Request for Service is submitted to DISA to seek out and determine all of the technical information required in that document, and there is also additional time between the task order award and the subcontract award to the winning service provider and for the set up or preparation before the start of the service. For example, under the DSTS-G contracts, the vendors have up to 30 days to provide required service in normal circumstances, or 5 days in emergencies. According to DISA, when users are not familiar with RFS development or satellite services, DISA spends substantial amounts of time educating users on requirement development, the acquisition process, and available satellite services. Timelines can also be extended for other reasons, according to DISA, including instances where customer equipment is not on hand when the service is available. Therefore, the actual time to fully satisfy a customer’s request from realization of the need to initiation of the service is even longer than the mean 79-day paperwork flow time. By contrast, users told us that the time to receive bandwidth services outside the DISA process was considerably shorter. In one U. S. Army example, the user was able to acquire satellite bandwidth needed to operate a multimedia communications system during Operation Enduring Freedom in Afghanistan within a few weeks. In another example, a U.S. Navy office was able to acquire service to support its commercial wideband satellite program in less than a month after receiving the GIG waiver approval. It was critical that the Navy acquire this service quickly as it was notified that one of its leased satellites would fail within 30 days. Users also reported that estimated prices they received under the DISA process were sometimes significantly higher than those that would be paid directly to a commercial company for the same or similar services. For example, the Army was able to acquire satellite services for the communications system supporting Operation Enduring Freedom for about $34,700 a month. DISA had quoted a price estimate earlier at $139,000 a month. When the Army later found it needed to install another ground terminal for this system, it acquired services for about $240,000, whereas DISA’s initial price estimate was $579,000. In another example, in acquiring service to support its commercial wideband satellite program, a U.S. Navy office found that the monthly price for the service it could acquire outside the DISA process ranged from $30,000 to $90,000 a month less than the initial DISA estimate. Over the 5 years projected for the task order, the savings on bandwidth was nearly $4.6 million. These projected savings, while not always calculated on a strict “apples-to-apples” basis, were nevertheless deemed significant enough that the GIG Waiver Panel used them when deciding to grant waivers to these organizations to buy outside the DISA process. The current pricing structure of the DISA acquisition process can result in users being charged from 9 to 12 percent more than the bandwidth cost from the service provider. Part of this added cost is due to profit and overhead charges that DISA vendors add on to bandwidth cost. This can total between 1 and 4 percent of the price of the service and is kept low because of the competition among vendors to win each task order. Another part of the added costs is attributable to surcharges that DISA adds to prices in order to recoup their costs for tasks they perform in acquiring the service. The surcharges—6 percent of the total price from the vendor for DISA’s Commercial Satellite Communications Branch’s efforts and another 2 percent for DITCO’s efforts—are a normal practice for DISA and other DOD activities that operate under the Defense Working Capital Fund, which is designed to ensure that defense activities that carry out business operations for others can recover their costs—neither making a profit nor incurring a loss in the course of their work. If users acquired the service themselves, they may well incur similar administrative costs, but those costs would not be as visible to them as when receiving an itemized bill from DISA for services. However, they would not normally have to pay extra for an intermediary agent when procuring services directly from industry. Some portion of the user-reported projected savings may be attributable to high initial estimates provided by DISA based on outdated pricing proposals of vendors’ contract line item prices. While DISA stated that users were advised that the actual prices might be significantly lower, users still had to commit their budget in the amount of the original estimate. Use of this high initial estimate has been a long-standing flaw in the DISA acquisition process that DISA has only recently taken steps to correct. However, DISA’s solution to this problem—asking the vendors to produce more detailed and more realistic original price estimates—will likely result in more days added to an already lengthy process. Another reason for the difference between DISA’s estimates and industry quotes may be that DISA’s estimates are based on features in its contracts with vendors that may call for a different level of services or equipment than required. For example, in one U.S. Army case, the bandwidth acquired to operate its communications network was less than the minimum bandwidth capacity that satellite providers were required to provide under the DSTS-G contract. In addition, users told us that the DISA process results in contract terms that are often too inflexible. Some of the features that are common in commercial contracts for satellite services are not in the contracts awarded through the DISA process. For example, DISA’s contracts for commercial bandwidth, according to the three DSTS-G vendors, do not contain the common commercial clause, “Portability of Services,” or anything comparable. This clause would typically allow a user to transfer the remaining time from one satellite, in an area no longer requiring coverage, to another satellite, where service is now required, at no additional cost. Industry representatives cited this clause as an example of flexibility that commercial customers have sought, as a best practice, but DOD has not. Further, DOD users often do not have the ability to change or cancel requirements, if necessary, without continuing to pay for the original ones. For example, while DISA’s contracts with vendors contain the “Termination for Convenience” clause, which should allow the government to terminate service that is no longer needed and to stop incurring costs for the unused portion, vendors’ contracts with service providers do not have this clause. In fact, the contracts that vendors have with the service providers reflect an industry practice that holds the vendors responsible for the remainder of the noncancelable lease, regardless of whether the government terminates the vendors’ contract. Therefore, any remaining lease costs would be paid to the service provider by the vendor and then submitted as part of the vendor’s termination settlement proposal to DOD, which would then bear some or all of these costs as agreed to in the negotiated termination settlement. Some users are bypassing the DISA acquisition process to acquire commercial bandwidth through alternative processes, either by formally requesting a waiver from the DISA process or by improperly procuring services without a waiver. We identified 10 instances where bandwidth was procured through an alternative process. In four of these, waiver requests were submitted and approved in advance of the procurement action, as called for in DOD policy. In the remaining six instances, however, users had independently procured bandwidth without processing waivers, inconsistent with DOD policy. We were initially given access to information on the four procurement actions with approved waivers and on three of the actions that had occurred without waivers. These latter three procurements had been brought to the attention of the Chairman of the GIG Waiver Panel, who then made the offending organizations process “after-the-fact” waivers. While we were interviewing user organization representatives on these, we uncovered three additional procurement actions that should have had waivers processed, but had not. We turned this information over to the Chairman of the GIG Waiver Panel, who will determine whether “after-the- fact” waivers are also to be processed for these cases. Representatives of the offices that had bypassed the DISA process and used an alternative acquisition process to acquire needed bandwidth indicated in interviews and in briefing documents that they had been able to achieve faster procurements, often resulting in more flexible contract instruments, and at lower (sometimes significantly lower) prices. According to DOD officials, users throughout DOD have been independently acquiring bandwidth, without an approved waiver, for years. One knowledgeable DISA official estimated that, if all the services and DOD entities had accurately reported their fixed satellite service bandwidth usage costs for fiscal year 2002, the total would likely have been $200 million higher than the amount actually reported, nearly doubling the reported amount of $221.7 million. As it was, we determined that, at a minimum, $42.4 million, or nearly 20 percent of the $221.7 million self-reported dollars spent, was spent outside the DISA process. Our past work has identified specific practices that can be employed to manage services from a more strategic perspective, thereby enabling an organization like DOD to leverage its buying power and achieve significant savings. These include establishing a central agent or manager for acquiring services, gaining visibility over spending, and revising business processes to enable the organization to leverage its buying power. While there are challenges to implementing this process, DOD has recognized its importance and called on agencies to embrace a strategic approach for acquiring services. Even though DISA is supposed to serve as a central manager for the acquisition of satellite bandwidth services, it is not following a strategic approach. Little attention is paid to collecting or addressing customer complaints, business processes are inefficient, and oversight is limited. Moreover, neither DOD nor DISA is making a concerted effort to collect forecasts of bandwidth needs from users, ensure those needs can be met by the commercial sector, and take steps needed to leverage its buying power with commercial providers. Our previous work has found that leading organizations have adopted practices and activities that enabled them to acquire services in a more strategic manner and in turn achieve dramatic cost reductions and service improvements. Faced with an increased dependence on services, growing market pressures, and an economic downturn, the companies we studied examined their service spending and found that they did not have a good grasp of how much was actually being spent and where these dollars were going. These companies found that responsibility for acquiring services resided largely with individual business units or functions, hindering efforts to coordinate purchases across the company. They also came to realize that they lacked the tools needed to make sure that the services they purchased met their business needs at the best overall value. To turn this situation around, these companies reengineered their approaches to buying services. This began with taking a hard look at how much they were spending on services and from whom. By arming themselves with this knowledge, the companies could identify opportunities to leverage their buying power, reduce costs, and better manage their suppliers. The companies also instituted a series of structural, process, and role changes aimed at moving away from a fragmented acquisition process to a more efficient and effective enterprisewide process. For example, the companies we studied often established or expanded the role of corporate procurement organizations to help business managers acquire key services and made extensive use of crossfunctional teams to help the companies better identify service needs, select providers, and manage contractor performance. These companies also developed information systems to enable them to track their spending and better match their needs with potential providers. They also implemented performance measures to track their progress and make further enhancements to their processes wherever needed. Taking a strategic approach clearly paid off, as companies found that they could save millions of dollars and improve the quality of services received by instituting these changes. DOD’s current process for acquiring commercial satellite bandwidth is not strategic. While DISA is supposed to serve as a centralized acquisition function, some users are, in effect, allowed to bypass the process, and there is little visibility over what is actually being spent on commercial satellite bandwidth services. For example, DOD has a formal waiver process—the GIG waiver process—in place to ensure that any acquisition made outside the DISA process is justified and that the service being procured is not duplicative of other existing services, preserves interoperability, and meets network control requirements. But the waiver process, at least until recently, has not been enforced. This past year, officials who manage this process recognized the problem and are now requiring users that already bypassed the process to obtain waivers after-the-fact. According to DOD officials, some users have been acquiring services outside the DISA process for years. In addition, other DOD organizations responsible for overseeing the DISA process—including the Assistant Secretary of Defense for Networks and Information Integration and the Office of the Chairman of the Joint Chiefs of Staff—have not been enforcing requirements for reporting, nor have they developed, nor required DISA to develop, performance metrics that could be used to assess user satisfaction, timeliness, and other factors that would give them a better sense of whether the process is efficient and effective. DOD directives since at least 1998 have required that DISA prepare a use and associated cost report on commercial bandwidth. DISA only recently submitted its first report. Further, no acquisition process measures exist at the oversight level, and DISA itself has not yet developed performance metrics to measure customer satisfaction. Officials indicated that preliminary data have been collected from customers, but there was no evidence of their being used to improve any parts of the process. Moreover, neither DOD nor DISA has developed a complete picture of what is being spent on bandwidth—the cornerstone to identifying what can be done to improve the process and to leverage DOD’s buying power. Our analysis indicated that the information contained in the fiscal year 2002 report on users and costs is incomplete, inaccurate, lacks proper identification of users, and contains costs associated with fiscal year 2003, impairing its reliability. Figure 2 highlights examples of our findings. Moreover, the self-reported user information that DISA collected did not reflect many purchases that were made outside of the DISA process. A 1998 DOD Inspector General report also found that DOD could not determine the total leased satellite communications bandwidth used among component commands or the total costs associated with obtaining that capacity. DOD also does not routinely maintain information on its ultimate providers of bandwidth services. While DOD maintains summary totals for task orders awarded to its three DSTS-G vendors, these data do not provide detailed information such as which actual bandwidth service providers competed the most, or least, or which ones were actually providing the most or next most service in terms of numbers of procurements or dollars to DOD. Even though DOD is the largest buyer of bandwidth in the commercial market, neither DOD nor DISA has taken steps essential to fully leveraging that buying power and to ensuring that future needs can be met by the commercial sector. There are options based on common commercial practices that are available to DOD for doing so, such as requesting most favored customer status with providers or maximizing business volume discounts. Table 7 discusses several of these options and their possible application to DOD’s current practices in more detail. While these options would position DISA to achieve cost savings, they require DISA to be able to project its future requirements and to be more proactive in dealing with its vendors. This is not being done. Instead, bandwidth is usually purchased on the “spot market” on an as-needed basis—when it is most expensive compared to longer duration leases. With few exceptions, individual small requirements are not aggregated by DISA to take advantage of DOD’s potential leverage in acquiring bandwidth in larger and less expensive quantities. According to DISA, users often decline opportunities to aggregate their requirements with other users. Two providers we interviewed indicated that they would be willing to develop creative solutions for consolidated requirements but would need to know in advance about future requirements to do so effectively. Several DOD and industry officials told us that DOD could benefit if bandwidth were acquired through a program office with central funding authority for that bandwidth. In this situation, it would be necessary for users to submit their plans and forecasts of requirements to the central program office. Currently, users have their own bandwidth funding and generally do not forward forecasts of requirements to DISA. If all user requirements were submitted to this single program office, it would then be able to aggregate bandwidth requirements in order to leverage buying power. In addition, some of these officials indicated that such a program office could allow increased visibility and control over DOD-wide bandwidth acquisitions. Longer-term changes to the DISA process that are necessary to implement more strategic management processes—including establishing better visibility over spending, revamping business processes, strengthening technical expertise within the agency, and securing a commitment from senior leadership—will be challenging to implement. DOD is aware of these challenges and has begun to study its processes. We found that leading organizations that applied a strategic approach to their purchases of services often spent months piecing together data from various financial and management information systems and examining individual orders just to get a rough idea of what they were spending on services. The companies found it was necessary to develop new information systems that could provide them with reliable spending data in a timely fashion. The task of gaining accurate visibility over spending will be equally, if not more, difficult for DOD given the lack of information systems available to provide spending data and the magnitude and breadth of spending involved with commercial satellite bandwidth services. Companies we studied also found that in establishing new procurement processes, they needed to overcome resistance from individual business units reluctant to share decision-making responsibility and to involve staff that traditionally did not communicate with each other. While DISA will likely face similar resistance within the agency, we believe it will also need to overcome resistance from users that manage their own operations and maintenance funds and have long been dissatisfied with the DISA process. Another challenge for DISA is obtaining the expertise needed to review complex technically sophisticated solutions proposed by vendors. Industry representatives and some vendors believe that DISA currently lacks the appropriate level of expertise. Lastly, the companies we studied found that they needed to have sustained commitment from their senior leadership; to clearly communicate the rationale, goals, and expected results from reengineering efforts; and to measure whether the changes were having their intended effects. We believe similar commitment will need to be secured not only from DISA leadership, but also from leaders within DOD and the user communities. DOD has recognized many of these challenges and is in the process of awarding a contract for a study to determine if it should change its approach to identifying, acquiring, and managing commercial satellite services. According to a DOD official, DOD has also initiated a study that will address ways to arrange for multiyear leasing and bulk discounts based on projected customer requirements. DOD recognizes it has an increasing need to supplement its own satellite bandwidth capacity with capacity from the commercial sector. But it does not have a firm idea on how much bandwidth it will require in the short or long term or whether the private sector can even continue to support its requirements. Moreover, though it has become the largest consumer of satellite bandwidth, it still buys its bandwidth on an as-needed basis, thereby missing significant opportunities to leverage its buying power and to achieve considerable savings as a result. Moreover, by allowing users to bypass the DISA waiver process, DOD is hampering its ability to ensure that its communications networks are interoperable and to minimize redundancies. If DISA is to remain as DOD’s primary agent to acquire satellite bandwidth, then it must implement a more strategic management approach—not only one that continues to ensure that acquisitions are processed fairly, but also one that ensures services can be acquired in a timely and cost-effective way that meets users’ needs. Doing so will be a considerable challenge, however, given the current environment and potential resistance within DISA and from its users. Commitment is needed from senior leaders within DISA and DOD to overcome challenges associated with implementing a strategic approach. To strengthen DOD’s ability to obtain commercial bandwidth effectively and efficiently, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Networks and Information Integration to develop, in coordination with the Joint Staff and the Director of DISA, a strategic management framework for improving the acquisition of commercial bandwidth. Specifically, this framework should include provisions for inventorying current and potential users of commercial bandwidth to determine their existing and long-term requirements; identifying and exploiting opportunities to consolidate the bandwidth requirements of combatant commanders, the military services, and defense agencies; adopting, when appropriate, commonly used commercial practices, such as conducting spend analyses and negotiating pricing discounts based on overall DOD volume, to strengthen DOD’s position in acquiring bandwidth; and improving the current funding structure by considering new funding approaches, such as centralized funding of commercial bandwidth, and seeking legislative authority for multiyear procurements. To ensure the successful implementation of this strategic management framework and to better leverage DOD’s buying power and increase user satisfaction, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Networks and Information Integration to develop performance metrics to assess user satisfaction with the timeliness, flexibility, quality, and cost in acquiring commercial satellite services; strengthen DOD’s capacity to provide accurate and complete analyses of commercial bandwidth requirements, spending, and the capabilities of commercial satellite providers by enhancing core internal technical expertise and information systems; and assess, and implement as needed, changes to the key elements of the existing acquisition process—including requirements generation, solution development and evaluation, and contract vehicles—to facilitate a more strategic approach to bandwidth acquisition. DOD, in commenting on a draft of this report, generally concurred with our findings, conclusions, and recommendations. Specifically, DOD concurred with four of our recommendations and partially concurred with the remaining three recommendations. DOD concurred that a strategic management framework for improving the acquisition of commercial bandwidth be developed to include inventorying current and potential users to determine their current and future needs, and adopting, where appropriate, commonly used commercial acquisition practices. It also concurred in developing performance metrics to assess user satisfaction with its process and in assessing and changing its process to facilitate a more strategic approach to commercial bandwidth acquisition. DOD partially concurred with our recommendations addressing consolidating user requirements, improving the current funding structure, and enhancing core internal technical expertise and information systems. In its comments DOD indicated it had initiated a review of its current approach to determine if process changes were necessary and is waiting to decide whether or how to act on these three issues until after the review is complete. While we agree it is important to review these issues, we also believe that actions, along the lines of our recommendations, will be necessary in order to develop a strategic framework to acquire commercial satellite bandwidth more efficiently and effectively. DOD also provided informal technical comments, which we incorporated as appropriate. To determine whether DOD’s process for acquiring fixed satellite services is fair and meets the needs of DOD users, we met with officials from DOD component organizations involved in procurement of these services, including officials from agency contracting offices, DISA, Assistant Secretary of Defense for Networks and Information Integration, and Joint Staff. We also interviewed the four DOD vendors (Lockheed Martin Global Telecommunications; Arrowhead Global Solutions, Inc.; Artel, Inc.; and Spacelink International, L.L.C.) that procure the needed bandwidth from industry, and officials from three commercial service providers, which are major suppliers of commercial bandwidth to DOD. We obtained available DISA data on all contractual actions awarded since enactment of the Open-market Reorganization for the Betterment of International Telecommunications (ORBIT) Act in March 2000, the beginning date given to us by our congressional requestors. We reviewed contract file documentation, as well as applicable sections of the FAR, as supplemented, and DOD policies and procedures, to determine the extent to which competition was obtained for each delivery or task order included in the universe under either the MTC or the DSTS-G contracts. For those orders not awarded competitively, we reviewed task order files to obtain sole-source or directed subcontractor justifications. We obtained details on all GIG waiver requests for fixed satellite service commercial bandwidth procurements processed since enactment of ORBIT. To determine the elapsed calendar days required to award the 48 DSTS-G task orders, we reviewed task order files to extract pertinent dates. For 11 of the task orders where we were unable to obtain the start date, we imputed the start date (request for service) based on 37 task orders for which we had actual start dates. To determine what DOD does to oversee spending on fixed satellite services and ensure cost-effective results, we reviewed policies and procedures DOD uses and interviewed DOD officials on oversight practices. We obtained and analyzed cost data reported by combatant commands, military services, and defense agencies. We reviewed task and delivery order documentation, including applicable modifications and amendments, awarded under the MTC and DSTS-G contracts since enactment of the ORBIT Act. We analyzed the current DSTS-G contract to identify the terms, conditions, and benefits available to large volume customers and compared our results to the reported practices of private sector buyers purchasing similar bandwidth capacity. We reviewed available contracts for bandwidth from U.S. Army and U.S. Navy sources, and we analyzed reported cost data to see if they included satellite bandwidth capacity obtained through sources outside of the DISA process. We conducted our review from February to October 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees; the Secretary of Defense; the Deputy Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Under Secretary of Defense (Acquisition, Technology, and Logistics); the Under Secretary of Defense (Comptroller); and the Director of the Defense Information Systems Agency. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please call me at (202) 512-4841 or John Needham at (202) 512-5274. Other major contributors to this report are Gary L. Delaney, John D. Heere, Oscar Mardis, Marie P. Ahearn, and Gary Middleton.
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In recent years, the Department of Defense (DOD) has come to rely more heavily on commercial satellite communications to plan and support operations and move toward a network-centric warfare environment. DOD acquires commercial satellite bandwidth services to support a variety of critical missions such as surveillance performed by unmanned aerial vehicles. GAO was asked to assess (1) whether DOD's process for acquiring these services is fair to vendors and providers, (2) whether the process meets users' needs, and (3) whether spending on these services is managed effectively and efficiently. DOD has for many years augmented its internally owned and operated satellite communications capability by leasing commercial fixed satellite bandwidth services primarily through the Defense Information Systems Agency (DISA) and its Defense Information Technology Contracting Organization (DITCO). DISA does not acquire commercial bandwidth directly from satellite service providers. Instead, it procures bandwidth through several competitively selected vendors, which, in turn, compete work among individual service providers. GAO found that the process for acquiring commercial satellite bandwidth is fair to DOD's vendors and their subcontractors, which are the ultimate commercial satellite bandwidth service providers. However, some major DOD users of commercial satellite bandwidth services are dissatisfied with DISA's process. They view the process as being too lengthy, particularly for time-critical military operations, and they believe that the cost is too high. They also indicated that the contracts resulting from the process are often too inflexible. As a result, some users are bypassing the DISA process, either by formally obtaining a waiver or by procuring services without a waiver. In fiscal year 2002, nearly 20 percent of DOD's reported spending on satellite bandwidth services occurred outside the process, and one DOD official stated that the true percentage is probably much higher. By allowing users to bypass the DISA waiver process, DOD is hampering its ability to ensure that its communications networks are interoperable and to minimize redundancies. Further, DOD does not know exactly how much it is spending on commercial satellite bandwidth services, nor does it know much about its service providers or whether customer needs are really being satisfied. Without this knowledge, DOD cannot take steps to leverage its buying power, even though it is the largest customer for commercial satellite bandwidth. Moreover, neither DOD nor DISA is making a concerted effort to collect forecasts of bandwidth needs from users and ensure those needs can be met by the commercial sector. These are also important steps toward optimizing DOD's spending. If DISA is to remain as DOD's primary agent to acquire satellite bandwidth, then it must implement a more strategic management approach--one that ensures that services can be acquired in a fair, timely, and cost-effective way that meets users' needs. Doing so will be a considerable challenge, however, given the current environment and potential resistance within DISA and from its users. Commitment is needed from senior leaders within DISA and DOD to overcome challenges associated with implementing a strategic approach.
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During initial entry training, recruits are trained on service tasks and skills, including basic military tactics, weapons training, and marksmanship. In addition, the services have annual training requirements that are focused on tasks such as crew-served weapons training, reacting to chemical and biological attacks, and offensive and defensive tactics. Prior to deploying overseas, units must also complete a set of service-directed predeployment training requirements, including a mission-rehearsal exercise. The Army’s Force Generation model (ARFORGEN) is a cyclical unit- readiness model that affects the types of training that units conduct during each phase. Through ARFORGEN, the Army builds the readiness of units as they move through three phases: Reset, Train/Ready, and Available. The Army uses these phases, which are described in figure 1, to prioritize resources and coordinate training, personnel, and equipment. As shown in figure 1, units entering the Available phase may or may not be deployed to conduct operational missions; units that are deployed in support of operations are known as deployed forces. Units in the Available phase that are not deployed are known as contingency forces. These units may conduct training or exercises with other services, governmental agencies, or military security forces from other nations. If units are deployed, they will return to the Reset phase upon redeployment—regardless of the length of deployment. If they are not deployed, units will return to the Reset phase after 12 months. There are no prescribed time lengths for one complete ARFORGEN cycle because the length of the cycle is driven by the length of active-component deployments, and reserve-component mobilizations. While current deployments are typically 12 months long, the Army has also used deployments of varying lengths, including 6 and 15 months, to support its ongoing operations. For the Army’s active-component forces the ARFORGEN cycle is three times as long as its deployments, and for its reserve-component forces the cycle is five times as long as its mobilizations. The Army maintains four CTCs: the Battle Command Training Program, Fort Leavenworth, Kansas; the National Training Center, Fort Irwin, California; the Joint Readiness Training Center, Fort Polk, Louisiana; and the Joint Multinational Readiness Center, Hohenfels, Germany. The Battle Command Training Program trains the command element of a unit. The National Training Center, Joint Readiness Training Center, and the Joint Multinational Readiness Center, collectively referred to as the maneuver CTCs, train brigade combat teams—approximately 5,000 servicemembers—during rotations that last for 18 to 25 days. Since 2003, the Army’s maneuver CTCs have been conducting mission- rehearsal exercises for units prior to their deployments. Each training rotation is designed to challenge units and their leaders with the opportunity to face a well-trained opposing force, provide in-depth analyses of performance to units and their leaders, and create a realistic training environment, intended to closely parallel actual warfare, including live-fire training. Training rotations at the maneuver CTCs also include force-on-force training in a live, virtual, and constructive environment. As noted in appendix II, the Army’s maneuver CTCs can conduct 28 training rotations annually for brigade combat teams. In addition to a brigade combat team, a CTC training rotation may also include Army support units and personnel or capabilities from other services and agencies. In addition to the maneuver CTCs, the Army has seven mobilization training centers for the Reserve and National Guard that are operated by First Army—which is responsible for training mobilized reservists—that conduct predeployment training. This training ranges from 15 to 60 days for reserve-component units varying in size from small detachments—1 or 2 people—to brigade combat teams. Prior to deployment, units conduct mobilization and collective training at the Army’s mobilization training centers for the Reserve and National Guard: Fort Dix, New Jersey; Camp Atterbury, Indiana; Fort Knox, Kentucky; Fort Bragg, North Carolina; Fort Stewart, Georgia; Camp Shelby, Mississippi; Fort Hood, Texas; Fort Bliss, Texas; Fort McCoy, Wisconsin; Fort Sill, Oklahoma; and Fort Lewis, Washington. Before 2008, all deploying brigade combat teams conducted training at an Army maneuver CTC prior to deployment. However, in 2008, due to the high operational tempos from the force increase in Iraq, and finite training capacities, the Army determined that reserve-component brigade combat teams that would be split into smaller units and assigned other missions, such as security forces, would conduct training at the Army’s mobilization training centers. The brigade combat teams that would control battle space in theater, both active and reserve component, would conduct training at the maneuver CTCs. We reported in July 2009 that capacity constraints had limited reserve- component access to facilities at certain Army mobilization training centers because they also were being used by active-component forces. Around that time, First Army began to consolidate the Army’s mobilization training centers for the Reserve and National Guard from 11 to 7. Specifically, First Army is retaining the locations that are owned by the reserve component or which have a dedicated training area for mobilizing reservists. These mobilization training centers will concentrate their efforts on training specific mission sets required for current operations while maintaining flexibility to support other missions in the future. As shown in appendix II, in fiscal year 2009, approximately 89,000 servicemembers were trained at the Army’s mobilization training centers for the Reserve and National Guard. The Marine Corps is organized into Marine Air-Ground Task Forces— which include headquarters, ground combat, logistics combat, and aviation combat elements—that train, exercise, and deploy as fully integrated combined-arms teams. At the Marine Corps’ CTC, the Air Ground Combat Center at Twentynine Palms, California, battalion-sized units participate in a 28-day exercise that immerses units in an environment that is continuously updated and is designed to replicate the current operational conditions using mock urban villages, cultural role players, and equipment that will be employed in Afghanistan. The exercise includes two infantry battalions, a combat logistics battalion, and an aviation combat element in a single rotation that prepares Marines for the tactics and procedures they are expected to employ in Afghanistan. In addition, the Marine Corps will occasionally incorporate units from other services, such as the Air Force and Navy, and other nations to enhance the training experience. The Marine Corps can conduct 6 training rotations per year at Twentynine Palms; in fiscal year 2009 it trained approximately 23,000 servicemembers. As of April 2010, the Marine Corps has trained approximately 9,800 servicemembers in support of missions in Afghanistan. We have previously reported on the Army’s approach to training and mobilizing its reserve component. In July 2009, we reported that although the Army was exploring and had several initiatives underway to address training constraints, it had not identified the total requirements with its reserve-component training strategy. We recommended that the Army determine the range of resources and support that are necessary to fully implement its reserve-component training strategy. DOD partially agreed with our recommendation, however, as of May 2010, the Army had not identified the total requirements to fully implement its reserve-component training strategy. The Army and Marine Corps have shifted their operational priority from Iraq to Afghanistan; however, few adjustments were required at the Army’s major training facilities for a number of reasons, including the similarities in the Army’s training requirements for both operations. In addition, since summer 2009, the Marine Corps has been preparing most of its forces for missions in Afghanistan at its CTC at Twentynine Palms. Initially, the Army published separate predeployment training guidance for forces deploying in support of operations in Iraq and operations in Afghanistan. However, in September 2007, the guidance was combined into one document because there were only small differences in the required training tasks for the two operations. Because of the similarities in requirements, the Army has had to make few adjustments at its major training facilities to support the increase in forces deploying to Afghanistan. For example, maneuver CTCs have continued to train the same types of units—brigade combat teams—as the Army has increased its forces in Afghanistan and reduced its forces in Iraq. The Army’s maneuver CTC and mobilization training centers for the Reserve and National Guard, which have dedicated opposing forces and trainers, use these same groups to train and prepare forces for missions in either Iraq or Afghanistan. These major training facilities also use the same training ranges, mock towns and villages, and instrumentation to train for both operations. Officials noted that they do not change much of the physical appearance of the training area except for village names and signs within the mock towns and villages to ensure that the proper language is displayed. While the equipment used in training varies somewhat for forces deploying to Iraq and Afghanistan, according to officials, these differences have required only minimal adjustments and have not affected the mission- rehearsal exercises or number of training rotations being conducted. For example, the types of Mine Resistant Ambush Protected vehicles that troops train on may vary due to the differing terrain between the two operations. In Afghanistan units use a lighter-weight all-terrain-capable version of the Mine Resistant Ambush Protected vehicles better suited for the uneven terrain and subpar road conditions, whereas in Iraq units use a heavier version of the vehicles. According to Army officials, the maneuver CTCs currently do not have the number of all-terrain-capable Mine Resistant Ambush Protected vehicles that they prefer for enhancing collective training; the majority of these vehicles currently are being deployed to Afghanistan. Therefore, the available vehicles are primarily being used at the maneuver CTCs to support individual training tasks required prior to deploying for operations in Afghanistan. As we previously reported, in instances when units lack the equipment to train on a task prior to deployment, they are supposed to receive the required training after they deploy. Army officials stated that the biggest change in adapting from Iraq to Afghanistan is in the training scenarios that are used during the rotations. For example, forces deploying to both Iraq and Afghanistan are provided training on counter–improvised explosive devices; however, differences in how the devices are being used in the two countries result in slightly different training scenarios. Although the development of the initial training scenarios for Afghanistan took several months, once the scenarios are developed, they can be tailored for each unit 180 days prior to the unit arriving at one of the Army’s major training facilities. In addition, officials noted that the types of cultural role players participating in these scenarios were also different. For example, regarding languages for Iraq, role players in training scenarios speak Arabic; for Afghanistan, they speak Dari and Pashtu. From 2003 to 2009, the Marine Corps had a significant number of forces in Iraq. With the drawdown of forces in Iraq, however, the Marine Corps has shifted its focus to missions in Afghanistan; as of the summer of 2009, the Marine Corps was conducting limited training for missions in Iraq at its CTC at Twentynine Palms. Like the Army, the Marine Corps, because of similarities in training requirements, had to make few adjustments at Twentynine Palms to support its shift in focus from Iraq to Afghanistan. For example, the Marine Corps uses the same training ranges, trainers, and mock towns and villages as it did when training forces for Iraq. However some modifications, such as changes to the signs in the mock towns and villages and the addition of Afghan role players, have been made to better replicate the current environment. The Army and Marine Corps face challenges as they look to broaden the scope and size of their training rotations in the future. The Army projects capacity shortfalls at its maneuver CTCs to meet its identified future requirements to train brigade combat teams for both continuing operations and a broader range of offensive, defensive, and stability operations. Further, the Army has not developed a plan to use its existing training capacity to meet these full-spectrum training requirements for its smaller reserve-component units. In addition, the Marine Corps estimates that it does not have sufficient training capacity to meet future large-scale training requirements at its major training facility; however, it is pursuing a land acquisition to meet its requirements. As outlined in the Army Training Strategy, the ARFORGEN process calls for brigade combat teams to conduct training rotations at the maneuver CTCs. To support this process, the Army has identified the need to conduct 36 to 37 brigade combat team rotations annually. Seventy-two of the Army’s 73 brigade combat teams will conduct their rotations at the maneuver CTCs. The timing of units’ rotations will depend on many factors, including their component and location. Specifically, the ARFORGEN process calls for most of the Army’s active component brigade combat teams to conduct two maneuver CTC rotations during each ARFORGEN cycle. The first rotation will occur following the Reset phase and units will focus on their core missions by conducting full- spectrum operations training that includes offensive, defensive, and stability operations or homeland operations. The second rotation will occur at the end of the unit’s Train/Ready phase and will focus on either the unit’s deployment mission—if the unit has been designated for deployment—or on its core missions if the unit has not been scheduled to deploy and has instead been designated as a contingency force. The ARFORGEN process calls for reserve-component brigade combat teams to conduct one maneuver CTC rotation during their ARFORGEN cycle. Due to their part-time status following deployments, Army National Guard brigade combat teams will go into the Reset pool for 12 months— twice as long as active brigade combat teams. As units move into the available pool after completing the Train/Ready phase of ARFORGEN, they will conduct a maneuver CTC rotation. If the unit is scheduled to deploy, its rotation will focus on the deployed mission. If the unit is designated a contingency force, its rotation will focus primarily on full- spectrum operations. Under ARFORGEN, forward-deployed brigade combat teams in Europe, with ready access to the maneuver CTC in Germany, will conduct a CTC rotation every year regardless of which phase of the ARFORGEN cycle the unit is in. The brigade combat team in Korea, which is thousands of miles from the nearest maneuver CTC, will not conduct a maneuver CTC rotation and will conduct all of its training in Korea. Based on its projected tempo of operations in fiscal year 2011—12-month deployments and goals of 1:2 active component and 1:4 reserve component time-deployed to time-at-home ratios—the Army has identified the need to conduct 36 to 37 training rotations, as displayed in table 1. In addition, the table highlights—under different deployment scenarios—the effect that the ARFORGEN model’s inputs can have on the number of maneuver CTC rotations that are needed. Specifically, table 1 shows different deployment periods, ranging from 6 to 15 months, and the number of maneuver CTC rotations required for each example. The examples in table 1 are meant to be illustrative; we did not reach any conclusions regarding these scenarios and recognize that the Army must consider many factors in determining the length of deployments. As shown in table 1, adjusting either the deployment length or time- deployed to time-at-home ratios can affect the required number of maneuver CTC rotations. Army officials have stated that while the current goal is time-deployed to time-at-home ratios of 1:2 for the active component and 1:4 for the reserve component, the Army would like to eventually get to a ratio of 1:3 for the active component and 1:5 for the reserve component. Example A in table 1 shows that if deployments remained constant at 12 months but the Army was able to achieve the desired longer times at home it would reduce its required CTC rotations to 28 or 29 each year. Examples B and C are presented simply to illustrate the effect of various deployment lengths, which the Army has used in the past, on the number of required training rotations. The Army’s maneuver CTCs cannot fully support the number of rotations called for by ARFORGEN—36 to 37 rotations. As of May 2010, the Army’s maneuver CTCs can currently conduct 28 brigade combat team training rotations per year—the National Training Center can conduct 10 rotations, the Joint Readiness Training Center can conduct 10 rotations, and the Joint Multinational Readiness Center can conduct 8 rotations. However, the Joint Multinational Readiness Center’s role in Europe is not limited to providing maneuver CTC rotations to U.S. Army brigade combat teams; the Joint Multinational Readiness Center is currently using 4 of its 8 annual training rotations to train multinational partners. Unless the Joint Multinational Readiness Center uses its entire capability—to conduct 8 annual training rotations—to train U.S. Army brigade combat teams, the Army will train less than 28 brigade combat teams each year. According to Army officials at the maneuver CTCs, the maneuver CTCs could surge to conduct up to 32 rotations in one year but this level is not sustainable for an extended period because it does not provide enough time between rotations to properly maintain equipment and vehicles. Further, the trainers—both observer controller/trainers and opposing forces, who normally work 7 days per week when units are conducting their 18-to-25-day maneuver CTC rotations—do not have enough time to recover between rotations. According to the Army Training Strategy, one of the Army’s goals is to develop sufficient maneuver CTC capacity to support the ARFORGEN training cycle for deploying and contingency brigade combat teams by the end of fiscal year 2012. To better meet the Army’s demand for maneuver CTC rotations and to generate trained and ready forces to conduct full- spectrum operations, the Army has developed an Exportable Training Capability at the Joint Multinational Readiness Center and is developing an Exportable Training Capability at the National Training Center. The Exportable Training Capabilities, which are mobile units of trainers and equipment, will travel to any of 15 designated training areas. Plans call for this training to be focused on full-spectrum operations for brigade combat teams as they transition from the Reset to the Train/Ready phase of ARFORGEN. The Exportable Training Capability Operational and Organizational Plan Coordinating Draft, dated February 28, 2007, states that the exportable capability training is better than the training a unit could conduct at home station without external support, although not as robust as the training conducted at the static maneuver CTC locations. For example, the Exportable Training Capability cannot provide an in-depth level of after- action reporting, and it will not conduct live-fire exercises. In addition, while the maneuver CTCs have a robust, dedicated opposing force that is used during training, the Exportable Training Capabilities will rely on other units to provide a portion of the opposing force resources. According to this same draft operational and organizational plan, in the event of a surge the Exportable Training Capability must be prepared to conduct mission-rehearsal exercises in support of deploying units. The Army initially planned to develop three Exportable Training Capabilities—one at the National Training Center, one at the Joint Readiness Training Center, and one at the Joint Multinational Readiness Training Center. However, due to personnel constraints, the Army was only able to develop the Exportable Training Capabilities at the Joint Multinational Readiness Center and the National Training Center. The Army designated the Joint Multinational Readiness Center as a dual- mission Exportable Training Capability because it already had employed its mobile capability to a limited extent into Eastern Europe to conduct training with multinational partners and had the necessary capabilities to perform as a mobile capability. In March of 2009 the Joint Multinational Readiness Center–Exportable Training Capability deployed to Fort Bragg, North Carolina, and conducted a “proof of principle” for this concept by conducting a training rotation for a brigade combat team from the 82nd Airborne Division. With this deployment, the Joint Multinational Readiness Center–Exportable Training Capability demonstrated that it has increased flexibility, which could be used to help the Army conduct 28 U.S. Army brigade combat team rotations by conducting its normal 4 rotations at Hohenfels, Germany, for the brigade combat teams in Europe and by deploying to the United States to conduct four additional rotations for Army brigade combat teams. The Exportable Training Capability at the National Training Center would increase the Army’s training rotation capacity for brigade combat teams and is expected to conduct exportable training at one of the designated training areas at the same time that training is being conducted at the National Training Center at Fort Irwin. At full capability, this training capability is expected to be able to conduct 6 rotations annually, which would increase the annual maneuver CTC training capacity from 28 to 34 rotations. The National Training Center’s Exportable Training Capability was initially scheduled to reach its full operational capability in 2010, but, as we reported in 2007, the Army was unable to meet its timelines due to personnel shortfalls caused by the Army’s current commitments to ongoing operations. The Army currently is projecting that its National Training Center–Exportable Training Capability will reach its initial operating capability in fiscal year 2012 and full operating capability in fiscal year 2013. If the Army is to reach its new goal for full operating capability in fiscal year 2013, it will need to fill about 300 military positions that are required for the National Training Center–Exportable Training Capability. To prepare for the initial training event in October 2011, the Army needs to fill 30 critical personnel positions in the operations group—which includes planners for the exportable capability—by September 2010. As of April 2010, the Army had filled 13 of these critical positions. The remaining 17 positions are for mid-level officers, who are in short supply throughout the entire Army and in the Army’s maneuver CTCs’ existing operations groups. According to Army officials, if all 30 of the critical personnel positions are not filled by September 2010, the Army will potentially miss its operational timeline for conducting its initial training rotation, which has already slipped once. Officials at the maneuver CTCs noted that they expect to see an improvement in the filling of these positions with a recent transfer of responsibility for the operations groups from the U.S. Army Training and Doctrine Command to U.S. Army Forces Command but still expressed concerns about whether they would meet the September 2010 deadline for filling the 30 critical personnel positions. These officials said they eventually expect to see improvements in the filling of these positions with the continued drawdown in Iraq and the increased time at home of servicemembers. To meet its goal of conducting 6 training rotations, the Exportable Training Capability at the National Training Center will also have to overcome a number of support challenges. For example, the exportable capability will have to rely on the designated training areas for support. Specifically, the training areas will have to fund the initial start-up costs for facilities or support infrastructure required by the Exportable Training Capability. Further, the designated training areas will have to provide administrative support, and the unit conducting training may have to provide trainers for the exportable capability. Even if the Army is able to use the Exportable Training Capabilities as projected and conduct 34 training rotations of various levels each year beginning in fiscal year 2013, the Army projects that it will fall short of the 36 to 37 rotations it expects to need to train brigade combat teams. To help address its training capacity shortfalls, the Army has developed a list that prioritizes the scheduling of units training at its maneuver CTCs. The list assigns first priority to deploying units, followed by the global response force / CBRNE (chemical, biological, radiological, nuclear, and high-yield explosives) consequence-management reaction force. Lower priority is assigned to units conducting full-spectrum operations mission- essential tasks and security forces. However, the Army has not assessed the risks associated with its inability to conduct the desired number of brigade combat team training rotations and has not developed a mitigation plan that identifies a full range of available options for addressing the risks of not conducting the desired numbers of rotations, within its current resource levels. Without such a plan, the Army’s brigade combat teams face uncertainties concerning their ability to conduct CTC rotations or receive support from the Exportable Training Capability and will need to conduct some type of alternative training. In recent years, the Army has relied heavily on its reserve-component forces to meet operational demands in Iraq and Afghanistan. As described in the 2010 Army Posture Statement, as the Army looks to the future it must retrain soldiers, leaders, and units to build critical skills necessary to operate across the full spectrum of operations. Further, the Army expects that its units will be prepared through the ARFORGEN model to support both the current operation and a broader range of missions that could arise outside of the U.S. Central Command area of responsibility. As we have previously reported, agencies need to consider how their training strategy works in conjunction with other already-established program initiatives and develop mechanisms that effectively limit unnecessary overlap and duplication of effort to enhance the execution of that training strategy. Furthermore, in the Army Training Strategy, the Army indicated that the service should, to the extent possible, leverage existing training resources and use innovative training methods to reduce overhead. It will also enable the reserve component to establish a training strategy that increases premobilization readiness, and provide for seamless transition from premobilization to postmobilization and the flexibility to provide training to contingency forces within the ARFORGEN cycle. In preparation for their deployments, the Army currently trains its smaller reserve-component units at its mobilization training centers. As the Army plans to meet its future requirements, its plans call for continuing to train its smaller reserve-component forces at its seven mobilization training centers. Prior to attending training at the mobilization training centers these smaller units may receive training at the Army Reserve’s Combat Support Training Center, located at Fort Hunter Liggett, California, or with the Army National Guard’s exportable training capability that it refers to as the Home Station Culminating Training Event. While the Army has identified its training requirements for its smaller reserve-component units that are scheduled to deploy in support of ongoing operations, the Army is still refining the training requirements for its smaller reserve-component units that will serve as contingency forces. Although the Army’s ARFORGEN requirements call for these units to be trained to operate across the full-spectrum of operations, the Army has not decided where these smaller units will conduct their collective training exercises in support of ARFORGEN. However, the Army has existing training locations that could be utilized to provide this training. For example, a recent First Army preliminary review indicates that it can train and support approximately 86,000 reserve-component servicemembers annually at the seven mobilization training centers. In addition to the Army’s mobilization training centers, the Army could also utilize the training capacity at the Army National Guard’s Home Station Culminating Training Event or the Army Reserve’s Combat Support Training Center. These training venues provide units with external equipment, resources, and trainers at a level above what normally could be provided at the units’ home stations. In addition, these training venues make available the external support that assists units with their ability to conduct training for both current and full-spectrum operations. As of April 2010 the Army had not finalized its training strategy, including where its smaller contingency forces will conduct training. Furthermore, the Army lacks a complete assessment that outlines how its existing training capacity can best support its smaller units. Without a complete assessment, the Army will be unable to determine if it can leverage its existing training capacity to meet its future training requirements for its smaller units or whether any excess reserve-component training capacity exists. Currently, the Marine Corps trains its forces at Twentynine Palms before they deploy to Afghanistan. However, Marine Corps officials, citing lessons from operations in Iraq and Afghanistan and themes outlined in the 2008 Marine Corps Vision and Strategy 2025, identified the need to train Marine Expeditionary Brigades, about 15,000 Marines, as an integrated combat team in large-scale training exercises. The Marines currently lack the training capacity to conduct this training. In 2004, at the request of the Marine Corps, the Center for Naval Analyses conducted a study to identify expeditionary brigade training requirements and the region that could best support these requirements. The study reviewed three regions: the Southwestern United States, which includes the Twentynine Palms training facility, the Middle Atlantic Coast, and the north coast of the Gulf of Mexico. The study’s authors concluded that while all three locations could support some form of Marine Expeditionary Brigade–level, live-fire and maneuver training, there was no Department of Defense range that could provide sufficient space for Marine Expeditionary Brigades to conduct sustained combined-arms, live-fire and maneuver training. They further concluded that the Southwestern United States provided the best training area for an expeditionary training brigade but found that this level of training could only be fully conducted with an expansion of the training ranges and airspace at Twentynine Palms. In 2006, the Marine Corps validated the need for a large-scale Marine Expeditionary Brigade training exercise and approved the need for a training area and facility to conduct realistic training for all elements of the expeditionary brigade. In 2009, the Marine Corps validated training objectives for the exercise and established a minimum threshold that all training has to meet. These requirements call for at least two battalion task forces to converge on a single objective. After receiving approval from the Office of the Secretary of Defense to pursue the establishment of airspace and land acquisition at Twentynine Palms, the Marine Corps identified six alternatives that, at a minimum, meet the training threshold. The six alternatives for land acquisition range in size from approximately 131,000 to 200,000 acres. In addition, the Marine Corps has also identified a “no-action alternative” which would provide no additional land or airspace in support of the new training requirement. According to officials, if the Marine Corps is not able to acquire land, the threshold level of training will still be met and it will train the 15,000 person expeditionary brigade, although the entire brigade will not be physically located at Twentynine Palms during the training. The Marine Corps is currently conducting its environmental impact assessment and expects to release its preferred alternative for land acquisition by fiscal year 2012. While the operational shift from Iraq to Afghanistan has not required many adjustments at the Army’s and Marine Corps’ major training facilities, both services face challenges for the future. The Marine Corps is pursuing options for acquiring land to support a recent increased requirement to train about 15,000 Marines as an integrated combat team in large-scale exercises. The Army is projecting a capacity shortfall as it seeks to expand the training for brigade combat teams at its maneuver CTCs. To address this capacity shortfall, the Army is developing exportable training capabilities, but personnel shortages could delay efforts to achieve full operational capability by 2013. The Army has not completed an assessment to determine its full range of options for meeting its future brigade combat team requirements or the risks associated with not conducting the desired number of training rotations. Until the Army develops a plan that examines all the options for meeting its brigade combat team training requirements or mitigating its capacity shortfalls, it will not be able to fully implement ARFORGEN. Further, the Army’s brigade combat teams face uncertainties concerning their ability to conduct CTC rotations or receive support from the Exportable Training Capability and may need to conduct some type of alternative training. In addition, while the Army has identified its training requirements and locations for its smaller reserve-component units that will be deploying for ongoing operations, it has not finalized the training requirements for its smaller reserve-component units that will serve as contingency forces, including where or when these contingency forces should be trained. As a result, the Army does not know if its existing training capacity can support these smaller units as they transition though the ARFORGEN training cycle to meet future training requirements. Until the Army finalizes its reserve-component training strategy it will not be able to determine whether it can leverage existing capacities to meet future reserve- component training requirements, or whether any excess reserve- component training capacity exists. We recommend that the Secretary of Defense take the following two actions: To address the challenges associated with training its brigade combat teams for both ongoing operations and a fuller range of missions, direct the Secretary of the Army to develop and implement a plan to evaluate the full range of available options for training its brigade combat teams; assess the risks of not conducting the desired number of training rotations; and determine how, if necessary, risks will be mitigated. To maximize the use of existing resources, direct the Secretary of the Army to finalize the training requirements for smaller reserve- component units that will act as contingency forces under its Army Force Generation (ARFORGEN) model. The completed training requirements should identify when smaller units’ training should occur and include an analysis of existing Army training capacity to determine whether any excess capacity exists. Specifically, the analysis should weigh the costs and benefits of using the training capacity that currently exists at the Army’s mobilization training centers in conjunction with or as alternatives to its other efforts, such as the home station culminating training events. In written comments on a draft of this report, DOD concurred or partially concurred with our recommendations. Specifically, DOD partially concurred with our recommendation that the Secretary of Defense direct the Secretary of the Army to address the challenges associated with training its brigade combat teams for both ongoing operations and a fuller range of missions by developing and implementing a plan to evaluate the full range of available options for training its brigade combat teams; assessing the risks of not conducting the desired number of training rotations; and determining how, if necessary, risks will be mitigated. In its comments, DOD recognized its shortfall in maneuver Combat Training Center (CTC) capacity to execute its brigade combat team training strategy and meet global force requirements. DOD stated that in January 2010, the Army initiated a Collective Training Comprehensive Review to identify and evaluate brigade combat team training options with a specific focus on the roles and requirements between home stations and CTCs in the training strategy. DOD noted that it will discuss the review's findings and recommendations during an upcoming Army Training and Leader Development Conference, and develop consensus on future adjustments to the training strategy or CTC Program based on acceptable levels of risk. DOD further noted that the Army agrees a risk and mitigation plan is required to address CTC capacity shortfalls. However, it believed that including table 1 in the report, which describes the current and potential Army maneuver CTC training rotation requirements under various deployment scenarios, was inappropriate. Specifically, DOD believed including the table suggests that the Army should mitigate CTC capacity shortfalls with longer deployments. While it noted that longer deployments would mitigate shortfalls, the Army must consider other factors, including stress on the force. We agree that the Army must consider a number of factors, including deployment length and deployment to time-at-home ratios, to identify the training capacity required at its CTCs. By including the table we are not suggesting that the Army increase deployment lengths. Rather, as noted in the report, the table is presented to illustrate the effect of various deployment lengths, which the Army has used in the past, on the number of required training rotations. However, in light of DOD’s comments, we have clarified the text further to emphasize that the table is illustrative and does not reach any conclusions on any of these scenarios. DOD concurred with our second recommendation that the Secretary of Defense direct the Secretary of the Army to finalize the training requirements for smaller reserve-component units that will act as contingency forces under its Army Force Generation (ARFORGEN) model. DOD noted that the Army is currently addressing these issues and has been executing a number of mitigating efforts to address training challenges, such as the Collective Training Comprehensive Review, which is intended to review all Army collective training requirements and analyze capacity to determine how best to maximize home-station and the CTCs’ abilities for all Army components. DOD further stated that the Army is reviewing the training requirements and readiness goals that units are expected to accomplish as they move through the ARFORGEN cycle. DOD noted that the Army has just completed the staffing process for a new Army regulation on ARFORGEN, AR 525-XX, which establishes a cyclic process to generate trained, ready units for full-spectrum operations. This Army regulation is supported by AR 350-xx, Reserve Component Training under ARFORGEN, which is under staff review and will address the reserve-component specific issues associated with executing full-spectrum operations training under ARFORGEN. Further, DOD noted that the Army is working with the Assistant Secretary of the Army for Manpower and Reserve Affairs, the National Guard Bureau, and the U.S. Army Reserve Command to address specific issues related to operationalizing the reserve component, such as contiguous training policies and the best use of all Army training capacity. Additionally, DOD stated that the Army has validated the Army National Guard’s Exportable Combat Training Capability, which provides home station culminating training events for all types of units, and the Army Reserve’s Combat Support Training Center, which is executed at three Army Reserve sites. The full text of DOD’s written comments is reprinted in appendix III. We are also sending copies of this report to the Secretary of Defense. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. To assess the extent to which the Army and Marine Corps have made adjustments at their major training facilities to support larger deployments to Afghanistan while still preparing forces for deployments to Iraq, we reviewed Army and Marine Corps training policies and guidance, such as Army regulation 350-50, Combat Training Center Program, the Army’s Combat Training Center Master Plan, and the Marine Corps’ OIF/OEF Predeployment Training Continuum, and Marine Corps Order 3502.6, Marine Corps Force Generation Process. In addition, we interviewed officials at the Department of the Army–Training Directorate; U.S. Army Forces Command; U.S. Army Training and Doctrine Command; First U.S. Army; U.S. Army National Guard; U.S. Army Reserve Command; Marine Corps Plans, Policies, and Operations–Ground Combat Element Branch; Marine Corps Training and Education Command; Marine Forces Command; and Marine Forces Reserve regarding adjustments that were required at the Army and Marine Corps major training facilities to support deployment to Iraq and Afghanistan. We also reviewed the U.S. Army Forces Command’s Predeployment Training Guidance for Follow-on Forces Deploying in Support of Southwest Asia, which outlines the training requirements for Iraq and Afghanistan, to identify differences in training requirements between Iraq and Afghanistan, and interviewed Army officials to discuss these documents. We obtained and reviewed information from the Army’s and Marine Corps’ major training facilities on the training they conducted in fiscal year 2009 and fiscal year 2010, through April. We also interviewed officials at the training facilities, and for the Army’s mobilization training centers for the Reserve and National Guard, on the installations where the training facilities are located, to discuss how they are currently using their training facilities to train for operations in Iraq and Afghanistan. Specifically, we held discussion with officials from all four of the Army’s Combat Training Centers (CTC)— Battle Command Training Program, Fort Leavenworth, Kansas; National Training Center, Fort Irwin, California; Joint Readiness Training Center, Fort Polk, Louisiana; and Joint Multinational Training Center, Hohenfels, Germany. While we met with officials from all four CTCs, we only included the three maneuver CTCs in the scope of our review, as they conduct live-fire training exercises; the fourth CTC, Battle Command Training Program, was designed to train the command element and not the entire unit, and focuses on computer-assisted training exercises. We also held discussions with officials from the Marine Corps’ training facility at Twentynine Palms, California, and officials from the Army’s seven mobilization training centers for the Reserve and National Guard at which the Army currently conducts training and plans to conduct training in the future, including Army Support Activity–Dix (formerly known as Fort Dix), Camp Atterbury, Fort Knox, Camp Shelby, Fort Hood, Fort Bliss, and Joint Base Lewis-McChord (formerly known as Fort Lewis). In focusing our review, we also identified the Army’s and Marine Corps’ major predeployment training facilities; specifically the locations at which these services are conducting final mission-rehearsal exercises that include live-fire training for units deploying in support of current operations in Iraq and Afghanistan. For the Army we focused on active and National Guard brigade combat teams, which prepare and train for deployment at the Army’s maneuver CTCs. In addition, we focused on the Army’s mobilization training centers, where National Guard brigade combat teams that will be split into smaller units in theater conduct training. Because smaller-sized reserve-component units also conduct predeployment training at the Army’s mobilization training centers, we included these units in the scope of this review. We did not include active- component units that do not train at CTCs, since these units generally train at different locations—their home stations where they have required training facilities and support. For the Marine Corps we focused on units training for deployment at Twentynine Palms, California, its only CTC. To determine the extent to which the Army and the Marine Corps have developed plans to adjust training capacity, we reviewed service documentation regarding future training needs, to include the 2009 Army Campaign Plan, 2010 Army Posture Statement, 2010 National Guard Posture Statement, 2010 Army Reserve Posture Statement, the Marine Corps Vision and Strategy 2025, and the 2009-2015 Marine Corps Service Campaign Plan. To further determine the Army’s future training capacity requirements at its CTCs we reviewed and assessed Army guidance for the CTCs to include the 2008 and 2010 Combat Training Center Master Plans, the 2010 Headquarters Department of the Army Execution Order for the Establishment of the Exportable Training Capability, and the 2010 Memorandum of Agreement between the U.S. Army Training and Doctrine Command and the U.S. Army Forces Command regarding the transfer of the National Training Center and Joint Readiness Training Center Operations Groups. We also obtained and reviewed guidance regarding the Army’s future training requirements for smaller units to include the 2009 Army Training Strategy, the 2009 ARFORGEN Training Support for an Operational Reserve (Coordinating Draft), First Army Command Training Guidance for Fiscal Years 2009 and 2010, and the 2008 First Army Operations Order, which provides command guidance for mobilization, training, validation, and deployment. In addition, we reviewed Marine Corps guidance regarding its expanded training requirements at Twentynine Palms, including the 2010 Marine Corps Force Generation Process, 2009 Marine Expeditionary Brigade Objective and Threshold Training Requirements, the Marine Corps Vision and Strategy 2025, the 2009-2015 Marine Corps Service Campaign Plan, and the 2004 Marine Corps Expeditionary Brigade Exercise Study by the Center for Naval Analysis. In addition, we reviewed Department of Army information outlining the number of training rotations that the Army will need at its maneuver CTCs to support its identified Army Force Generation (ARFORGEN) requirements for 72 brigade combat teams based on a time-deployed to time-at-home ratio of 1:2 for the active-component brigade combat teams and 1:4 for the reserve-component brigade combat teams. To determine the number of rotations needed under the Army’s ARFORGEN model portraying a lower deployment demand of 1:3 time-deployed to time-at- home ratio for active-component brigade combat teams and 1:5 for reserve-component brigade combat teams, we applied the Department of Army’s data regarding total rotations required under the ARFORGEN cycle. Based on the time-deployed to time-at-home ratio of 1:3 and 1:5 for active- and reserve-component brigade combat teams, respectively, we determined that a total of 28-29 training rotations would be required annually. We developed an additional ARFORGEN model scenario based on deployments of 6 months—similar to how the Army deployed in support of missions before September 2001—but still maintained a time- deployed to time-at-home ratio of 1:3 for the active component and 1:5 for the reserve component. The total number of required rotations under this ARFORGEN cycle would increase to 53-54 annually. To assess the extent to which challenges existed for the Army in meeting its future training requirements for brigade combat teams, we compared the total number of training rotations that the Army can conduct annually at its maneuver CTCs to the desired number of rotations it would conduct under its force generation cycle—ARFORGEN. The Army has identified a rotation shortage and developed plans to mitigate this shortage through its Exportable Training Capability. However, in examining the Exportable Training Capability we found that the Army would still have a shortage of training rotations to meet the future training requirements called for in the Army’s Force Generation model. We interviewed officials with the Department of the Army, the Combat Training Center Directorate, U.S. Army Forces Command, the Army’s three maneuver CTCs, and the Exportable Training Capability at the National Training Center regarding the likelihood of this capability meeting its current timelines and milestones and the availability of risk assessments or plans to assist the Army in conducting its desired number of training rotations in the future. In addition, to determine if the Army’s reserve component faced challenges in meeting its future training requirements as prescribed in the ARFORGEN model, we interviewed officials within the Department of the Army, U.S. Army Forces Command, First Army, the Army National Guard Bureau, and U.S. Army Reserve Command to determine if there is an Army policy identifying when and where the training of reserve-component contingency forces would occur within the ARFORGEN model. Further, we interviewed officials to determine the availability of existing Army resources, including the Army’s mobilization training centers for the Reserve and National Guard, to support future requirements. In addition, we reviewed First Army’s preliminary review detailing the availability of the Army’s mobilization training centers to conduct training for contingency forces. We interviewed Marine Corps officials within the Marine Corps Training and Education Command to discuss their recently established training requirement; specifically to discuss the lessons learned that prompted this requirement. Further, we interviewed officials at Marine Corps Forces Command; Marine Corps Plans, Policies, and Operations; and the Marine Corps Air Ground Task Force to obtain further information regarding future training requirements and training capacity at Twentynine Palms. We also reviewed documents, such as the Marine Corps 2010 Proposed Land Acquisition and Airspace Establishment in Support of Large Scale Marine Air Ground Task Force Live Fire and Maneuver Training public information briefing, to obtain information regarding the Marine Corps land-acquisition timelines and alternatives to meet its new training requirement. We assessed the reliability of the data presented in this report. Specifically, with regard to capacity—the maximum number of training rotations that can be conducted, or people that can be trained, on a sustainable basis—we interviewed officials and obtained data from the Army’s and Marine Corps’ headquarters organizations. In addition, we interviewed officials and obtained data from the major training facilities to verify that these data were consistent with the data provided by the headquarters organizations. We found the data to be sufficiently reliable for the purposes of this report. In conducting this work, we contacted appropriate officials at the organizations outlined in table 2. We conducted this performance audit from August 2009 to May 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As noted in table 3 below, in fiscal year 2009, the Army conducted 28 rotations, training over 120,000 people, at its three maneuver Combat Training Centers (CTC). Specifically, the National Training Center conducted 10 training rotations at Fort Irwin, California; the Joint Readiness Training Center conducted 10 training rotations at Fort Polk, Louisiana; and the Joint Multinational Readiness Center conducted 8 rotations which were split between its permanent Hohenfels, Germany, location and unit home-station locations. As shown below in table 4, in fiscal year 2009, the Army’s mobilization training centers for the Reserve and National Guard trained nearly 89,000 servicemembers for deployment. In addition to the contact named above, key contributors to this report were Michael Ferren (Assistant Director), Jerome Brown, Susan Ditto, Kenya Jones, Lonnie McAllister, Richard Powelson, Terry Richardson, Michael Silver, and Nicole Volchko.
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The Army's and Marine Corps' major training facilities--Army and Marine Corps combat training centers and Army mobilization training centers--have focused on training units for counterinsurgency missions in Iraq and Afghanistan. As troop levels decrease in Iraq and increase in Afghanistan, larger numbers of forces will be training for Afghanistan. To meet future requirements, the services plan to adjust training to train forces on a fuller range of missions. The House report to the National Defense Authorization Act for Fiscal Year 2010 directed GAO to report on any challenges the Department of Defense faces as it adjusts training capacities. GAO assessed the extent to which the Army and Marine Corps have (1) made adjustments at their major training facilities to support larger deployments to Afghanistan; and (2) developed plans to adjust training capacity to meet future requirements. GAO analyzed service training guidance, future training requirements, and related plans, and interviewed headquarters officials and personnel from the services' major training facilities. Due to similarities in training requirements, the Army and Marine Corps did not need to make significant adjustments at their major training facilities to support the shift in operational priority from Iraq to Afghanistan. While the Army had to adapt training scenarios to more closely resemble the operating environment in Afghanistan, it did not have to adjust trainers, training ranges, and mock towns and villages as these are the same regardless of whether forces are preparing for missions in either Iraq or Afghanistan. Since the summer of 2009, the Marine Corps had withdrawn most of its forces from Iraq and shifted the focus of training at its combat training center to exclusively train forces for missions in Afghanistan. Like the Army, the Marine Corps noted that, because of similarities in training requirements, it had to make few adjustments beyond changing some cultural role players and signs in mock towns and villages to support its shift in focus from Iraq to Afghanistan. The Army and Marine Corps face several challenges as they plan to broaden the scope and size of training rotations to meet future training requirements. The Army projects capacity shortfalls at its combat training centers as it seeks to train brigade combat teams to meet future requirements for both ongoing operations and full-spectrum operations--offensive, defensive, and stability operations. The Army has identified the need to conduct 36 to 37 annual training rotations for its brigade combat teams by fiscal year 2011; the centers can currently conduct 28 rotations a year. The Army is developing an exportable capability, expected to increase its capacity by 6 rotations each year when it reaches full operational capability in 2013. However, this will not be sufficient to meet the total projected requirements. To address the gap, the Army plans to give priority to deploying units. The Army has not completed an assessment to determine its full range of options for meeting future brigade combat team training requirements, or the risks associated with not conducting the desired number of training rotations. The Army's force generation model calls for smaller reserve-component units to train for both ongoing and full-spectrum operations, but the Army has not finalized its training strategy for these reserve-component forces. The Army has identified training requirements and locations where deploying forces will train for ongoing operations, but it has not determined where or when it will train its reserve-component contingency forces for full spectrum operations. The Army has the capacity to train 86,000 reserve-component personnel at its seven mobilization training centers each year. It is also conducting enhanced training at other locations, which could expand capacity. Until the Army finalizes its reserve-component training strategy it will not be able to determine whether it can leverage existing resources to meet future training requirements, or whether any excess reserve-component training capacity exists. In the future, the Marine Corps plans to expand training to allow larger numbers of forces to train together, but it lacks sufficient space at its combat training center. It is considering alternatives for acquiring land, ranging in size from approximately 131,000 to 200,000 acres, and expects to reach a decision by fiscal year 2012. GAO recommends the Army develop a risk-assessment and mitigation plan to address gaps in training capacity, and assess how it can maximize existing resources to conduct reserve-component training called for under its force generation model. DOD generally agreed with our recommendations.
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The Under Secretary for Health is the head of VHA and is supported by the Principal Deputy Under Secretary for Health, four Deputy Under Secretaries for Health (DUSH), and nine Assistant Deputy Under Secretaries for Health (ADUSH). Five of these senior leadership positions have been added since 2015. (See fig. 1.) The four DUSH-level positions are Operations and Management: This official oversees VHA’s field operations. All VISN directors report to the DUSH for Operations and Management; VISNs manage the day-to-day functions of VAMCs and outpatient facilities within their network. The Office of the DUSH for Operations and Management supports the VISNs by providing guidance and individual assistance to address operational challenges (such as personnel issues, adverse events at facilities, and implementation of legislation), and supporting the management of access to care (through the ADUSH for Access to Care position, added in 2016). The office also serves as the focal point for the flow of information and guidance between VHA central office and the VISNs and VAMCs. Policy and Services: This official oversees VHA offices focused on health care policy, information management, and research. The Office of the DUSH for Policy and Services is responsible for developing and promulgating VHA policies, employing information and informatics tools to improve patient outcomes, and measuring results to ensure continuous learning. Organizational Excellence: This official oversees program offices focused on assessing and improving quality and safety, providing VHA leadership with analytics to assess how VHA is performing as an organization, and addressing issues related to public trust and integrity. For example, the ADUSH for Integrity reports to the DUSH for Organizational Excellence and is responsible for the day-to-day management of offices focused on internal and external audits, compliance, and ethics. The Office of the DUSH for Organizational Excellence—created in 2015—serves as a hub to enable VHA to achieve the five priorities the Under Secretary of Health established in 2015, and to respond to our High Risk List designation. Community Care: This official oversees all VHA community care programs and business processes, such as determining veterans’ eligibility to receive health care benefits and purchasing care from non-VA providers. The Office of the DUSH for Community Care was created in 2015 to implement provisions in the Choice Act that expanded veterans’ access to non-VA health care services and directed VHA to consolidate the administration of payment for care from non-VA providers. Prior to the creation of this office, the administration of such care to veterans had been spread across VHA. Recent internal and external reviews of VHA operations have identified deficiencies in VHA’s organizational structure and recommended changes that require significant restructuring to address, including eliminating and consolidating program offices and reducing VHA central office staff. For example, the Choice Act required VA to contract with a private entity to conduct an independent assessment of 12 areas of its health care delivery system and management processes, including VHA’s leadership. The Independent Assessment report, which VHA reported cost $68 million, was released in September 2015. It made recommendations across each of the 12 areas that support the report’s four systemic findings of (1) a disconnect in the alignment of demand, resources, and authorities; (2) uneven bureaucratic operations and processes; (3) non-integrated variations in clinical and business data and tools; and (4) leaders not fully empowered due to a lack of clear authority, priorities, and goals. For example, to address the finding of uneven bureaucratic business operations and processes, the report includes a recommendation for VHA to develop a patient-centered operations model that balances local autonomy with appropriate standardization and employs best practices for high-quality health care. To accomplish this, the report states that, among other things, VHA should reorient its central office to better support field operations in its delivery of care to veterans. Pub. L. No. 113-146, § 202(g), 128 Stat. 1776. On September 1, 2016, the President concurred with 15 of the 18 recommendations and directed VA to implement any of the 15 recommendations that the department was not already working to implement. assessment of the Commission on Care’s recommendations and a description of the recommendations VHA is directed to implement. In addition to the reviews required by the Choice Act, VHA initiated internal task forces to examine organizational structure changes and make recommendations. For example, VHA chartered its governance task force in December 2014, with the goal of making recommendations to improve operational effectiveness and efficiency, and to align the agency to strengthen business processes. According to the task force’s charter, VHA needed to modify its governance structure to help address recent issues with substandard and inconsistent care delivery. The governance task force submitted a report in February 2015 with 21 recommendations. For example, the task force recommended reorganizing VHA’s central office around functional areas and establishing processes for regular review and revision of the VISN and VHA central office structures. A governance task force recommendation to examine VISN staffing resulted in VHA chartering another task force, the VISN Staffing Task Force, in February 2015. In July 2015, this task force submitted a report to the DUSH for Operations and Management with recommendations for a new VISN staffing model. It included an option for reorganized VISN organizational structures; new positions focused on special populations (e.g., women’s health, rural health), nursing, and communications; and staffing limits that would result in 95 fewer VISN full-time-equivalent staff nationally in fiscal year 2016 compared to fiscal year 2012. In addition, VHA chartered a task force—the Integrated Project Team—in September 2015 to develop a detailed, time-limited, and organization- specific plan for, and initiate implementation of, selected recommendations from the Independent Assessment required by the Choice Act. According to the task force’s charter, it was formed because, in a climate of intense public and congressional scrutiny, VHA needed to act quickly and could not afford to wait for the Commission on Care to publish its recommendations, which were to incorporate the results of the Independent Assessment. Despite several critical internal and external reviews, VHA does not have a process that ensures that recommendations resulting from these reviews are evaluated to determine appropriate actions and that any such appropriate actions are implemented. (See app. I for a table of recent internal and external reviews that examined VHA’s organizational structure.) The lack of such processes is inconsistent with federal standards for internal control, which state that management should remediate identified internal control deficiencies on a timely basis. This remediation may include evaluating the results of reviews to determine appropriate actions, and, once decisions are made, completing and documenting corrective actions on a timely basis. We found instances where VHA task force actions in response to recent recommendations for organizational structure changes were incomplete, not documented, or not timely: Governance task force. A senior VHA official on the task force— one of 10 senior officials who worked on the February 2015 report—told us that the Under Secretary for Health did not approve 13 of the 21 recommendations, so they would not be implemented. Additionally, VHA officials stated that there was no documentation of the Under Secretary for Health’s decisions on the recommendations because they were communicated verbally. Some of these 13 unimplemented recommendations focused on organizational structure changes that were later repeated in the Independent Assessment’s recommendations. For example, the Independent Assessment and the VHA governance task force reports both noted that VHA central office programs and staff had increased dramatically in recent years, resulting in a fragmented and “silo-ed” organization without any discernible improvement in business or health outcomes, and recommended restructuring and downsizing VHA central office. The Under Secretary for Health told us that his immediate priorities were to focus on improving access to care and hiring officials for vacant senior-level positions, and as a result he did not want to make significant changes to VHA’s organizational structure. Recommendations the Under Secretary for Health approved included those on improving the coordination and oversight of non-VA community care, restructuring the monthly meetings of VHA’s National Leadership Council, and establishing processes to develop and improve health care performance measures. VISN Staffing Task Force. VHA officials told us that the DUSH for Operations and Management verbally communicated approval of the task force’s recommendations to change VISN staffing, which were developed over a week-long work session and incorporated input from all VISN directors. VHA officials provided us a VISN organizational chart with revised VISN staffing limits as documentation of the DUSH’s approval, but did not provide documentation of the decision made on each task force recommendation. For example, the documentation did not include the DUSH’s decisions on the task force’s recommendations on whether larger VISNs should be allowed to establish deputy network director positions, or if certain staff positions could be shared across VISNs. It also did not include information on why one staffing model was chosen over another. Officials stated that the DUSH was responsible for implementing the new VISN staffing model, but had not developed a timeline for its implementation. VHA officials were not able to provide us with any updates on implementation and told us in May 2016 that the task force had been disbanded. Integrated Project Team. The task force, made up of 18 senior VA and VHA officials, conducted its work over about 6 months but did not produce the detailed implementation plan of the Independent Assessment recommendations it was chartered to create, according to VHA officials. A senior VHA official on the task force told us that the team planned to have a completed implementation plan in March 2016, and had identified senior-level VHA officials who would be responsible for ensuring implementation of the recommendations. The official also noted that the task force’s work would be included in VHA’s strategic planning summit in April 2016, at which point the task force would disband. VHA officials later told us that although the Integrated Project Team developed eight topic areas that applied to the Independent Assessment’s recommendations, and presented them at the strategic planning summit, they would not be moving forward with further work to develop and approve an implementation plan. In August 2016, VHA officials told us that since the strategic planning summit, they have been focused on addressing other priorities such as the Commission on Care report, proposed legislation that could affect VHA operations, and the Under Secretary for Health’s five priorities for VHA. VHA devoted significant time and effort to these different task forces, but then either did not act or acted slowly to implement recommendations. For example, all three task forces included senior officials from VHA’s central office and VISNs, whose participation on the task forces created additional responsibilities beyond those related to their positions. In addition, all three sets of recommendations were available to VHA officials in 2015, but decisions on these recommendations were delayed by 6 months to 1 year after the report’s completion, and in the case of the Integrated Project Team’s work, decisions have not been made at all. One attribute of the federal internal control standard for timely remediation for identified deficiencies is assigning responsibility and authority for carrying out corrective actions. The three task force charters did not require senior leadership to make decisions on the results of reviews within a certain time frame, or ensure implementation of agreed- upon recommendations. As a result, when officials retired (as did the chairs for all three task forces) or resumed their regular duties, there were no other individuals or offices responsible for ensuring that recommendations were acted on, or any documentation available to track progress made. VHA officials expressed frustration and confusion at the lack of response from central office to the findings and recommendations resulting from task forces. Without a process for ensuring that the recommendations resulting from internal and external reviews are evaluated, decisions documented, and promptly acted on, VHA will not be able to ensure that officials are accountable for taking actions that will resolve deficiencies. VHA also cannot ensure that it is making efficient use of internal resources allocated to developing and implementing recommendations. The VISN realignment is a significant change to VHA’s organizational structure; it is the first large-scale reorganization of VISN boundaries since the VISNs were created in 1995. However, VISNs have been implementing this change with little monitoring from VHA’s central office. In addition, VHA did not proactively identify and provide guidance to address challenges VISNs and VAMCs have encountered. These actions are inconsistent with federal standards for internal control concerning monitoring and risk assessment. Specifically, these controls state that management should establish monitoring activities, evaluate the results, and remediate identified deficiencies in a timely manner. This monitoring may include ongoing activities that are built into operations, as well as evaluations that provide feedback on the effectiveness of the monitoring and identify possible deficiencies that require corrective actions. In addition, these controls state management should identify, analyze, and respond to changes that could affect the system. In October 2015, VHA began to implement a realignment of its VISN boundaries, with the goal of aligning them with MyVA regional boundaries. This involved decreasing the number of VISNs from 21 to 18 and reassigning some VAMCs to different VISNs. The governance task force evaluated several options for aligning VISN boundaries with MyVA regions and for aligning VISN boundaries better with state lines, and proposed an 18-VISN configuration. For example, the governance task force proposed reassigning West Virginia VAMCs so that they would all report to one VISN instead of four different VISNs. (See app. II for pre- and post-realignment VISN maps, and a table that shows the extent that each VISN is affected by the realignment.) VHA officials anticipate that the realignment will be completed, at the earliest, by the end of fiscal year 2018. Directors from the 15 VISNs affected by the realignment described a range of actions that needed to be completed as part of the realignment, including setting up new VISN governance structures; merging clinical and administrative functions; and assessing the operations in VAMCs that have been reassigned to a VISN to ensure they are in alignment with the VISN’s practices, such as VAMCs’ use of service contracts. According to VHA, the realignment is not expected to impact veterans’ access to health care. For example, officials told us that the VISNs are expected to continue to honor historical geographical referral patterns for veterans—that is, to continue to refer veterans to the same VAMC or outpatient facility they were referred to prior to the realignment even if that VAMC or facility is part of a different VISN post- realignment. VHA has provided little monitoring of VISNs’ implementation efforts, and it has not provided adequate guidance in anticipation of implementation challenges. VHA chartered a task force—the VISN Realignment Workgroup—to implement the realignment across the VISNs. According to its charter, the task force is responsible for developing an implementation plan and timeline for the realignment, as well as identifying barriers and solutions to mitigate them. The task force is made up of VHA central office and VISN officials and led by the DUSH for Operations and Management and a VISN director. It meets monthly with VISNs affected by the realignment. Although these meetings provide a structure for VISN directors to share actions taken and challenges encountered in the realignment process, VHA has not taken an active role in implementing the realignment. VISN Realignment Workgroup officials told us that at the beginning of the realignment, the workgroup provided guidance in the form of a communication plan that answered frequently asked questions about the realignment’s purpose, and made decisions about how the VISNs would be numbered. However, officials added that they wanted to be facilitators, rather than directors or implementers, for the realignment, and that VISN directors were capable of implementing the realignment independently without the need for a close level of monitoring. Directors from several VISNs affected by the realignment told us that they have made decisions independently about how to implement the realignment in their VISNs, and many also noted that they continue to face challenges with implementation, including services and budgets. Directors from 12 of the 15 VISNs affected by the realignment told us they continue to face challenges in managing services and budgets. The director of a VISN that gained a VAMC with after-hours call center services on site told us he faced an unexpected task of consolidating his VISN’s existing call center services with those being provided at the VAMC. In addition, a VAMC director expressed concern about potentially having to re-start a VISN strategic planning exercise that the VAMC had participated in for 18 months because the VISN to which it had been reassigned had not done similar planning work. Finally, several VISN directors expressed concerns about how the realignment would affect their budgets, including one director who was concerned about losing a large VAMC that supplemented budget losses for other, smaller VAMCs in the VISN. “double-encumbered” positions. Six of the 15 VISNs affected by the realignment are in the process of merging, which has resulted in double-encumbered positions—two officials serving in the same position, such as two Chief Financial Officers. For example, one VISN director told us at the time of our interview (February 2016) that there were about 30 double-encumbered positions between two merging VISNs, which represented about one-third of their total staff. According to VHA, 23 positions remained double-encumbered in the merged VISN as of August 2016. Several VISN directors described challenges in resolving double-encumbered positions. For example, without authorization to offer Voluntary Separation Incentive Payments—also known as buyout authority—or specific instructions from central office, directors told us they were concerned that any actions they took (such as having officials compete for the position) would be inconsistent with other VISNs. VHA officials told us that they have been involved in helping VISNs address double-encumbered positions, such as assisting in finding staff new positions within VHA, but not all such situations had been resolved. Further, according to VHA, one merged VISN received central office approval to pursue buyout authority, and two other merged VISNs were awaiting approval as of August 2016. VISN directors with double-encumbered staff expressed frustration at the lack of resolution of this issue and told us it has contributed to low staff morale. Double-encumbered positions were a VISN realignment challenge that VHA could have anticipated and made plans to address before the realignment started, but according to senior task force officials, the task force did not establish a subgroup on human resources until after the realignment began. As of August 2016, VHA reported there were 37 double-encumbered positions across the three merged VISNs. information technology. Six of the 15 directors from VISNs affected by the realignment told us that they continue to face information technology challenges, including having to manually reconstruct datasets to add or delete VAMCs that are still electronically associated with their former VISNs. One VISN director described difficulties in obtaining access rights to data from VAMCs that were reassigned to the VISN. Similarly, a VAMC director told us that the facility was no longer able to access its own data after changing VISNs because the data were located on their former VISN’s server, requiring workarounds to gain access because there was no guidebook or plan for how to transfer VAMC data from one VISN to another. VISN Realignment Workgroup officials told us they were aware of continued realignment challenges, but had no plans in place at the time of our review to expand their monitoring efforts to include an evaluation of the implementation of the realignment. Officials said that if they conducted an evaluation, the best time frame would be after the realignment is mostly complete because realignment actions are still in the process of being implemented. However, an evaluation may be useful to correct any identified implementation deficiencies. It can also help inform future organizational structure changes by offering VHA the opportunity to anticipate challenges and proactively provide guidance to address them. For example, the Under Secretary for Health told us he would be open to other VHA organizational structure changes in the future once he completes the process of filling vacant leadership positions within VHA. In addition, the implementation of the Commission on Care report recommendations could result in large-scale organizational structure changes. VISN Realignment Workgroup officials told us they thought that an evaluation could also be useful for identifying any unintended consequences resulting from the realignment that bear examination. VHA is aware that it is providing health care services to veterans in a time of significant scrutiny from us and others. This scrutiny comes in the wake of VHA’s inability to provide timely health care services to veterans, which contributed to the placement of VA health care on our High Risk List. Although VHA has spent considerable resources—staff time and funds— on reviews and task forces that recommended improvements in its organizational structure, VHA lacks the processes needed to ensure that officials can evaluate those recommendations, document decisions, monitor and evaluate implementation, and hold staff accountable. In addition, without adequate monitoring, including a plan for evaluation, VHA cannot be certain it is effectively implementing the ongoing VISN realignment. VHA would also miss the opportunity to apply lessons learned from such an evaluation to future organizational structure changes, such as those it makes in response to the Commission on Care report’s recommendations. Without processes for evaluating and implementing recommendations and actively monitoring major organizational structure changes, there is little assurance that VHA’s delivery of health care to the nation’s veterans will improve. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following two actions: 1. Develop a process to ensure that organizational structure recommendations resulting from internal and external reviews of VHA are evaluated for implementation. This process should include the documentation of decisions and assigning officials or offices responsibility for ensuring that approved recommendations are implemented. 2. Conduct an evaluation of the implementation of the VISN realignment to determine whether deficiencies exist that need corrective actions, and apply lessons learned from the evaluation to future organizational structure changes, such as possible changes to VISN staffing models or actions to implement Commission on Care recommendations. We provided a draft of this report to VA for comment. In its written comments, reproduced in appendix III, VA agreed with our conclusions and concurred with our recommendations. In its comments, VA stated that VHA plans to develop processes to ensure organizational structure changes are evaluated and implemented appropriately and to evaluate the implementation of the VISN realignment, with estimated completion dates for the development of these processes by March 2017 and September 2017, respectively. VA also stated that as the VISN realignment continues, VHA will strive to ensure a seamless flow of communication and execution of VHA’s mission at all levels. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, the Under Secretary for Health, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Appendix I: Recent External and Internal Reviews That Include an Examination of Veterans Health Administration’s (VHA) Organizational Structure VHA contracted with the Centers for Medicare & Medicaid Services’ Alliance to Modernize Healthcare (operated by MITRE Corporation, a private entity) and the Institute of Medicine to conduct the assessment. Parts of the evaluation were subcontracted to other organizations, including McKinsey & Company and the RAND Corporation. VA announced a major organizational initiative in September 2014 called MyVA. As part of this initiative, the department established a single regional framework for its three administrations—VHA, the Veterans Benefits Administration, and the National Cemetery Administration— dividing the United States into five regions based on state boundaries. (See fig. 2.) Following the MyVA initiative’s implementation, VHA announced plans to realign, and in some cases, merge its VISNs—regional offices that oversee networks of VA medical centers (VAMC) and outpatient facilities—so that they geographically aligned with MyVA regional boundaries. (See figs. 3 and 4 for pre- and post-realignment VISN maps, respectively; and table 2 for information on the extent that each VISN is affected by the realignment.) The VISN realignment began in October 2015 and VHA officials anticipate it will be completed, at the earliest, by the end of fiscal year 2018. Some VISN borders will cross state lines and MyVA regional boundaries once the realignment is complete. VHA officials told us this reflects geographical referral patterns and the locations of outpatient clinics, which can be across state lines from their associated VAMCs. VHA officials told us that the VISNs are expected to continue to honor historical geographical referral patterns for veterans—that is, to continue to refer veterans to the same VAMC or outpatient facility they were referred to prior to the realignment even if that VAMC or facility is part of a different VISN post-realignment. Debra A. Draper, (202) 512-7114 or [email protected]. In addition to the contact named above, Janina Austin, Assistant Director; Malissa G. Winograd, Analyst-in-Charge; Amanda Cherrin; and Amanda Pusey made key contributions to this report. Also contributing were Jennie F. Apter, George Bogart, Muriel Brown, and Jacquelyn Hamilton.
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GAO and others have expressed concerns about VHA's management of its health care system. In response, VA initiated a new regional framework to improve internal coordination and customer service, and VHA initiated an effort to realign its VISNs. GAO was asked to review VHA's organizational structure—the operating units, processes, and other components used to achieve agency objectives. This report examines the extent to which (1) VHA has a process for evaluating recommended organizational structure changes to determine actions needed and implementing them as appropriate; and (2) VHA monitored and provided guidance for implementing the VISN realignment. GAO reviewed VHA documents, reviewed internal and external assessments of VHA, and interviewed officials from VHA central office and all VISNs. GAO evaluated VHA's actions against relevant federal standards for internal control. Recent internal and external reviews of Veterans Health Administration (VHA) operations have identified deficiencies in its organizational structure and recommended changes that would require significant restructuring to address, including eliminating and consolidating program offices and reducing VHA central office staff. However, VHA does not have a process that ensures recommended organizational structure changes are evaluated to determine appropriate actions and implemented. This is inconsistent with federal standards for internal control for monitoring, which state that management should remediate identified internal control deficiencies on a timely basis. GAO found instances where VHA actions in response to recent recommendations for organizational structure changes were incomplete, not documented, or not timely. For example, VHA chartered a task force to develop a detailed plan to implement selected recommendations from the independent assessment of VHA's operations required by the Veterans Access, Choice, and Accountability Act of 2014; according to VHA, the assessment cost $68 million. It found, among other things, that VHA central office programs and staff had increased dramatically in recent years, resulting in a fragmented and “silo-ed” organization without any discernible improvement in business or health outcomes. It recommended restructuring and downsizing VHA's central office. The task force of 18 senior Department of Veterans Affairs (VA) and VHA officials conducted work over about 6 months, but did not produce a documented implementation plan or initiate implementation of recommendations. Without a process that documents the assessment, approval, and implementation of organizational structure changes, VHA cannot ensure that it is making appropriate changes, using resources efficiently, holding officials accountable for taking action, and maintaining documentation of decisions made. VHA central office's monitoring of the Veterans Integrated Service Networks (VISN) realignment—a recent and significant organizational structure change—has been limited, and the office has provided little implementation guidance. In October 2015, VHA began to implement a realignment of its VISN boundaries, which involves decreasing the number of VISNs from 21 to 18 and reassigning some VA medical centers (VAMC) to different VISNs. VHA officials anticipate this process will be completed by the end of fiscal year 2018. VHA officials on the task force implementing the realignment told GAO they thought VISNs could implement the realignment independently without the need for close monitoring. VHA also did not provide guidance to address VISN and VAMC challenges that could have been anticipated, including challenges with services and budgets, double-encumbered positions (two officials in the same position in merging VISNs), and information technology. Further, VHA officials said they do not have plans to evaluate the realignment. VHA's actions are inconsistent with federal internal control standards for monitoring (management should establish monitoring activities, evaluate results, and remediate identified deficiencies) and risk assessment (management should identify, analyze, and respond to changes that could affect the system). Without adequate monitoring, including a plan for evaluating the VISN realignment, VHA cannot be certain that the changes being made are effectively addressing deficiencies; nor can it ensure lessons learned can be applied to future organizational structure changes. GAO recommends that VHA (1) develop a process to ensure that organizational structure recommendations are evaluated for implementation; and (2) evaluate the implementation of the VISN realignment to determine and correct deficiencies, and apply lessons learned to future organizational structure changes, such as possible changes to VISN staffing models. VA concurred with GAO's recommendations.
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The Telephone Consumer Protection Act of 1991 (FCC’s basic statutory mandate with respect to telemarketers) required FCC to issue regulations to protect consumers’ privacy by preventing unwanted telemarketing calls and authorized, but did not require, FCC to fulfill this requirement by creating a national do-not-call database. The Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (FTC’s specific statutory mandate regarding telemarketing) required FTC to issue rules prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices but did not specifically mention a national registry. Both commissions have promulgated regulations imposing requirements on telemarketing practices, ranging from restrictions on the hours when unsolicited calls may be made to provisions prohibiting calls under certain circumstances. FTC’s regulations are known as the Telemarketing Sales Rule, and FCC’s as the Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991. The two commissions have different but overlapping jurisdiction over the activities of entities that make telemarketing calls: thus, telemarketers may have to comply with one or both sets of regulations. FCC’s authority covers entities that use the telephone to advertise, including those making intrastate telephone solicitations, while FTC’s authority under its telemarketing law is limited to entities engaged in interstate telemarketing. In addition, by statute, certain entities are wholly or partially exempt from FTC jurisdiction but remain subject to FCC jurisdiction. These include common carriers, banks, credit unions, savings and loan institutions, airlines, nonprofit organizations, and insurance companies. FTC and FCC initially responded to the statutory mandate to address unwanted telemarketing by prohibiting calls to individuals who previously had stated to telemarketers that they did not wish to receive calls made by or on behalf of a particular seller. These regulatory provisions are called “entity-specific” do-not-call provisions, and they remain in effect as a complement to the national registry. Telemarketers are required to maintain lists of consumers who have specifically requested to have their names placed on the company-specific do-not-call list, and it is a violation of law for them to call a consumer who has asked to be placed on the company’s list. Thus, those consumers who have not placed their telephone numbers on the national registry still can instruct telemarketers to place them on an entity-specific do-not-call list. In addition to FTC’s and FCC’s entity-specific do-not-call provisions, consumers can register their telephone numbers on state do-not-call lists. FCC stated in a July 2003 Report and Order that 36 states had established their own statewide do- not-call lists to respond to the growing consumer frustration with unsolicited telemarketing calls. Entering one’s telephone number on the national registry will not stop all unwanted solicitations. There are several exemptions in the law that allow organizations to call consumers, even if their telephone numbers are on the national registry. Exempt organizations include charities, organizations conducting surveys, political fundraisers, those calling on behalf of tax exempt organizations, and those calling under an “established business relationship” or with the consumer’s written permission. Under an established business relationship, a telemarketer can call a consumer for a period of up to 18 months after the consumer’s last purchase or financial transaction with the business or up to 3 months after the consumer’s last inquiry or application to the business. However, even if a business relationship was established, the company is required to comply with a request under the previously mentioned entity-specific do- not-call provision. Thus, if the consumer tells the company they do not want to be solicited by telephone, the company is prohibited from calling again. Similarly, the consumer can use the entity-specific option to ask a paid fundraiser for a charitable organization to stop soliciting them for a specific charity by telephone. On the basis of its experience and growing evidence that the entity- specific provisions were ineffective and overly burdensome on consumers, in January 2002, FTC proposed a national do-not-call registry and 1 year later adopted its proposal to amend its Telemarketing Sales Rule to create the national registry and prohibit telemarketing calls to consumers who registered their telephone numbers. FTC also allowed states to transfer to the national registry those consumer telephone numbers on their state registries. As of December 2004, 17 states have transferred their state list and adopted the national registry as the state registry. FCC revised its regulations pursuant to the Telephone Consumer Protection Act, in June 2003, to require telemarketers under its jurisdiction to comply with the requirements of the national registry. In addition, in accordance with the Telephone Consumer Protection Act, FCC required states with their own state registries to include on the state registry those telephone numbers registered on the national registry from their respective states. FCC required this to reduce the potential for consumer confusion and reduce regulatory burdens on the telemarketing industry. FCC allowed an 18-month transition period for states to download information from the national registry to their state registry. In March 2003, Congress passed the Do-Not-Call Implementation Act (the Implementation Act), which authorized FTC to establish fees “sufficient to implement and enforce” the national registry. Initial registration of consumer telephone numbers began in late June 2003. In July 2003, FTC set fees to be paid by telemarketers to access the national registry. In September 2003, in response to legal challenges to the national registry and requirements, Congress passed additional legislation expressly authorizing FTC to implement and enforce a national do-not-call registry under the Telemarketing and Consumer Fraud and Abuse Prevention Act and ratifying the National Do-Not-Call Registry regulation as promulgated by FTC in 2002. To manage the anticipated large number of consumers who would want to register via the telephone, FTC had a two-stage process whereby consumers west of the Mississippi could register by telephone starting June 27, 2003, and on July 7, 2003, telephone registration was opened to the rest of the country. FTC and FCC began enforcement of the national registry on October 1, 2003; and FTC issued a revised rule to increase telemarketer fees in July 2004. Figure 1 provides a timeline of FTC and FCC actions to implement the national registry. Under the Implementation Act, FTC and FCC were to consult and coordinate with each other to maximize consistency between their regulations governing the national registry. The Implementation Act required both FTC and FCC to provide a written report to Congress 45 days after FCC finalized its rulemaking on the national registry. Each commission’s report was to cover their efforts to maximize consistency in their enforcement efforts by (1) conducting an analysis of the telemarketing rules implemented by both commissions, (2) listing any inconsistencies between the two commissions and the effects of such inconsistencies on consumers and on telemarketers paying for access, and (3) providing proposals to remedy any inconsistencies. FTC and FCC issued reports in September 2003 that analyzed differences related to enforcement of the national registry and other areas where they had common enforcement interests related to solicitations by telemarketers, such as abandoned calls and calling time restrictions. As shown in table 1, differences related specifically to the national registry that FTC and FCC identified in their reports included (1) jurisdiction, (2) definition of established business relationship, (3) instances where the telemarketer caller had a personal relationship with a consumer, and (4) instances where tax-exempt nonprofit entities use for-profit telemarketers to solicit on their behalf. FTC and FCC consulted and coordinated to address the inconsistencies that they identified. For example, since FCC’s jurisdiction is broader than FTC’s, FCC decided to focus its enforcement efforts on activities over which FTC does not have jurisdiction, such as common carrier and intrastate telemarketing. In other cases, the two agencies proposed monitoring the impact of the inconsistencies to determine whether any action was needed. Table 1 summarizes FTC’s and FCC’s inconsistencies with respect to the national registry and decisions made to address the differences. In addition to the above, FTC noted minor differences related to monitoring and enforcement with respect to safe harbor provisions and differences regarding entities that can be held liable for violations. FTC did not believe differences for these two issues were significant enough to warrant any action, and FCC had not identified these as inconsistencies in its report. FTC and FCC entered into a Memorandum of Understanding that further established both commissions’ intent to work together in a cooperative and coordinated fashion to implement consistent, comprehensive, efficient, and nonredundant enforcement of federal telemarketing statutes and rules. FTC and FCC agreed that (1) the commissions would meet at least quarterly to discuss matters of mutual interest; (2) FTC would provide FCC with national registry information through the Consumer Sentinel system; (3) the commissions would make available to each other consumer complaints regarding possible violations of federal telemarketing rules; (4) the commissions would endeavor to avoid unnecessarily duplicative enforcement actions; (5) the commissions would engage in joint enforcement actions, when necessary, that are appropriate and consistent with their respective jurisdictions; (6) the commissions would coordinate public statements on joint cases; and (7) the Memorandum of Understanding was to remain in effect until modified by mutual consent of both parties or terminated by either party upon 30 days advance written notice. FTC and FCC staff said that they tend to meet more frequently than quarterly to discuss matters of mutual interest. FTC’s December 2002 regulation establishing the national registry set forth a process for consumers to register their telephone numbers and for telemarketers to obtain these numbers to remove them from their call lists. Consumers who want to place their telephone number(s) on the national registry can register either on FTC’s Web site (www.donotcall.gov) or by telephone (1-888-382-1222). A consumer can enter up to three telephone numbers at one time by registering online. The consumer must also enter their e-mail address, which is used for confirmation and completion of the registration process. Consumers are to receive an e-mail of the Web site registration, which they must respond to within 72 hours in order to confirm registration. To register a number by telephone, a consumer must call the national registry from the telephone he or she wants to register. The consumer’s telephone number is confirmed at the time the call is made, and registration is completed at that time. A registered telephone number remains on the national registry for 5 years before expiration at which time the consumer may re-register it. A consumer can use FTC’s national registry Web site or toll free number to verify the registration’s expiration date. According to FTC, of the approximately 62 million registered consumer telephone numbers as of August 2004, 61 percent registered on FTC’s Web site, 22 percent registered using the toll-free telephone number, and 17 percent came from state downloads. FTC entered into a contract, dated March 1, 2003, with AT&T Government Solutions to provide services necessary to develop, implement, and operate the national registry. The contract provided that the contractor was to develop and provide a secure database that included the telephone numbers collected from consumers during the registration process as well as receive telephone numbers from states that decided to include consumer telephone numbers from their do-not-call registries in the national registry. The database was also to include information on the date the registration was made and the expiration date of the registration. The automated database was to, among other things, permit consumers to confirm or alter their registration; provide reports and access to information regarding registration to FTC personnel; provide a system to allow telemarketers to access consumer telephone numbers and pay fees, when required; provide for a system to gather consumer complaint information concerning alleged violations of the national registry; provide a system that transferred all valid processed consumer complaints to the FTC in a format that would be compatible with the FTC’s Consumer Sentinel system; and allow appropriate federal, state, and other law enforcement personnel access to consumer registration and telemarketer information maintained in the national registry. Until December 31, 2004, covered telemarketers are to access the national registry within 3 months of making a call to drop from their call lists the telephone numbers of consumers who have registered. However, Congress directed FTC to amend its regulation to require telemarketers to access information at least once a month. FTC issued a notice of proposed rulemaking February 13, 2004, and a final rule on March 29, 2004, to require, effective January 1, 2005, that telemarketers must obtain national registry telephone numbers and purge registered telephone numbers from their call lists at least every 31 days. In promulgating the final rule, FTC explained that 31 days was used to define the statutory monthly requirement in order to provide a set interval at which telemarketers must access the telephone numbers in the national registry. An interval of 31 days rather than 30 days was used to mirror the length of the most frequently occurring and longest month. The FCC rule was also amended to require that telemarketers download the registry every 31 days. FTC also explained in promulgating the final rule that it had set the effective date as January 2005 to allow businesses 9 months to ready their systems and procedures and to enable FTC and its contractor sufficient time to implement necessary changes to the national registry system to accommodate the increased usage. FTC and FCC have mechanisms in place to handle consumer complaints. Both commissions provide numerous ways for consumers to file complaints. These include by mail, over the telephone, by facsimile, by e- mail directly to the agency and through their Web sites for the national registry. In filing a complaint, both FTC and FCC require that the consumer have been on the national registry for 3 months, but differ in the information consumers are to provide. For example, FTC requires consumers to provide their telephone number, the company name or telephone number, and the date of the violation. FCC requires consumers to provide their name and telephone number, the telemarketer’s name or telephone number, any specific information about the complaint, and the date of the violation. According to FTC and FCC, the requirement that consumers have been on the national registry for 3 months will be revised to 31 days on January 1, 2005, when telemarketers are required to remove registered telephone numbers from their call lists every 31 days. As of December 11, 2004, consumers had filed 557,727 complaints through the national registry’s Web site and 117,610 complaints via the telephone. According to FCC staff, FCC has established a process for handling complaints against common carriers that differs from those used for noncommon carriers. Under this process, FCC serves a common carrier with a notice of complaint that includes a copy of the complaint and a specified time in which to respond. With respect to noncommon carriers, FCC and FTC may initiate an investigation of the complaint depending on the number of complaints they have received against the company and other factors. FTC and FCC do not take action on all consumer complaints. Rather, FTC and FCC said that they consider a number of factors when determining which alleged violations to pursue that include the type of violation alleged, the nature and amount of harm to consumers (e.g. invasion of privacy or financial harm), the potential that telemarketers will make future unlawful calls, and securing meaningful relief for affected consumers. FTC’s enforcement actions generally are accomplished by seeking injunctive relief and sometimes consumer redress in federal court; actions for civil penalties (up to $11,000 per violation) are filed by the Department of Justice on behalf of FTC and are less common. FCC’s enforcement efforts are generally accomplished through an administrative process whereby FCC first issues citations against entities not otherwise regulated by FCC for violations of laws it enforces. For subsequent violations by such entities, or for initial violations by FCC regulated entities (such as common carriers, broadcasters, or other licensees), FCC may impose a civil penalty through forfeiture proceedings or take additional enforcement actions that include, for example, cease and desist proceedings, injunctions, and revocation of common carrier license operating authority for violations of the requirements of the national registry. Enforcement of a forfeiture order is done in federal court through the Department of Justice, which handles violations of statutes that FCC enforces. Fines collected through civil penalties go to the U.S. Treasury’s general fund and are not retained in either commission’s accounts for their use. As of December 2004, FTC filed 9 lawsuits for injunctive relief, and in some cases, consumer redress, and the Department of Justice had filed one lawsuit on behalf of FTC for violations of the national registry. As of December 2004, FCC reported that it had initiated 99 investigations against companies that allegedly made calls to consumers on the national registry. FCC’s investigations have resulted in 16 citations for violations of the national registry. In addition, 2 companies have entered into consent decree settlements involving substantial voluntary monetary payments and implementation of strict compliance plans, 54 investigations have been closed because the calls underlying the complaints were not legally actionable, and the remaining 27 investigations are under active consideration. In some instances, consumers had an established business relationship but did not realize it. Also, as mentioned earlier, FTC and FCC have various factors they consider with respect to which complaints to pursue; therefore, not all complaints are investigated. Appendix I provides more information on FTC’s ten lawsuits, and FCC’s 16 citations and 2 consent decrees related to enforcement of the national registry provisions. FTC collected about $5.2 million in fees in fiscal year 2003 and incurred costs of about $14.6 million to implement, operate, and enforce the national registry. This is a shortfall of about $9.4 million. In fiscal year 2004, FTC collected about $14 million in fees and incurred costs of about $14 million to implement, operate, and enforce the national registry. FTC attributed the FY 2003 shortfall in fees to unexpectedly short partial year operations (less than one month) and to fees being set too low due to lack of information about (1) the number of telemarketers that would pay to access the registry and (2) the average number of area codes that telemarketers would access. FTC revised the national registry access fee effective September 1, 2004, using information on the number of telemarketers that had actually paid to access the registry in fiscal year 2003 and the number of average area codes accessed. FTC uses funds from its salaries and expenses account to cover costs of implementing, operating, and enforcing the national registry and is required to reduce its general fund appropriations by the amount of fees collected. In fiscal years 2003 and 2004, appropriations estimates of fees to be collected for the national registry ($18.1 million and $23.1 million, respectively) were greater than the actual amount of fees collected and costs incurred. Because the estimates were greater than the actual amounts of fees collected by the national registry, the differences represented funds available for other allowable expenses covered by the salaries and expenses appropriation. FCC’s costs associated with its enforcement of the national registry are funded in its salaries and expenses account. According to FCC staff, FCC does not distinguish costs associated with enforcing the national registry from its other enforcement efforts. In 2003 when FTC initiated its fee structure, it based the fee for the national registry on the number of entities that would be required to pay the fee and the number of area codes that a telemarketer would access annually. FTC estimated that $18 million would be needed to implement, operate, and enforce the national registry requirements. In two separate notices of proposed rule making for the original national registry fee, FTC stated that it made a number of assumptions to estimate the number of entities that would be required to pay and the number of areas codes to be accessed. Because of an absence of information available about the number of companies then in the marketplace that made telemarketing calls to consumers covered by national registry regulations, FTC sought public comment on its assumptions and methodology but received virtually no comments. Consequently, FTC estimated the fee based on those assumptions and estimates and noted that the fees might need to be reexamined periodically and adjusted to reflect actual experience with operating the registry. FTC’s original fee rule established an annual fee of $25 for each area code requested from the national registry, up to a maximum of $7,375 (300 area codes or more). The first 5 area codes are provided at no cost. FTC provided for free access to the first 5 area codes to limit the burden that might be placed on small businesses that only require access to a small portion of the national registry. FTC’s rule also permits exempt organizations to have free access to the national registry with the intent that should the exempt organizations want to purge their calling lists as a matter of customer service, they would be able to obtain the information necessary to do so. Once a telemarketer paid for access to a selected number of area codes, or was granted free access, it could access those area codes as often as it deemed appropriate for the annual period covered. If, during the course of the annual period, a telemarketer needed to access telephone numbers from more area codes than those initially selected, it would be required to pay for access to those additional area codes. For purposes of additional payments, the annual period was divided into two periods of 6 months each. Obtaining additional area codes for the first 6-month period required a payment of the full year fee of $25 for each new area code whereas for new area codes to be used for the second 6-month period, telemarketers would be assessed a reduced $15 fee for each area code. Table 2 shows FTC’s estimation of the national registry fee to raise approximately $18 million in fiscal year 2003. According to FTC, it collected about $5.2 million in fiscal year 2003. FTC said it collected fewer fees than anticipated for two reasons. First, FTC did not begin collecting fees until September 2003 because its appropriations funding, which provided the total estimated fees that could be collected, was enacted later than anticipated, delaying implementation of the fee collection process. Second, the number of telemarketers that accessed the national registry and the average number of area codes that they accessed were smaller than FTC estimated. FTC estimated that 10,000 companies would pay for the national registry data and that, on average, telemarketers would access 73 area codes. In June 2004, FTC used information from the national registry to reexamine its estimates for setting the fee. As figure 2 shows, about 7,100 companies had paid for access to the national registry as of June 2004. The average number of area codes accessed was 63. FTC published a revised fee rule for the national registry on July 30, 2004. The revised final fee rule established the fee for each area code to be $40 per year, with the first 5 area codes provided to each telemarketer at no charge. Exempt organizations would continue to be allowed access to the national registry at no charge. The maximum amount that would be charged any single telemarketer would be $11,000, which would be charged to any telemarketer accessing 280 or more area codes. The reduced fee charged to telemarketers requesting access to additional area codes during the second 6 months of the semiannual period would be $20. The fee was based on the number of telemarketers that had accessed the national registry as of June 1, 2004, the actual average number of area codes accessed, and FTC’s estimate that $18 million would be needed to cover estimated costs associated with the national registry in fiscal year 2004. Table 3 shows FTC’s estimation for the national registry fee to raise approximately $18 million in fiscal year 2004. In fiscal year 2004, FTC collected about $14 million in fees. Funds collected through the national registry fees are to cover FTC costs related to the implementation, operation, and enforcement of the national registry. In its original fee rule dated July 31, 2003, FTC identified its costs as falling into three broad categories. First are the actual contract costs along with associated agency costs to develop and operate the national registry. The second category of costs relates generally to enforcement efforts. The third category of costs covers FTC infrastructure and administration costs, including information technology structural supports. Table 4 summarizes the costs incurred for the three broad categories plus overhead costs for fiscal years 2003 and 2004, as reported by FTC. As shown in the table 4, FTC incurred costs of about $15 million in fiscal year 2003 and about $14 million in fiscal year 2004. According to FTC staff, the commission had three objectives to measure whether the national registry was successful. These were to (1) have the system up and running during calendar year 2003, (2) to ensure that the system could enroll about 60 million telephone numbers in the national registry in the first year of operation, and (3) reduce unwanted calls to consumers who sign up for the national registry, approximating Missouri’s experience of reducing telemarketing calls by about 80 percent. The national registry was up and running in calendar year 2003. Performance goals were contained in FTC’s contract with AT&T Government Solutions to develop and maintain the national registry. The contractor was responsible for, among other things, consumer registration, telemarketer access to the registry, law enforcement access to the registry, and collecting consumer complaint information concerning violations of the national registry provisions. The contract contained specific performance measurements for completing various tasks associated with the national registry. FTC considered the national registry to be fully operational October 2003 when both commissions began enforcing national registry provisions. FTC also reached its expectation based on states’ experience to enroll 60 million telephone numbers in the national registry in the first year of operation. FTC began receiving consumer registration of telephone numbers in June 2003, and, as of June 2004, 62 million telephone numbers had been registered on the national registry. On the basis of the experience of certain states with do-not-call registry laws, FTC anticipated that consumers who entered their telephone numbers in the national registry would experience as much as an 80 percent reduction in unsolicited telemarketing calls. However, measuring the actual reduction in telemarketing calls is not possible because baseline data on the volume of telemarketing calls consumers received prior to the national registry’s implementation are not available to make a comparison and determine what change has occurred in calls received. As an alternative, FTC has cited polls taken by Harris Interactive® and the Customer Care Alliance as evidence that the national registry has resulted in a reduction of unwanted telemarketing calls. Specifically, in January 2004, Harris Interactive® found that about 90 percent of those who signed up for the national registry had fewer telemarketing calls, and 25 percent of those registered indicated they had received no telemarketing calls since signing up. In June 2004, a Customer Care Alliance telephone survey reported that 87 percent of those who had signed up for the national registry had received fewer telemarketing calls. This survey also attempted to quantify changes in the volume of unsolicited calls registered consumers had received since signingup, reporting an 80 percent reduction; however, we have concerns about how this was done and the accuracy of the results. The two surveys may provide indications of the national registry’s overall performance; however, we are uncertain about how representative the results of each actually are of the opinions and experiences of adults nationwide because, for example, the Harris survey did not use a probability sample that can be projected nationwide and the Customer Care survey had a low response rate, among other things. Notwithstanding these concerns about the surveys’ methodologies and implementation problems, the FTC told us that they found no evidence, anecdotal or otherwise, that contradicts the results of the surveys. Furthermore, FTC considers the surveys’ results to have found that most people know about the national registry and that most people who say they have a telephone number on the national registry say they are getting fewer calls, creating some confidence that the results are generally correct. See appendix II for a more detailed discussion of the two surveys. FTC staff said that complaints filed also provide an alternative measure of the success of the national registry. As of December 11, 2004, 675,337 complaints had been filed since FTC and FCC began accepting complaints in October 2003. FTC staff noted that as a percentage of the total number of telephone numbers registered, this is about 1 percent and is indicative of the success of the national registry. While the number of complaints may be an indication of the national registry’s success, few complaints could also be the result of consumer complacency or reluctance to take the time to file a complaint. The Implementation Act required FTC and FCC to each provide an annual written report for fiscal years 2003 through 2007 on the national registry to include (1) an analysis of the effectiveness of the national registry; (2) the number of consumers who have placed their telephone numbers on the national registry; (3) the number of persons paying fees for access to the national registry and the amount of such fees; (4) an analysis of the progress of coordinating the operation and enforcement of the national registry with similar registries established and maintained by the various states; (5) an analysis of the progress of coordinating operation and enforcement of the national registry with the enforcement activities of the FCC pursuant to the Telephone Consumer Protection Act; and (6) a review of the enforcement proceedings under the Telemarketing Sales Rule in the case of FTC and Telephone Consumer Protection Act in the case of FCC. The FCC issued its annual report for fiscal year 2003 on December 15, 2004. As of December 2004, the FTC had not issued its annual report for fiscal year 2003, but it plans to have it issued by February 2005. We provided FTC and FCC with draft copies of this report for their review and comment. FTC and FCC agreed with the contents of our report and provided informal technical comments on the draft, which we have incorporated where appropriate. In addition, FTC noted that quantitative measurement of the effectiveness of a program based on “before and after” snapshots is difficult, particularly in situations like the national registry where only anecdotal evidence of a baseline for the “before” figure exists. According to FTC, when reports from consumers, the media, and professional surveyors consistently conclude that the national registry effectively and successfully protects registered consumers against invasions of their privacy by most commercial telemarketing calls, it is reasonable to infer the program is working as intended. We plan to provide copies of this report to Commissioners of the Federal Trade Commission and the Federal Communications Commission and interested congressional committees. We will make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me on (202) 512-8777 or at [email protected]. Individuals making key contributions to this report are listed in appendix IV. The Federal Trade Commission (FTC) identified ten lawsuits related to the National Do-Not-Call Registry (the national registry) since enforcement of the national registry became effective October 1, 2004. The Federal Communications Commission (FCC) has issued 16 citations for violations of the national registry and has entered into 2 consent decrees settling investigations of alleged violations of the national registry. The ten FTC lawsuits are as follows: Telephone Protection Agency, Inc., was charged with falsely claiming that it would register consumers with the FCC’s national registry, when, in fact, FCC had no such list at the time. The charge also included other violations of the Telemarketing Sales Rule. (Ongoing litigation.) National Consumer Council was charged with engaging in or causing others to engage in initiating telephone calls to consumers on the national registry and initiating or causing others to initiate telephone calls to consumers within a given area code without first paying the required access fee for the national registry data, among other violations of the Telemarketing Sales Rule. (Preliminary injunction in place, litigation ongoing.) Braglia Marketing Group was charged with engaging in or causing others to engage in initiating telephone calls to consumers on the national registry, abandoning or causing others to abandon telephone calls, and initiating telephone calls to consumers within a given area code without first paying the required access fee for the national registry data. (Filed on behalf of FTC by the Department of Justice, on- going litigation.) Internet Marketing Group, Inc.; OnesetPrice, Inc.; First Choice Terminal, Inc., (Louisiana and Arizona Corporations); B & C Ventures, Inc.; RPM Marketing Group, Inc.; National Event Coordinators, Inc.; and several individual defendants were charged with engaging in or causing others to engage in initiating telephone calls to consumers on the national registry, among other violations of the Telemarketing Sales Rule. (Preliminary injunction in place; litigation ongoing.) Free Do Not Call List.org and National Do Not Call List. US was charged with falsely claiming that for a fee it would arrange for consumers’ telephone numbers to be placed on the national registry. (Stipulated permanent injunction.) Vector Direct Marketing, LLC was charged with unauthorized billing to consumers’ for purported do-not-call protection services and for removal of personal information from telemarketers’ files and falsely claiming to consumers that for a fee it would remove consumers’ personal information from telemarketers’ lists. (Stipulated permanent injunction entered June 2004.) 4086465 Canada, Inc., a corporation doing business as International Protection Center and Consumers Protection Center was charged with falsely claiming to consumers inter alia, that for a fee it would arrange for consumers’ telephone numbers to be placed on the national registry. (Ongoing litigation.) Debt Management Foundation Services was charged with engaging in or causing others to engage in initiating telephone calls to consumers on the national registry and initiating telephone calls to consumers within a given area code without first paying the required access fee for the national registry data, among other violations of the Telemarketing Sales Rule. (Preliminary injunction in place; litigation ongoing.) 3R Bancorp was charged with engaging in or causing others to engage in initiating telephone calls to consumers on the national registry and initiating or causing others to initiate telephone calls to consumers within a given area code without first paying the required access fee for the national registry data, among other violations of the Telemarketing Sales Rule. (Litigation ongoing.) FGH International, Inc. was charged with initiating or causing telephone calls to numbers on the national registry and calls to consumers within a given area code without first paying the required access fee. (Litigation ongoing.) FCC has issued 16 citations for violations of the national registry and has entered into 2 consent decrees settling investigations of alleged violations of the national registry. Table 5 summarizes FCC’s enforcement actions as of December 31, 2004. Two surveys have been conducted about the National Do-Not-Call Registry (the national registry) since it went into effect in October 2003—one survey by Harris Interactive® and one by Customer Care Alliance. The results of these surveys may provide some indications of the national registry’s overall performance; however, we are uncertain about how representative the results of each actually are of the opinions and experiences of adults nationwide, and we are uncertain of the accuracy of the measures in the Customer Care Alliance survey. Notwithstanding limitations of these surveys, FTC considers the surveys’ results to have found that most people know about the national registry and that most people who say they have a telephone number on the national registry say they are getting fewer calls creating some confidence that the results are generally correct. The Harris Interactive survey was conducted on-line within the United States in January 2004 with a sample of nearly 3,400 adults from its multimillion-member Harris Poll market research panel of individuals specially recruited to participate in large surveys. In this brief survey, respondents were asked whether they knew about the national registry; whether they had registered for it; and, for those who had registered, an opinion question was asked about whether they had received more, about the same, or less telemarketing calls since registering. While respondents were asked whether they believed survey research firms and pollsters were exempt from calling restrictions, they were asked no further questions about their knowledge of what types of telemarketing calls are prohibited and what types of calls are exempt. Of all respondents, 91 percent indicated that they had heard of the national registry, and 57 percent indicated that they had signed-up for it. Of those who had registered, 25 percent answered that they had received no telemarketing calls since signingup, and 67 percent responded that they had received a little or far less calls than before signingup. Two-thirds (68 percent) of respondents who had registered answered that they did not know if survey research firms and pollsters were allowed to call. The survey data were weighted using both demographic and propensity score weights to be representative of the total adult population. However, because the survey sample consisted of computer users in its market research panel and the sample was selected using nonprobabilistic methods, we are uncertain how representative the results actually are of the opinions and experiences of adults nationwide. Customer Care Alliance conducted a telephone survey during February through April 2004 with about 850 adults nationwide. Among other topics and as in the Harris survey, respondents were asked whether they were aware of the national do-not-call legislation, and if so, whether they had signedup for the national registry. However, unlike the Harris survey, for those who had signed-up, this survey attempted to quantify changes in the number of telemarketing calls the respondents had received since signing- up for the national registry compared to prior to registering. To measure changes in telemarketing call volume, these respondents were asked to estimate about how many telemarketing calls they had received per month prior to registering for the national registry and in the month prior to being interviewed for the survey. Respondents were also asked whether they had been on the national registry for more or less than 3 months. No questions were asked about respondents’ knowledge of what types of telemarketing calls are prohibited and what types of calls are exempt from the national registry. Ninety-two percent of all respondents answered that they were aware of the national do-not-call legislation, and 60 percent of all respondents said that they had placed their primary home telephone number on the national registry. Respondents who had signedup for the national registry reported receiving an average of about 30 telemarketing calls per month prior to registering and an average of 6 calls per month after signingup, for an 80 percent reduction. We are uncertain how representative the results of the Customer Care Alliance survey are of the opinions and experiences of adults nationwide because of certain limitations. First, the reported survey response rate was only 20 percent. Second, there appears to be a high degree of nonresponse bias in the respondent sample that may be due to the low response rate. The report indicates that the sample of survey respondents overrepresented adults in the U.S. population 45 years of age and older and underrepresented adults between the ages of 18 and 44. Additionally, individuals with incomes of less than $35,000 were greatly underrepresented and those with incomes of more than $50,000 were overrepresented. We are also uncertain about the accuracy of the measures used in the survey because of additional limitations. First, calls from charitable organizations were incorrectly included in a list of the types of prohibited telemarketing calls that was read to respondents in several questions. Second, while the approach to quantify changes in telemarketing call volume gives the appearance of obtaining quantifiable numbers about the national registry’s effect on the telemarketing call volume, we are uncertain about the validity of the answers to these questions. In a telephone interview, a month is a long time period to expect respondents to accurately recall telemarketing call volume. This recall is even more of a problem when respondents are asked to recollect during a telephone interview monthly call volumes from more than 3 months in the past, and over 80 percent of the individuals who reported signingup for the national registry said they had done so more than 3 months prior to being interviewed. So, given the length of time that had transpired since registering for such a large percentage of the survey sample and the complexities of what types of telemarketing calls are prohibited and what types of calls are exempt, we believe that it is unlikely that respondents could have accurately estimated the average number of calls received per month either before or after registering. In addition to those mentioned above, David Alexander, John E. Bagnulo, Frances Cook, Katherine Davis, and Julian L. King made key contributions to this report.
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In response to consumer frustration and dissatisfaction with unwanted telemarketing calls, Congress has passed several statutes directing the Federal Trade Commission (FTC) and Federal Communications Commission (FCC) to regulate intrusive and deceptive telemarketing practices, authorizing both agencies to establish the National Do-Not-Call Registry (the national registry), and authorizing FTC to collect fees to fund this national registry. The objective of the national registry is to limit the numbers of unwanted telemarketing calls that registered consumers receive. The Conference Report for the Consolidated Appropriations Act, 2004, mandated that GAO evaluate the implementation of the national registry. Specifically, this report addresses (1) how FTC and FCC have implemented and operated the national registry, (2) fees collected to cover costs to operate the national registry, and (3) how FTC has measured the success of the national registry. FTC and FCC have done several things to implement the national registry, including issuing regulations and coordinating with each other on the development of regulations and enforcement efforts. FTC has contracted out management of the operational aspects of the registry. Fees for the national registry were less than costs incurred in fiscal year 2003 but covered costs in fiscal year 2004, the first full year of operation. Fees collected by FTC in fiscal year 2003 fell short of actual costs incurred by about $9.4 million. However, fees collected in fiscal year 2004 covered FTC's $14 million in costs incurred. FTC uses appropriated funds to cover costs associated with the national registry and, as required, reduces its appropriations by the amount of fees collected. FCC uses appropriated funds to cover its costs associated with the national registry. FTC established three objectives to measure whether the national registry was successful--(1) having the system operational in calendar year 2003, (2) having the system capable of enrolling about 60 million telephone numbers within the first 12 months of operation, and (3) reducing by 80 percent unwanted calls to consumers who sign up for the registry. The national registry was operational in calendar year 2003, and 62 million telephone numbers had been registered by consumers as of June 2004, within 12 months after registration opened. FTC cannot measure how much unwanted calls have been reduced because it does not know how many calls were being received before the establishment of the registry. However, as an alternative, FTC relied upon two surveys. The results of one survey showed that respondents had an 80 percent reduction in unwanted telemarketing calls since registering on the national registry. However, this result is questionable because, among other problems, the survey relied on respondents' recall of the number of telemarketing calls received at least three months prior. The two surveys found that about 90 percent and 87 percent of registered consumers surveyed reported receiving fewer calls. The surveys may provide indications of the national registry's overall performance; however, GAO is uncertain how representative the results are because, for example, one survey did not use a probability sample that can be projected nationwide. FTC and FCC provided informal technical comments to our report, which we incorporated where appropriate. According to FTC, there is no evidence that the national registry is not working.
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In November 2002, the Congress passed IPIA. The major objective of IPIA is to enhance the accuracy and integrity of federal payments. The law requires executive branch agency heads to annually review all programs and activities that they administer, identify those that may be susceptible to significant improper payments, and estimate and report annually on the amount of improper payments in those programs and activities. IPIA also requires the agencies to report annually to the Congress on the actions they are taking to reduce erroneous payments for programs for which estimated improper payments exceed $10 million. IPIA further requires OMB to prescribe guidance for federal agencies to use in implementing the act. OMB issued this guidance in Memorandum M-03- 13 in May 2003. It requires use of a systematic method to annually review and identify those programs and activities that are susceptible to significant improper payments. OMB guidance defines significant improper payments as annual improper payments in any particular program exceeding both 2.5 percent of program payments and $10 million. The OMB guidance then requires agencies to estimate the annual amount of improper payments using statistically valid techniques for each susceptible program or activity. For those agency programs, including state-administered programs, determined to be susceptible to significant improper payments and with estimated annual improper payments greater than $10 million, IPIA and related OMB guidance require each agency to report the results of its improper payment efforts. OMB guidance requires the reporting to be in the Management Discussion and Analysis section of the agency’s PAR for each fiscal year ending on or after September 30, 2004. IPIA requires the following information to be reported to the Congress: a discussion of the causes of the improper payments identified, actions taken to correct those causes, and results of the actions taken to address those causes; a statement of whether the agency has the information systems and other infrastructure it needs to reduce improper payments to minimal cost-effective levels; if the agency does not have such systems and infrastructure, a description of the resources the agency has requested in its most recent budget submission to the Congress to obtain the necessary information and infrastructure; and a description of the steps the agency has taken and plans to take to ensure that agency mangers are held accountable for reducing improper payments. OMB’s guidance in M-03-13 requires that three additional things be included in the PAR: a discussion of the amount of actual erroneous payments that the agency expects to recover and how it will go about recovering them; a description of any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing improper payments; and provided the agency has estimated a baseline improper payment rate for the program, a target for the program’s future improper payment rate that is lower than the agency’s most recent estimated error rate. In August 2004, OMB established Eliminating Improper Payments as a new program-specific initiative in the President’s Management Agenda (PMA). The separate improper payments PMA program initiative began in the first quarter of fiscal year 2005. Previously, agency efforts related to improper payments were tracked along with other financial management activities as part of the Improving Financial Performance initiative. The objective of establishing a separate initiative for improper payments was to ensure that agency managers are held accountable for meeting the goals of IPIA and are therefore dedicating the necessary attention and resources to meeting IPIA requirements. This program initiative establishes an accountability framework for ensuring that federal agencies initiate all necessary financial management improvements for addressing this significant and widespread problem. Specifically, agencies are to measure their improper payments annually, develop improvement targets and corrective actions, and track the results annually to ensure the corrective actions are effective. State responses to our survey show that the number of state-administered federal programs (state programs) estimating improper payments significantly decreases if there is no federal requirement to estimate or if the states are not participating in a federally administered pilot to estimate. For the 25 major programs reviewed for fiscal years 2003 and 2004, all 51 states estimated improper payments where there was a federal requirement to do so. For the federally administered improper payment pilots, the number decreased to 29 states. Where there was no federal requirement or pilot in place, only 11 states reported estimating improper payments on their own initiative, as shown in figure 1. Only 2 of the 25 major programs in our review had federal requirements for all the states to annually estimate improper payments—the Food Stamp and UI programs. In total, 47 states reported estimating improper payments for one or more major programs, which represented 97 program surveys for fiscal year 2003, fiscal year 2004, or both. More than half of the reported estimates were for the Food Stamp and UI programs. Food Stamp and UI program outlays expended by the states totaled about $61 billion for fiscal year 2004. This constitutes about 15 percent of the total federal funds that are estimated to be annually distributed to states and other nonfederal entities for redistribution to eligible parties. Both of these programs are benefit programs, have a history of measuring improper payments through established systems, and can calculate a national error rate. The purpose of the Food Stamp Program is to help low-income individuals and families obtain a more nutritious diet by supplementing their incomes with benefits to purchase food. As reported in USDA’s fiscal year 2005 PAR, the causes of improper payments in the Food Stamp Program include client errors, such as incomplete or inaccurate reporting of income, assets, or both by participants at the time of certification or by not reporting subsequent changes. Causes can also be provider based, such as errors in determining eligibility or benefit amounts or delays in action or inaction on client reported changes. The Food Stamp quality control system measures payment accuracy and monitors how accurately states determine food stamp eligibility and calculate benefits. USDA reports a rate and dollar amount of estimated improper payments for the Food Stamp Program in its annual PAR based on the quality control system. In its fiscal year 2005 PAR, USDA reported a national improper payment error rate of 5.88 percent, or $1.4 billion, for the Food Stamp Program. A national error rate is calculated and incentives and penalties are applied to the states that have rates lower or higher than the national rate. Recent initiatives reported in USDA’s fiscal year 2005 PAR include the agency’s fiscal year 2004 nationwide implementation of an electronic benefit transfer (EBT) system for the delivery of food stamp benefits. The EBT card, which replaced paper coupons, creates an electronic record for each transaction that makes fraud easier to detect. Other USDA efforts include Partner Web, which is an intranet for state food stamp agencies, and the National Payment Accuracy Workgroup, which consists of representatives from USDA headquarters and regional offices who meet to discuss best practice methods and strategies. (See app. III for more details on the Food Stamp Program.) The UI Program provides temporary cash benefits to workers who lose their jobs through no fault of their own. Labor reported in its fiscal year 2005 PAR that the principal cause of improper payments was claimants who continue to claim benefits despite having returned to work. Pursuant to Part 602 of Title 20, Code of Federal Regulations, Labor implemented the Benefit Accuracy Measurement system to measure state payment accuracy in the UI Program. Labor also reports a rate and dollar amount of estimated improper payments for the UI Program in its annual PAR. In its fiscal year 2005 PAR, Labor reported an annual error rate of 10.13 percent, or $3.2 billion, for the UI Program. Labor’s initiatives to reduce improper payments in the UI Program include implementing new cross-matching technologies like the National Directory of New Hires database and funding states’ data-sharing efforts with federal agencies, such as the Social Security Administration, and other state agencies, such as the state departments of motor vehicles. Further, Labor is instilling additional performance measures for states to detect and recover overpayments of benefits and continuing analyses of the causes, costs, and benefits of improper payment prevention or establishing recovery operations. (See app. IV for more details on the UI Program.) Twenty-nine states in our review responded in our surveys or during interviews that they voluntarily participated in federally administered pilot projects to estimate improper payments. We visited the state participating in the Department of Transportation’s (DOT) Highway Planning and Construction Program and one of the states participating in the Department of Health and Human Services’ (HHS) Medicaid program and discussed the states’ efforts to measure improper payments. These pilots serve as models for the federal agencies on obtaining improper payment information and establishing a methodology for other states to estimate improper payments for those programs. Neither of the two pilots was sufficiently comprehensive to allow the responsible federal agency to project an error rate with statistical precision to all of the states. DOT provides funding to the state departments of transportation to administer the nation’s federal Highway Planning and Construction Program. During our review, DOT had a pilot in place to estimate improper payments for two construction projects in Tennessee. The sampled transactions reviewed to identify improper payments for these two projects were selected from a population of almost $35 million, which represented a small portion of DOT’s fiscal year 2005 outlays totaling $31 billion for the Highway Planning and Construction Program. For one of these projects, DOT reported that the estimated improper payments amount was statistically insignificant. For the other project, DOT reported an improper payment estimate of $111,671. The methodology and testing procedures that resulted from DOT’s pilot project will be used to extend the methodology nationwide. In its fiscal year 2005 PAR, DOT reported a zero-dollar improper payment estimate for this program. However, the DOT OIG also reported that detecting improper payments for several grant programs, including the Highway Planning and Construction Program, was a top management challenge for the agency. In particular, the OIG reported that the DOT pilot project was too limited and that OIG investigators continue to identify instances of improper payments. The OIG cited two improper payment examples totaling over $1.3 million, which was reimbursed to DOT as a result of OIG investigations. In response, DOT is reorganizing and redesigning its procedures to better improve oversight of research agreements. This includes creating a new division within DOT’s Office of Acquisition Management devoted to the award and administration of cooperative agreements. (See app. V for more details on the improper payment pilot for the Highway Planning and Construction Program.) In coordination with the states, HHS finances health care services to low-income individuals and families through the Medicaid program. Medicaid improper payments are caused by medical review, eligibility review, or data-processing review errors. In fiscal year 2002, HHS began a pilot to estimate improper payments for its Medicaid program. The number of states voluntarily participating in the pilot has increased each year, and in the second year of the pilot, fiscal year 2003, 12 states participated. In the third year, fiscal year 2004, 24 states participated in the pilot. Because HHS had not fully implemented a statistically valid methodology, the agency did not report an improper payment estimate for the Medicaid program in its fiscal year 2005 PAR. According to agency officials, HHS is in the process of implementing a methodology for estimating payment error rates for Medicaid in all states. HHS stated that it expects to be fully compliant with the IPIA requirements for the Medicaid program by fiscal year 2008. Other initiatives HHS is undertaking for the Medicaid program are the hiring of additional staff to do prospective reviews of state Medicaid operations and the Medicare/Medicaid data match program designed to identify improper payments and areas in need of improved payment accuracy. (See app. VI for more details on the Medicaid program.) We identified other improper payment pilot initiatives during our review of agencies’ fiscal year 2005 PARs. Specifically, HHS reported that improper payment pilots are being conducted for three other state-administered programs to assist HHS in its efforts to report a national improper payment estimate in the future. For HHS’s State Children’s Health Insurance Program (SCHIP), 15 states participated in a payment accuracy measurement pilot in fiscal year 2004. The states performed a combination of medical, eligibility, or data-processing reviews of claims and applicable payments for the period October 1, 2003, to December 31, 2003. Using a standard methodology, those states computed a payment accuracy error rate for their programs. Based on these results, HHS has adopted a national strategy using federal contractors to obtain a national error rate for SCHIP with expected implementation in fiscal year 2006. In fiscal year 2007, HHS expects to begin measuring SCHIP error rates nationwide for its fee-for- service component. HHS expects to report SCHIP error rates for its fee-for- service, managed care, and eligibility components in its fiscal year 2008 PAR. For HHS’s Child Care and Development Fund (CCDF) Program, 11 states participated in an improper payment pilot in fiscal year 2004 to assess states’ efforts to prevent and reduce improper payments. The states worked with HHS to assess the adequacy of state systems, databases, policy, and administrative structures. In fiscal year 2005, HHS expanded pilot participation to 18 states. HHS also conducted an error rate study in 4 states to assess those states’ ability to verify information received from clients during the initial eligibility process or to establish eligibility correctly. In addition, HHS conducted interviews in 5 other states to gather information about improper payment activities. HHS reported that it will continue to work with states during fiscal year 2006 to identify an appropriate strategy for determining estimates of payment errors in the CCDF Program. For HHS’s Temporary Assistance for Needy Families (TANF) Program, one state participated in a pilot to undergo a more in-depth review of TANF expenditures as part of its single audit requirement. The objective of the pilot was to explore the viability of estimating improper payments in the single audit process. Using statistical sampling, the auditors reviewed 208 cases to test controls. According to HHS, the auditors reported an overall case error rate of 20 percent and a payment error rate of 3.9 percent from their review of the 208 cases. In addition to this pilot, state-led initiatives involving the TANF Program were also under way, as described below. During our review of survey responses, we also noted that 11 states, on their own initiative, were estimating improper payments related to 5 separate programs for fiscal year 2003, fiscal year 2004, or both. For example, 6 of the 11 states indicated in their survey responses that they were estimating improper payments for HHS’s TANF Program. Among the varying methods the 11 states used to estimate amounts, error rates, or both were statistically representative samples of payments and findings from states’ single audits. Other techniques respondents reported using included Food Stamp Program quality control reviews to ascertain the accuracy of TANF payments, which would be reasonable to do if the eligibility requirements of the two programs were similar. As part of their funds stewardship responsibilities for federal awards, states are required to establish and maintain internal control designed to provide reasonable assurance that funds are administered in compliance with federal laws, regulations, and program requirements. This includes maintaining accountability over assets and safeguarding funds against loss from unauthorized use or disposition. To ensure proper administration of federal funds, states reported using a variety of prepayment and postpayment mechanisms. For example, states reported the use of computer-related techniques to identify and prevent improper payments as well as recovery audits to collect overpayments. In addition, selected programs reported that federal incentives and penalties are in place to help reduce improper payments. These types of actions contribute to a strong internal control structure that helps mitigate the risk and occurrence of improper payments. Generally, improper payments result from a lack of or an inadequate system of internal control, but some result from program design issues. Our Standards for Internal Control in the Federal Government provides a road map for entities to establish control for all aspects of their operations and a basis against which entities’ control structures can be evaluated. Also, our executive guide on strategies to manage improper payments focuses on internal control standards as they relate to reducing improper payments. The five components of internal control—control environment, risk assessment, control activities, information and communication, and monitoring—are defined in the executive guide in relation to improper payments as follows: Control environment—creating a culture of accountability by establishing a positive and supportive attitude toward improvement and the achievement of established program outcomes. Risk assessment—analyzing program operations to determine if risks exist and the nature and extent of the risks identified. Control activities—taking actions to address identified risk areas and help ensure that management’s decisions and plans are carried out and program objectives are met. Information and communication—using and sharing relevant, reliable, and timely financial and nonfinancial information in managing activities related to improper payments. Monitoring—tracking improvement initiatives over time, and identifying additional actions needed to further improve program efficiency and effectiveness. For this engagement, we focused on two of these internal control components—risk assessments and control activities, which are discussed in more detail in the following sections. All states except 1 acknowledged using computer-related techniques to prevent or detect improper payments, while 21 states reported having performed some type of statewide assessments to determine what programs are at risk of improper payments. Strong systems of internal control provide reasonable assurance that programs are operating as intended and are achieving expected outcomes. A key step in the process of gaining this assurance is conducting a risk assessment, an activity that entails a comprehensive review and analysis of program operations to determine where risks exist and what those risks are, and then measuring of the potential or actual impact of those risks on program operations. In performing a risk assessment, management should consider all significant interactions between the entity and other parties, as well as all internal factors at both the organizationwide and program levels. IPIA requires agencies to review all of their programs to identify those that may be susceptible to significant improper payments. Since the programs in our review were state administered, we asked the states if they performed statewide reviews to assess if their programs may be at risk of improper payments. Twenty-one states responded that they had performed some type of statewide assessment of their programs. Some of the states’ risk assessment processes included internal control assessments, which were generally self-assessments performed by the states’ program agencies and entities. Two states noted that these self-assessments can be used as a tool by state auditors to evaluate weaknesses or to plan work to be performed. Regular evaluation of internal control systems is statutorily required by at least 2 states. Other risk assessment methods states reported using included single audits and other audits or reviews performed by state auditors or by state agencies. Survey respondents also cited using control activities, such as computer- related techniques, to aid in the detection and prevention of improper payments. Computer-related techniques play a significant role not only in identifying improper payments, but also in providing data on why these payments were made and, in turn, highlighting areas that need strengthened prevention controls. The adoption of technology allows states to have effective detection techniques to quickly identify and recover improper payments. Data sharing, data mining, smart technology, data warehousing, and other techniques are powerful internal control tools that provide more useful and timely access to information. The use of these techniques can achieve potentially significant savings by identifying client- related reporting errors and misinformation during the eligibility determination process—before payments are made—or by detecting improper payments that have been made. Fifty of the 51 states representing 21 different programs reported in their surveys that they used computer- related techniques to prevent or detect improper payments. Table 1 shows the number of programs that reported using each technique. As table 1 shows, for the state programs that reported using a computer- related technique, 106 state program administrators reported using some sort of fraud detection system. One example is the Transportation Software Management Solution, a fraud detection system used by several states for the Highway Planning and Construction Program. This software contains a Bid Analysis Management System that allows highway agencies to analyze bids for collusion. Also, a limited number of states in our survey reported using smart technology. For example, the Medicaid Fraud, Abuse and Detection System is designed to structure, store, retrieve, and analyze management information. It has the ability to detect fraud patterns, and it works with the Medicaid Management Information System, which contains a data warehouse that can be queried for information to be used in a variety of analyses. Other techniques include one state’s use of a Web-based system that allows National School Lunch Program participants to enter monthly claims by site. System checks are in place to ensure that sites do not overclaim meals based on days served and eligible students. Recovery auditing is another method that states can use to recoup detected improper payments. Recovery auditing focuses on the identification of erroneous invoices, discounts offered but not received, improper late payment penalties, incorrect shipping costs, and multiple payments for single invoices. Recovery auditing can be conducted in-house or by recovery audit firms. Section 831 of the National Defense Authorization Act for Fiscal Year 2002 contains a provision that requires all executive branch agencies entering into contracts with a total value exceeding $500 million in a fiscal year to have cost-effective programs for identifying errors in paying contractors and for recovering amounts erroneously paid. The legislation further states that a required element of such a program is the use of recovery audits and recovery activities. The law authorizes federal agencies to retain recovered funds to cover in-house administrative costs as well as to pay contractors, such as collection agencies. OMB guidance suggests that federal agencies awarding grants may extend their recovery audit programs to cover significant contract activity by grant recipients (e.g., states). States may engage in their own recovery audit programs. As shown in table 2, based on our review of survey responses, 15 states reported conducting recovery audits in fiscal year 2003, fiscal year 2004, or both. In fiscal year 2003, states reported recovering over $180 million, compared to $155 million for fiscal year 2004. In survey responses, states reported using either outside contractors to perform recovery audits or establishing in-house fraud and detection units to recover improperly paid amounts. One state noted that it passed legislation requiring the use of recovery auditors in its state agencies. In June 2005, Texas enacted legislation that directs the state’s Comptroller of Public Accounts to contract to conduct recovery audits of payments made by state agencies to vendors and to recommend improved state agency accounting operations. The law requires state entities with more than $100 million in biennial expenditures to undertake annual recovery audits. The state expects to recover up to $4.5 million annually starting in state fiscal year 2007. Viewed broadly, agencies have applied limited incentives and penalties for encouraging improved state administration to reduce improper payments. Incentives and penalties can be helpful to create management reform and to ensure adherence to performance standards. The IPIA implementing guidance requires that each federal agency report on steps it has taken to ensure that agency managers are held accountable for reducing and recovering improper payments. When a culture of accountability over improper payments is instilled in an organization, everyone in the organization, including the managers and day-to-day program operators, have an incentive to reduce fraud and errors. Transparency, through public communication of performance results, also acts as an incentive for agencies to be vigilant in their efforts to address the wasteful spending that results from lapses in controls that lead to improper payments. In the survey, we asked the state program administrators to identify any incentives they have received from the federal government to encourage them to reduce improper payments. We also asked them to identify any penalties they have received from the federal government for not doing so. Thirty-two states reported incentives such as enhanced funding and reduced reporting requirements for 5 of the 25 major programs. Most incentives were related to the Food Stamp Program, largely because of a statutory requirement that USDA assess penalties and provide financial incentives to the states. As we previously reported on the Food Stamp Program, the administration of the quality control process and its system of performance bonuses and sanctions is a large motivator of program behavior and has assisted in increasing payment accuracy. Examples of other incentives identified by the state programs included reduced reporting requirements for benefit recipients and additional funding received for a fraud and abuse detection system. Penalties such as decreased funding, increased reporting, and client sanctions were reported by 17 states for four different programs. As with incentives, most of the penalties identified related to the Food Stamp Program. States can get approval from USDA to reinvest portions of their penalties toward corrective actions to reduce the error rate as opposed to USDA recovering the penalty from the state; thus the distinction between incentives and penalties is somewhat blurred. Our survey results showed that some states believed that being able to reinvest a portion of their food stamp penalty toward corrective action plans to improve payment accuracy was actually an incentive, while other states considered it a penalty. For another program, one state noted in its survey response that it was penalized by the federal government for not applying applicable reductions to TANF beneficiaries for noncompliance with child support enforcement regulations. In lieu of paying a penalty of over $1 million, the state submitted a corrective action plan to address the problems. Certain states perceive limitations in their ability to adequately address improper payments. For example, 37 states reported in their survey responses that federal legislative and program design barriers hinder their ability to detect, prevent, and reduce improper payments for one or more programs. Legislative barriers relate to an agency’s ability to take actions to reduce improper payments. Program design barriers relate to the complexity and variety of programs. From our review of survey responses, several state program officials, representing multiple programs, reported that they encountered legislative barriers related to due process. Specifically, states are not permitted to stop or adjust payments until the due process hearing or appeals processes are complete, even though they know the payment is improper. For example, one state reported that it has a state superior court ruling that requires paying UI benefits conditionally under certain circumstances, and that the recovery of the paid benefits can only take place once the courts have determined the payments were incorrect. Another state program response said that lack of authority to mandate the submission of Social Security numbers for those applying for benefits was a barrier that limited the ability to identify and prevent improper payments. Additionally, 23 state programs identified statutory restrictions over the use of certain data as a barrier to improved accuracy. For example, three state programs noted that because of security policies, they were restricted from accessing and using information from the Internal Revenue Service. Program design barriers have also contributed to states’ inability to reduce improper payments. Generally, states receive broad statutory and regulatory program guidelines from the responsible federal agency. States then issue state-specific guidelines to manage day-to-day operations, which may vary among the states. A few survey respondents indicated that inconsistent requirements between programs hindered their ability to reduce improper payments. For example, four state programs noted that efforts to manage improper payments are hindered because of the different eligibility requirements among the federal programs that they administer. The survey responses of the state programs also indicated that they encountered resource barriers, such as lack of funding for additional personnel or information technology. For example, one state program responded that the lack of funding needed to identify eligible beneficiaries through data matching was a barrier. Minimizing improper payments is often most efficiently and effectively achieved through the exchange of relevant, reliable, and timely information between individuals and units within an organization and with external entities that have oversight and monitoring responsibilities. For state- administered programs, assistance from the federal agencies and OMB may be needed in order for the states and state programs to successfully assist the federal agencies in implementing IPIA requirements. The types of communication and information that may be necessary at both the state and federal levels include (1) a determination of what information is needed by managers to meet and support initiatives aimed at reducing improper payments; (2) adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on improper payment initiatives, such as periodic meetings with oversight bodies; and (3) working relationships with other organizations to share information on improper payments. Of the 227 state program surveys received, 100 identified one or more areas where guidance or resources from the federal government would be helpful. OMB can play an important role in encouraging and coordinating efforts between the state programs and federal agencies. OMB, as part of its responsibilities, develops and implements budget, program, management, and regulatory policies. As such, OMB can set the tone at the top by creating a general framework and setting expectations for federal agencies in meeting the requirements of IPIA. Additional resources and guidance would be needed for increased state involvement. As noted above, 100 state program officials requested various tools cited as needed in their efforts to estimate improper payments and to help the federal agencies in meeting various IPIA requirements, including guidance on estimating improper payments, additional funding for staffing and various projects, sharing of best practices and available guidance, and guidance on performing risk assessments. State programs also indicated that they would want an opportunity to comment on any proposed regulations prior to implementation that would require state actions to estimate and report improper payment information. In our survey, we asked the state program officials what types of guidance and resources from the federal agencies or OMB would be beneficial to better estimate improper payments. State program officials identified one or more types of guidance or resources that would be helpful to assist the federal agencies in meeting the requirements of IPIA. We classified these responses into the following areas: Guidance on estimating improper payments. Forty-four of the state programs asked for general procedures, program-specific procedures, or both for identifying and detecting improper payments, calculating error rates, and establishing sampling methodologies. One state program suggested that guidance related to training for detecting improper payments and on how to design controls to facilitate improper payment detection be made available. Additional funding. Forty-three of the state programs indicated a need for additional funding to train and support the additional staff levels they believe would be necessary to estimate improper payments. Additional funding also was requested for automation projects. One state requested enhanced funding to update its eligibility system to include fraud detection. Another state requested additional funding for developing an automated Quality Management System to capture data from all levels of reviews and programs. Sharing of best practices and available guidance. Fifteen of the state programs also expressed interest in the creation of groups to discuss trends and best practices in improper payment-related areas, while other states wanted general information on IPIA and the states’ roles. Assessing risk/risk assessment instruments. Thirteen of the state programs requested procedures for assessing risk of improper payments, including items to take into consideration when assessing their programs for risk susceptibility. Recognition of state input. Seven of the state programs want an opportunity to comment on any proposed regulations prior to implementation of any requirements to estimate or report improper payment information. For example, one state responded in its survey that the state, in coordination with its cognizant federal agency, should determine its own plans to detect improper payments. Additionally, another state program inquired as to the purpose of involving the states, particularly those that have had little occurrence of audit findings, and another wanted clarification on what sanctions would be assessed for those that identified improper payments. Other guidance and resources. Forty-eight of the state programs requested other types of guidance and resources relating to enhancing the use of information technology, overcoming legislative barriers, and establishing incentives and penalties for subrecipients, among others. For example, one state program wanted the creation of a national database to track the activity of medical providers that operate in multiple states. OMB has continued to conduct its improper payments work through CFOC and PCIE’s Erroneous and Improper Payments Workgroup. The workgroup periodically convenes to discuss and develop best practices and other methods to reduce or eliminate, where possible, improper payments made by federal government agencies. It has issued reports and other products to CFOC/PCIE, reflecting workgroup deliberations and determinations. OMB officials have told us that they have started to draft a plan on developing and maintaining partnerships with states to facilitate state’s estimating and reporting information to the federal agencies. For federal agencies’ fiscal year 2005 PAR reporting, OMB included a new requirement in Circular No. A-136, Financial Reporting Requirements, that federal agencies were to report on their actions and results at the grantee level. However, based on our review of selected federal agencies’ fiscal year 2005 PARs, reporting of fund stewardship at the grantee level was limited. The CFOC and PCIE Erroneous and Improper Payments Workgroup created the Grants Subgroup in March 2004 to explore the feasibility of using various tools to measure and report improper payments, including evaluating currently available policies and guidance and modifying OMB single audit guidance to fulfill IPIA reporting requirements. Specifically, the Grants Subgroup’s work focused on developing cost-effective approaches for tracking improper payments at each stage of the payment cycle, including (1) evaluating existing policies and guidance that could be used to measure and report improper payments and (2) examining the possibilities of measuring improper payments using the audits conducted under the Single Audit Act of 1996, as amended; OMB’s Circular No. A-133 Single Audit Compliance Supplement; and the Federal Single Audit Clearinghouse. In March 2005, the subgroup issued a report reflecting the results of its work. Specifically, the subgroup identified issues with (1) the current structure and design of grant programs’ distribution of funding, which hinders determining a national payment error rate; (2) little incentive for states to assist federal agencies with IPIA reporting; (3) lack of funding to perform IPIA compliance activities; and (4) awareness and commitment from all levels of management within an agency to address the causes of improper payments. Further, in an effort to foster working relationships among federal agencies and the states, OMB has begun work to clarify state and federal roles in estimating and reporting improper payments information and planning the development of state partnerships for certain state-administered programs. Additionally, beginning with fiscal year 2005 PARs, OMB included three reporting requirements for those agencies with grant-making programs: (1) agency’s accomplishments in the area of funds stewardship past the primary recipient, (2) status of projects, and (3) results of any reviews. Our preliminary review of these PARs showed that in general agencies either did not report on their grant-making activities, did not clearly identify grant programs, or did not address fund stewardship beyond the primary recipient. However, we noted that some agencies provided partial information on the three reporting requirements. For example, eight agencies reported on the status of their projects, including one that discussed linking grants management and financial data to produce better information to ensure that projects funded by grants achieve program objectives and grant recipients are technically competent to carry out the work. In November 2005, OMB issued draft revisions to its IPIA implementing guidance. This implementing guidance, together with recovery auditing guidance, is to be consolidated into future Parts I and II of Appendix C to OMB Circular No. A-123, Management’s Responsibility for Internal Controls (Dec. 21, 2004). Among the proposed changes, OMB provides that for state-administered programs, federal agencies may provide state-level estimates either for all states or a sample of states to generate a national improper payment rate for that program. Also, OMB proposes to allow modifications to agency-specific compliance supplements to enhance implementation of IPIA for federal grant-making agencies, such as the ones discussed in this report. While OMB has taken steps to begin addressing the complexities related to reporting improper payment information for federally funded, state-administered programs, additional enhancements could be made that address how federal agencies define state-administered programs and the methodology to be employed for generating a national estimate. Specifically, we found that the proposed changes do not clearly define the term state-administered programs. Without a clear definition, OMB is at risk of receiving inconsistent improper payment reports because agencies could define programs differently. In addition, we noted that the draft guidance did not provide basic criteria, such as the nature and extent of data and documentation that agencies should consider when developing a plan or methodology to calculate a national improper payment error rate for these state-administered programs. Federal agencies continue to make progress toward meeting the requirements of IPIA, in response to the PMA and other key initiatives to eliminate improper payments. However, measuring improper payments and designing and implementing actions to reduce or eliminate them are not simple tasks, particularly for grant programs that rely on quality administration efforts at the state level. With budgetary pressures rising across the federal government, agencies are under constant and increasing pressure to do more with less. Preventing improper payments and identifying and recouping those that occur become an even higher priority in this environment. States have a fundamental responsibility to ensure the proper administration of federal awards by using sound management practices and maintaining internal controls to ensure distribution of federal funding to subrecipients or beneficiaries in accordance with federal and state laws and regulations. Given their involvement in determining eligibility and distributing benefits, states are in a position to assist federal agencies in reporting on IPIA requirements. In fact, the success of several existing programs and pilots in estimating improper payment rates indicates that such efforts could logically be expanded. Communication, coordination, and cooperation among federal agencies and the states will be critical factors in estimating national improper payment rates and meeting IPIA reporting requirements for state-administered programs. We are making four recommendations to help further the progress toward meeting the goals of IPIA and determining states’ role in assisting federal agencies to report a national improper payment estimate on federal programs. Specifically, we recommend that the Director, Office of Management and Budget, revise IPIA policy guidance to clearly define state-administered programs so that federal agencies can consistently identify all such programs; expand IPIA guidance to provide criteria that federal agencies should consider when developing a plan or methodology for estimating a national improper payment estimate for state-administered programs, such as criteria that address the nature and extent of data and documentation needed from the states to calculate a national improper payment estimate; require federal agencies to communicate, and make available to the states, guidance on conducting risk assessments and estimating improper payments for federally funded, state-administered programs; and share ideas, concerns, and best practices with federal agencies and states regarding improper payment reporting requirements for federally funded, state-administered programs. We received written comments on a draft of this report from OMB and reprinted them in appendix VII. OMB agreed with our recommendations and highlighted several initiatives under way to ensure that accurate improper payment rates can be generated without creating undue cost and burden on federal agencies or state partners that manage federally funded programs. OMB also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the Director, Office of Management and Budget; Secretaries of Agriculture, Health and Human Services, Labor, and Transportation; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-9095 or [email protected] if you 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. Major contributors to this report are listed in appendix VIII. The objectives of this report were to determine (1) what actions are being taken by states to assist federal agencies in estimating improper payments; (2) what techniques, related to detecting, preventing, or reducing improper payments, have states employed to ensure proper administration of federal awards; and (3) what assistance can be provided by the Office of Management and Budget (OMB) that state program administrators would find helpful in supporting the respective federal agencies with the implementation of the Improper Payments Information Act of 2002 (IPIA). To address each of these objectives, we conducted a statewide survey in all 50 states and the District of Columbia regarding actions to estimate improper payments for state- administered federal programs for fiscal years 2003 and 2004, conducted a program-specific survey of the major programs in each of performed site visits to selected states, conducted interviews with federal and state officials, and reviewed federal agencies’ fiscal year 2005 performance and accountability reports (PAR) and prior GAO and office of inspector general (OIG) reports. More detailed information on each of these aspects of our research is presented in the following sections. We conducted our work from April 2005 through December 2005 in accordance with generally accepted government auditing standards. The surveys were developed based on IPIA, the National Defense Reauthorization Act for Fiscal Year 2002, and our executive guide on managing improper payments, and included questions about state-issued policies or guidance on internal controls or on estimating statewide risk assessments for improper payments; state recovery auditing efforts; state program efforts to prevent, detect, and reduce improper payments; state program participation in improper payment pilots; and additional assistance needed by state programs to support efforts in measuring and reporting improper payments. The surveys were pretested with state officials in two states. Revisions to the survey were made based on comments received during the pretests. To determine the state programs that would receive the program-specific survey, we designed a spreadsheet for each state containing its major programs, which we defined as those programs for which federal funds covered at least 60 percent of total state-administered expenditures. To do this, we used the Federal Audit Clearinghouse single audit database to identify a universe of federally funded, state-administered programs for each state. We sorted the programs from largest to smallest expenditure amount and identified the major programs in decreasing order until we obtained, in aggregate, at least 60 percent of the total federal portion of state-administered expenditures in each state. We provided this spreadsheet to states so they could confirm it with their state records. Table 3 lists the 25 major programs and the number of states in which each major program was included. The number of states identified for each major program ranged from 1 to 51. As shown in table 4, the number of major programs identified for each state ranged from 1 to 12. We e-mailed the surveys in June 2005 and followed up with subsequent mailings and telephone communications. The collection of survey data ended in October 2005 with a response rate of 98 percent for the statewide surveys (50 of the 51 states) and a 95 percent response rate for the program-specific surveys (227 of the 240 programs). We conducted follow-up phone calls to clarify responses where there appeared to be discrepancies; however, we did not independently verify the responses or information obtained through the surveys. Although no sampling errors were associated with our survey results, the practical difficulties of conducting any survey may introduce certain types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted or differences in the sources of information that participants use to respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages to reduce such nonsampling errors. Specifically, social science survey specialists designed draft questionnaires, we pretested two versions of the questionnaire, and we performed reviews to identify inconsistencies and other indications of error prior to analysis of data. The data were keyed and verified after data entry. We conducted our survey work from June 2005 through December 2005. We visited two states and interviewed state agency officials and other relevant parties about initiatives in place to estimate improper payments for the Highway Planning and Construction, Medicaid, and Unemployment Insurance (UI) programs. The two states were selected based on our knowledge of actions under way for programs in Tennessee and Texas. We went to Tennessee to obtain information about the Department of Transportation’s (DOT) implementation of a pilot project to estimate improper payments related to the Highway Planning and Construction Program. The pilot was the first that DOT’s Federal Highway Administration had conducted to estimate improper payments in a state and covered two construction projects. We went to Texas to obtain information about the Department of Health and Human Services’s (HHS) Medicaid program and the Department of Labor’s (Labor) UI Program. One reason for selecting Texas was that HHS’s Center for Medicare and Medicaid Services had identified Texas as having a leadership role in estimating improper payments for its Medicaid program. In addition, Texas was one of three states participating in a new pilot project organized by Labor to begin data-matching work using the National Directory of New Hires. More information about these states’ efforts in these three programs is provided in appendixes IV, V, and VI. Detailed information regarding the Department of Agriculture’s Food Stamp Program and its efforts in estimating and reporting improper payments is presented in appendix III. Improper payment estimates and references from agencies’ PARs are used for background purposes. We did not assess the reliability of these data. Temporary Assistance for Needy Families Surveys, Studies, Investigations, and Special Purpose Grants Child Care and Development Block Grant Temporary Assistance for Needy Families Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Special Supplemental Nutrition Program for Women, Infants, and Children Highway Planning and Construction (Continued From Previous Page) Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Lower Income Housing Assistance Program Section 8 Moderate Rehabilitation Child Care and Development Fund Improving Teacher Quality State Grants Temporary Assistance for Needy Families Temporary Assistance for Needy Families Temporary Assistance for Needy Families Temporary Assistance for Needy Families Capitalization Grants for Clean Water State Revolving Funds Unemployment Insurance (Continued From Previous Page) Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Medicaid (Continued From Previous Page) Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Temporary Assistance for Needy Families Temporary Assistance for Needy Families (Continued From Previous Page) Temporary Assistance for Needy FamiliesTitle I Grants to Local Educational AgenciesTemporary Assistance for Needy Families Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Child Care and Development Block Grant Temporary Assistance for Needy Families Highway Planning and Construction (Continued From Previous Page) Temporary Assistance for Needy Families Capitalization Grants for Clean Water State Revolving Funds Capitalization Grants for Drinking Water State Revolving Funds Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Child Care and Development Block Grant Food Stamp Program (Continued From Previous Page) OMB’s implementing guidance requires that agencies report overpayments and underpayments in their programs if the figures are available. USDA reports these amounts in its PAR for the Food Stamp Program. Table 5 provides the overpayment and underpayment amount for each state. In fiscal year 2003, overpayments ranged from $454,636 to $103,236,074 while underpayments ranged from $126,288 to $40,679,714. In fiscal year 2004, overpayments ranged from $756,935 to $94,118,074 and underpayments ranged from $151,016 to $46,714,340. Since fiscal year 1999, the combined Food Stamp error rate has continued to decline. Figure 2 displays the error rates for the 6-year period from fiscal years 1999 to 2004. Actions taken by both the states and FNS contributed to the declining error rates. For example, the state of Arizona has completed a statewide implementation of a fingerprint imaging system. The state is using the system as a means of positive identification of welfare applicants and clients to ensure that participants do not use false identities to receive benefits to which they are not entitled; the system is also used in the eligibility determination process. The state reported that cost avoidance savings resulted from welfare fraud reduction achieved through the identification and prevention of duplicate enrollments in the Food Stamp and TANF programs. Recent initiatives reported in USDA’s fiscal year 2005 PAR include FNS’s nationwide implementation of an electronic benefit transfer (EBT) system for the delivery of food stamp benefits. EBT recipients use a plastic card, much like debit cards, to pay for their food at authorized retail stores. Funds are transferred from a Food Stamp benefits account to a retailer’s account. With EBT cards, food stamp customers pay for groceries without any paper coupons changing hands. By eliminating paper coupons, EBT creates an electronic record for each transaction that precludes certain types of fraudulent claims and makes other attempted frauds easier to detect. Other FNS efforts include Partner Web, a Web-based system to facilitate communication and information exchange between USDA and its nutrition assistance program partners. Another initiative, the National Payment Accuracy Workgroup, consists of representatives from USDA headquarters and regional offices who meet to discuss best practice methods and strategies. The practices the states are promoting include preparing reports detailing causes and sources of errors for the local offices and publishing and distributing monthly error rates for all local offices; transmitting the results of statewide error review panels on the source and causes of errors to local offices, along with suggested corrective actions; sponsoring statewide QC meetings and state best practices conferences for local offices to discuss error rate actions taken and common problems; and sponsoring local office participation in FNS regional conferences. Table 6 summarizes these and other factors contributing to the declining error rate. Since 1988, Labor has reported a national improper payment estimate for its UI Program. As part of the BAM program’s quality control, each state is responsible for selecting representative samples and investigating the accuracy of the benefit determinations, benefit payments, and recoveries. The results of these reviews are integrated with the BAM system to identify erroneously paid claims. UI overpayments at a national level have fluctuated over the past 16 years. The lowest reported national error rate occurred in 1991 at 7.5 percent while the highest national error rate occurred in 1988 with 10.1 percent, as shown in figure 3. We also noted that since 2001, UI’s national error rate has steadily increased. Labor attributes the rise in error rates to an increase in payments to claimants who improperly continue to claim benefits despite having returned to work. Although when combined, the dollar amounts of overpayments and underpayments decreased between calendar years 2003 and 2004, the national error rate increased from 9.9 percent in calendar year 2003 to 10.6 percent in calendar year 2004. At the state level, the improper payment overpayments in calendar year 2003 ranged from $2,829,017 to $450,073,624, while underpayments ranged from $100,263 to $37,825,338. In calendar year 2004, overpayments ranged from $2,250,919 to $317,991,985 and underpayments ranged from $20,184 to $40,330,046. Table 7 lists the UI improper payment overpayments and underpayments by state. In addition to its leadership role in producing improper payment estimates on a national level, Labor has initiated the NDNH pilot for the UI Program to further assist in identifying, detecting, and preventing improper payments. In fiscal year 2005, three states (Texas, Utah, and Virginia) participated in the pilot. Labor initiated the NDNH pilot to determine how a cross-match between NDNH and state UI claimant data would help identify and reduce improper payments. For further review of Labor’s pilot project, we visited the state of Texas. Texas’s participation in the NDNH pilot was through its Texas Workforce Commission (TWC). During this pilot, TWC conducted three matches of the state UI claimant data against the NDNH’s new hire data, UI claimant data, and quarterly wage data to identify potential overpayments. Generally, to perform these matches, TWC electronically transmitted state UI claimant data to HHS’s OCSE. OCSE then compared the state UI claimant data to data in the NDNH. Potential matches of claimants who may have improperly received unemployment benefits were then transmitted to TWC. TWC investigated all matches to determine the validity and amount of overpayment. According to TWC, using the national cross-match along with the statewide cross-match helped detect 50 percent more cases of potential fraud in one quarter than it would have detected otherwise. Besides the NDNH pilot, Texas also communicated to us that it had several other actions in place to manage UI improper payments. In July 2004, the Texas governor issued an executive order for each state agency to report on efforts to assess risk in the agency; identify best practices for eliminating fraud in contracting, contract management, and procurement; and describe common components for fraud prevention and elimination programs. Each agency was also to develop a fraud prevention program. Additionally, the executive order required TWC to prioritize prevention, detection, and elimination of fraud and abuse in the UI Program by identifying any state policies, weaknesses in computer cross-matching systems, and other appropriate factors that are ineffective in preventing fraud and abuse; developing strategies to address benefit fraud and claims overpayments; identifying and implementing national best practices for detecting and prosecuting fraudulent schemes, identifying cost-effective strategies designed to eliminate fraud, and increasing recovery of overpayments. Further, TWC has been educating employers on their responsibilities to provide TWC with information to make benefit determinations. For example, TWC sent letters to those employers that have a history of not providing complete or timely information during the initial claims investigation. These letters reiterated employers’ responsibilities and TWC’s expectations for receiving timely information during an investigation. Based on its NDNH pilot results, Labor reported in its fiscal year 2005 PAR that a substantial amount of additional overpayments could be detected using the database. In addition, Labor reported that it is already moving ahead with full implementation of the NDNH cross-match with 5 states (Connecticut, Texas, Utah, Virginia, and Washington). Labor expects 29 states to use NDNH by the end of fiscal year 2006. In addition to funding initiatives related to the new hire cross-matches, Labor has announced that states will be given an additional incentive to prevent and detect overpayments by implementing core measures in states’ performance budget plans based on the level of overpayments the states have detected. Labor’s fiscal year 2006 budget request contained a legislative proposal that is designed to give states the means to obtain funding for integrity activities, including additional staff, to enhance recovery and prevent overpayments. Also, to reduce overpayments and facilitate reemployment, Labor awarded Reemployment and Eligibility Assessments grants to 21 states during fiscal year 2005. The grants have been used to conduct in-person claimant interviews to assess UI beneficiaries’ need for reemployment services and their continued eligibility for benefits and to ensure that beneficiaries understand that they must stop claiming benefits upon their return to work. Further, Labor continues to promote data sharing with other agencies, such as the Social Security Administration, to identify, detect, and prevent improper payments. In its fiscal years 2004 and 2005 PARs, DOT reported a zero-dollar amount for its improper payment estimate for the Highway Planning and Construction Program. To enhance its reporting of improper payments, DOT conducted a pilot in the state of Tennessee. DOT completed this project in the summer of 2005. Testing disclosed three underpayments, one of which was determined by DOT to be statistically insignificant. An extrapolation of the other two errors to the population of payments for that construction project resulted in an improper payment estimate of $111,671. The sample was not designed to produce an estimate for the Tennessee statewide Highway Planning and Construction Program. DOT noted in its fiscal year 2005 PAR that the Tennessee pilot resulted in a methodology and testing procedures that will be used nationwide, but that the testing procedures may need to be modified based on each state’s grant management policies. DOT plans to pilot the project in more volunteer states in fiscal year 2006 and extend the process nationwide in fiscal year 2007. In addition to participating in the pilot, states work to reduce improper payments by implementing computer software to detect fraud and abuse. One such tool is the Transportation Software Management Solution, which was used by several state programs in their Highway Planning and Construction programs and contains a Bid Analysis Management System that allows highway agencies to analyze bids for collusion. At the federal level, DOT improper payment initiatives for the future include citing the inherent higher risk of improper payments because of concentrated and accelerated spending related to Hurricanes Katrina and Rita. Fiscal year 2006 Highway Planning and Construction Program testing will be focused on these hurricane regions. In its fiscal year 2006 PAR, DOT will provide interim information on the amounts and causes of improper payments and control procedures that can be used to prevent or detect improper payments in national emergency situations. Because of the variations in the states’ Medicaid programs, CMS provided states the option of either testing for the FFS or managed care components, including testing eligibility for the two components. The rates for the 12 states that participated in the PAM pilot for Year 2 (fiscal year 2003) ranged from 0.3 percent to 18.6 percent for the FFS component and 0 percent to 2.5 percent for the managed care component. The rates for the 24 states that participated in the Year 3 PAM pilot (fiscal year 2004) ranged from 0.80 percent to 54.3 percent for the FFS component and 0 percent to 7.45 percent for the managed care component. Rates for the Year 1 PERM pilot (fiscal year 2005) had not been published at the conclusion of our fieldwork. Although all states used a standard methodology to produce the rates, CMS noted that these rates should not be compared among states. Specifically, states applied different administrative standards that resulted in a lack of a common approach to the reviews among states. For medical reviews, states have different policies against which the reviews are conducted. For eligibility reviews, states had two review options under the PAM Year 3 pilot for verifying program eligibility. Other differences include the level of provider cooperation in submitting information and whether states conducted reviews in-house or contracted with vendors to perform the reviews. CMS identified Texas as having a leadership role in estimating improper payments for its Medicaid program. Texas was estimating improper payments prior to implementing the CMS pilots. Under state statute, effective 1997, Texas was required to biennially estimate improper payments for its Medicaid program. In September 2003, the state of Texas passed another statute, among other things, to fund 200 additional positions to investigate Medicaid fraud. Texas has also initiated a Medicaid Integrity Pilot (MIP) project to assist in preventing improper payments. The MIP project incorporates the use of biometric technology, such as fingerprint imaging and smart cards, as eligibility verification tools. For example, Texas issues smart cards to Medicaid clients participating in the pilot and smart card and biometric readers to medical providers. When a client obtains services, he or she inserts the card into the smart card reader and positions his or her finger on the biometric reader, which compares the print to the fingerprint image contained on the card. The use of this type of technology promotes positive identification, incorporates automated eligibility determination, and assists in an electronic billing process. Furthermore, Texas has performed a feasibility study to consolidate multiple program benefits onto a single card called an Integrated Benefits Card (IBC). This study has identified four primary benefit programs for consolidation—Medicaid; TANF; Food Stamps; and Women, Infants, and Children. Texas believes that the IBC may facilitate the needs of the Medicaid program by preventing fraud, making payments to medical providers more quickly, and offering a means for providers to quickly and accurately verify the eligibility of a client. In addition to the above initiatives, CMS has taken additional steps programwide to estimate improper payments at the national level. See table 9 for a detailed description of actions taken. In October 2005, CMS published an interim final rule, with plans to publish a final rule that would include responses to comments received. According to the interim final rule, states would be stratified based on the states’ annual FFS Medicaid expenditures from the previous year, and a random sample of up to 18 states would be reviewed. States would only be selected once every 3 years. The interim final rule also outlines the strategy for conducting medical and data-processing reviews on claims made for FFS only. CMS will address estimating improper payments for Medicaid’s managed care and eligibility components at a later time. In November 2005, CMS sent a memo to the states selected for review during fiscal year 2006. Subsequent to the publication of the October 2005 interim final rule, CMS stated that it anticipates the number of states selected each year will be 17 to ensure that each state and the District of Columbia would only be selected once every 3 years. This approach would exclude any U.S. territories or possessions that receive Medicaid funds. In a discussion with CMS’s consultant firm, it communicated to us that the sampling approach to be employed was statistically valid since every state was selected by strata, for each of the 3 years, in year 1 of this process, and thus, each state had an equal chance of being selected for years 1 through 3. Because CMS’s sampling methodology, including sampling plans, had not been fully documented by the conclusion of our fieldwork, we were unable to independently assess the statistical validity of CMS’s approach to obtain a national improper payment estimate for its Medicaid program. In its fiscal year 2005 PAR, HHS also identified efforts to detect and reduce improper payments through activities other than the pilot project. For example, HHS’s Health Care Fraud and Abuse Control Office has two projects under way that will assist in reporting improper payments. The office plans to hire 100 staff to conduct prospective reviews of state Medicaid operations and the Medicare/Medicaid data match program to identify areas where efficiencies could be made to enhance payment accuracy. Additionally, HHS expects to improve its data match capabilities to detect improper payments for Medicaid, as well as other programs, through the use of its Public Assistance Reporting Information System (PARIS). PARIS is a voluntary project that enables the 33 participating states’ public assistance data to be matched against several databases to help maintain program integrity and to detect and deter improper payments. CMS expects to be fully compliant with the IPIA requirements for its Medicaid program by fiscal year 2008. In addition to the contact named above, Carla Lewis, Assistant Director; Verginie Amirkhanian; Francine DelVecchio; Louis Fernheimer; Danielle Free; Wilfred Holloway; Stuart Kaufman; Donell Ries; and Bill Valsa made important contributions to this report. Financial Management: Challenges Continue in Meeting Requirements of the Improper Payments Information Act. GAO-06-581T. Washington, D.C.: April 5, 2006. Financial Management: Challenges Remain in Meeting Requirements of the Improper Payments Information Act. GAO-06-482T. Washington, D.C: March 9, 2006. Financial Management: Challenges in Meeting Governmentwide Improper Payment Requirements. GAO-05-907T. Washington, D.C.: July 20, 2005. Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-605T. Washington, D.C.: July 12, 2005. Food Stamp Program: States Have Made Progress Reducing Payment Errors, and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5, 2005. Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-417. Washington, D.C.: March 31, 2005. Medicaid Program Integrity: State and Federal Efforts to Prevent and Detect Improper Payments. GAO-04-707. Washington D.C.: July 16, 2004. TANF and Child Care Programs: HHS Lacks Adequate Information to Assess Risk and Assist States in Managing Improper Payments. GAO-04- 723. Washington, D.C.: June 18, 2004. Financial Management: Fiscal Year 2003 Performance and Accountability Reports Provide Limited Information on Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.: April 15, 2004. Financial Management: Status of the Government Efforts to Address Improper Payment Problems. GAO-04-99. Washington, D.C.: October 17, 2003. Financial Management: Effective Implementation of the Improper Payments Information Act of 2002 Is Key to Reducing the Government’s Improper Payments. GAO-03-991T. Washington, D.C.: July 14, 2003. Financial Management: Challenges Remain in Addressing the Government’s Improper Payments. GAO-03-750T. Washington, D.C.: May 13, 2003. Financial Management: Coordinated Approach Needed to Address the Government’s Improper Payments Problems. GAO-02-749. Washington, D.C.: August 9, 2002. Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments. GAO-02-697. Washington, D.C.: July 12, 2002. Financial Management: Improper Payments Reported in Fiscal Year 2000 Financial Statements. GAO-02-131R. Washington, D.C.: November 2, 2001. Strategies to Manage Improper Payments: Learning From Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 2001. Financial Management: Billions in Improper Payments Continue to Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000.
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Over the past several years, GAO has reported that federal agencies are not well positioned to meet requirements of the Improper Payments Information Act of 2002 (IPIA). For fiscal year 2005, estimated improper payments exceeded $38 billion but did not include some of the highest risk programs, such as Medicaid with outlays exceeding $181 billion for fiscal year 2005. Overall, state-administered programs and other nonfederal entities receive over $400 billion annually in federal funds. Thus, federal agencies and states share responsibility for the prudent use of these funds. GAO was asked to determine actions taken at the state level to help federal agencies estimate improper payments for state-administered federal programs and assistance needed from the federal level to support the respective federal agencies' implementation of IPIA. To date, states have been subject to limited requirements to assist federal agencies in estimating improper payments. For the 25 major state-administered federal programs surveyed, only 2 programs--the Food Stamp and Unemployment Insurance programs--have federal requirements for all states to estimate improper payments. A limited number of federal agencies are conducting pilots to estimate improper payments in other programs, but state participation is voluntary. Where no federal requirement or pilot is in place, 5 programs involving 11 states had estimated improper payments during fiscal years 2003 or 2004. States have a fundamental responsibility to ensure the proper administration of federal awards by using sound management practices and maintaining internal controls. To do this, states reported using a variety of techniques to prevent and detect improper payments. All states, except for one, responded that they use computer-related techniques, such as fraud and abuse detection programs or data matching, to prevent or detect improper payments. Other techniques selected states used included performing statewide assessments and recovery auditing methods. States also reported receiving federal incentives and penalties to assist with reducing improper payments, although most of these actions related to the Food Stamp Program, which gives incentives and penalties to states having error rates below and above the program's national error rate. Of the 240 state program officials surveyed, 100 identified tools that would be needed to estimate improper payments and help federal agencies meet various IPIA requirements, including guidance on estimating improper payments and performing risk assessments. OMB has begun planning for increased state involvement in measuring and reporting improper payments via the Erroneous and Improper Payments Workgroup and IPIA guidance. However, much work remains at the federal level to identify and estimate improper payments for state-administered federal programs, including determining the nature and extent of states' involvement to assist federal agencies with IPIA reporting requirements.
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The Federal Employees’ Retirement System Act of 1986 (FERSA) created TSP to provide options for retirement planning and encourage personal retirement savings among the federal workforce. Most federal workers are allowed to participate in TSP, which is available to federal and postal employees, including members of Congress and congressional employees and members of the uniformed services, and members of the judicial branch. As of February 2007, TSP held approximately $210 billion in retirement assets for 3.7 million current and former federal employees and their families. Participants may allocate their contributions and any associated earnings among five investment fund options: the G Fund, F Fund, C Fund, S Fund, and I Fund. Since August 2005, TSP participants also may choose one of five Lifecycle funds, which diversify participant accounts among the G, F, C, S, and I Funds, using investment mixes that are tailored to different time horizons for retirement and withdrawal. The investment mix of each Lifecycle fund adjusts quarterly to more conservative investments as the participant nears retirement. Pension plans are classified either as defined benefit or as defined contribution plans. Defined benefit plans promise to provide, generally, a fixed level of monthly retirement income that is based on salary, years of service, and age at retirement regardless of how the plan’s investments perform. In contrast, benefits from defined contribution plans are based on the contributions to and the performance of the investments in individual accounts, which may fluctuate in value. Examples of defined contribution plans include 401(k) plans, employee stock ownership plans, and profit-sharing plans. As with other defined contribution plans, TSP is structured to allow eligible federal employees to contribute a fixed percentage of their annual base pay or a flat amount, subject to Internal Revenue Service limits, into an individual tax-deferred account. Additionally, FERS participants are eligible for automatic 1 percent contributions and limited matching contributions from the employing federal agency. According to FRTIB, TSP provides federal (and in most cases, state) income tax deferral on contributions and their related earnings, similar to those offered by many private sector 401(k)-type pension plans. Participants can manage their accounts and conduct a variety of transactions similar to those available to 401(k) participants, such as reallocating contributions, borrowing from the account, making withdrawals, or purchasing annuities. Administration of TSP falls under the purview of the Federal Retirement Thrift Investment Board, an agency established by Congress under FERSA. FRTIB is composed of five Board members appointed by the President, with the advice and consent of the Senate. They are authorized to appoint the Executive Director, who hires additional personnel, and an Employee Thrift Advisory Council. The Employee Thrift Advisory Council is a 15- member council that provides advice to the Board and the Executive Director on the investment policies and administration of the TSP. The Board is responsible for establishing policies for the investment and management of the TSP, as well as administration of the plan. The Executive Director and staff of FRTIB are responsible for implementing the Board’s policies and managing the day-to-day operations of TSP, prescribing regulations to administer FERSA, and other duties. The Board members and the Executive Director serve as plan fiduciaries. The Department of Labor and Congress both play roles in overseeing FRTIB. As we have previously reported, DOL is charged with conducting regular compliance audits to determine if the Board is fulfilling its fiduciary duties and properly safeguarding TSP participants’ assets. Congress created FRTIB and has the ability to change the structure for overseeing FRTIB. As with every federal agency, Congress may exercise oversight of FRTIB. Currently, Congress requires FRTIB to submit its budget and other reports regularly, but it has not typically held hearings unless a challenge has arisen or there has been a proposed change to legislation. In addition, DOL officials do not have in place a specific mechanism for sharing their audit program findings or other issues of concern with Congress. DOL’s oversight of FRTIB is based on a FERSA requirement that the Secretary of Labor establish an audit program and conduct audits of FRTIB and its operations. DOL compliance audits are designed to determine whether FRTIB is complying with FERSA and applicable laws and regulations. This includes whether TSP fiduciaries are acquiring, protecting, and using plan resources prudently, efficiently, and solely in the interest of participants and beneficiaries. The DOL Employee Benefits Security Administration’s (EBSA) Office of the Chief Accountant has administered the audit program since its inception in fiscal year 1988. According to DOL officials, DOL’s audit program reviews all significant activities of FRTIB, including FRTIB’s policy formulation and administration, record keeping, and other functions handled by service providers under contract, and functions of federal agencies related to contributions and employee participation programs. The audits include on- site reviews of TSP’s principal service providers. Because service providers carry out many day-to-day operations of TSP, from record keeping to investment management, audits are primarily conducted on TSP’s service providers. DOL officials have developed an audit manual that includes detailed audit guides, but a firm carries out the audits under contract with DOL. DOL officials said that their ongoing audit presence for TSP is greater than its presence for most of the private plans it oversees, which numbered about 730,000 in 2002. According to DOL, each year, DOL develops a strategic plan that identifies how many and which functions it could audit based on risk and funding. For example, due to FRTIB’s increased use of private contractors to provide call center and other plan services formerly provided by the U.S. Department of Agriculture’s National Finance Center, two of DOL’s five audits in fiscal year 2006 looked at particular operations of newer providers, including certain internal controls. DOL officials also said that the number of audits in a given year is based on the level of funding allocated to the audit program. Fiscal year 2006 funding for the contract audits was $630,000 and covered five audits. DOL exercises its authority over FRTIB by making recommendations for improving operations based on audit findings. DOL officials and the contract auditor meet with the Board members at least once a year to highlight significant issues from audits and to present the department’s future compliance audit schedule. DOL’s recommendations to FRTIB and its service providers generally address compliance with FERSA and FRTIB policies, significant weaknesses in internal controls, or areas where FRTIB could improve the efficiency and effectiveness of its operations. For example, during its fiscal year 2005 audit cycle, DOL’s contractor audited one of FRTIB’s customer call centers, which is operated by a contractor. The audit report included recommendations for FRTIB to implement and enforce policies for information security, designated as a fundamental internal control by DOL, at the contractor’s sites; establish additional performance measures; and implement consistent monitoring of call volume at the two call centers. As of September 2006, DOL considered the first recommendation partially implemented and the other two recommendations implemented. DOL cannot compel FRTIB or its service providers to implement its audit recommendations. However, FRTIB generally had implemented a high percentage of DOL’s audit recommendations. According to DOL and FRTIB officials, this voluntary implementation of audit recommendations has worked well for them because DOL and FRTIB have a longstanding and positive working relationship. Congress has not required FRTIB or DOL to testify regularly before Congress on TSP operations, although it does receive routine reports from FRTIB. As with other federal agencies, Congress may exercise oversight of FRTIB by investigating agency operations, holding hearings, issuing subpoenas, and requiring the agency to submit performance or financial reports. Congressional committees have typically held hearings on TSP when a challenge has arisen or when there was a proposed change to legislation. For example, FRTIB officials were asked to testify in response to customer service issues with TSP in 2003 and in response to abusive trading practices in the private sector in 2004. In the 20 years since TSP has been in existence, FRTIB estimates it has been called to testify approximately a dozen times. Most recently, Board members and the Executive Director provided testimony in 2005 and 2006 about adding a new fund to TSP’s investment options. According to DOL officials, Congress does not require DOL to meet with committee staff or testify about TSP or its audit findings on a regular basis. DOL has testified at least three times on its audit program — in 1994, 2003, and 2004. Congress requires FRTIB to submit its budget and to have an independent financial audit each year, performed under contract by a public accounting firm. FRTIB also provides a list of each audit report, including DOL’s compliance audits, and summaries of any particularly significant findings, to Congress each year, as required by the Inspector General Act of 1978. The 2006 summary contained little information about audit recommendations. DOL is not required to submit its audit reports directly to Congress, and Congress has not asked DOL to share its audit findings on a regular basis through hearings or meetings with committee staff. Consequently, Congress may be unaware of concerns DOL may have. In a 2003 report, we noted that there have been times when DOL has had issues of concern with FRTIB outside of its audit findings. We recommended that Congress consider amending FERSA to require DOL to establish a formal process by which the Secretary of Labor can report to Congress areas of critical concern about the actions of the Executive Director and Board members, but no changes have yet been made. FRTIB’s fiduciary duties are similar to those of private sector plan fiduciaries, and FRTIB has adopted various policies and practices to fulfill these responsibilities, but unlike private plan fiduciaries, Board members and the Executive Director have special liability protections. Both FERSA and ERISA require fiduciaries to act prudently and solely in the interest of plan participants and beneficiaries. However, unlike ERISA, FERSA does not authorize DOL to bring civil action against Board members or the Executive Director for the breach of their duty, whereas DOL can take such actions against fiduciaries of private plans and other TSP fiduciaries. Congress amended FERSA to provide special liability protections for the Board members and the Executive Director, given the potential assets of TSP and concerns about the availability of fiduciary insurance. FRTIB and private plan fiduciaries have similar fiduciary duties. TSP’s authorizing statute, FERSA, and ERISA set the overarching requirements for fiduciaries to act prudently and solely in the interest of plan participants and beneficiaries. That is, fiduciaries must exercise an appropriate level of care and diligence given the scope of the plan and act for the exclusive benefit of plan participants and beneficiaries, rather than for their own or another party’s gain. In addition, FERSA and ERISA specifically prohibit fiduciaries from engaging in certain transactions that that could raise questions about their ability to fulfill their duties, unless certain safeguards are met or waivers are granted by DOL. For TSP, the statute specifically lists Board members, the Executive Director, and any person who has or exercises discretionary authority or control over the management or disposition of TSP assets as fiduciaries. FRTIB has adopted a range of policies and practices that are similar to those that private plans should follow to carry out these broad duties. DOL has issued guidance for private plans describing important policies and practices to fulfill fiduciary responsibilities. While the guidance is not specifically designed for TSP, FRTIB has implemented policies and practices for several of the areas in DOL’s guidance. For example, FRTIB has policies and practices for selecting and monitoring service providers, as well as measuring investment performance. Because private service providers perform many of TSP’s operations, including record keeping for participant accounts and investment management of all funds but one, these areas are important for acting prudently and solely in the interest of participants and beneficiaries. Specifically: FRTIB generally uses a competitive process in order to select qualified service providers at a reasonable cost. According to FRTIB, contracts for major activities undergo review and competition at least every 5 years. While we did not review its procurement documentation, DOL reviews the selection and monitoring of service providers as part of its compliance audit program. FRTIB noted that it uses several approaches to monitor service providers. FRTIB has included performance measures in certain service providers’ contracts. Also, since 2004, FRTIB has reviewed quarterly financial reports for most of its major private providers, including financial statements, credit scores, and overall viability. FRTIB further noted that it monitors providers through daily contact with them, periodic on-site visits, and reports from the provider, such as monthly and annual reports from the annuity vendor. FRTIB also reviews its performance measures monthly, including the investment performance of each fund. The company providing investment management services must provide monthly reports to FRTIB showing how closely each option is tracking its underlying index. A measure of the difference between the performance of the TSP fund and the underlying index is known as the “tracking error,” and by contract, the investment manager must report the amount and reasons for the error. Because the investment manager is allocated fiduciary responsibility by contract, given the manager’s control of plan assets, this measurement of performance is essential for both FRTIB and the investment manager to act prudently and ensure that the investment manager is not trading needlessly or for self-gain. The Secretary of Labor can take civil action against private plan fiduciaries. Under ERISA, DOL is allowed to seek remedies if fiduciaries of private plans do not fulfill their fiduciary duties, including using litigation when necessary. According to DOL, its primary goal in litigating a case is to ensure that a plan’s assets, and therefore its participants and beneficiaries, are protected. For example, DOL has brought legal actions or filed briefs against private plan fiduciaries for investing imprudently in company stock, not investing exclusively for participants’ benefit, and failing to monitor appointed fiduciaries. DOL cannot bring civil actions against Board members or the Executive Director for breaching their plan duties or engaging in prohibited transactions. FERSA allows DOL to bring civil actions against any fiduciary, such as the investment manager, other than a Board member or the Executive Director. While DOL was initially authorized under FERSA to bring civil actions against any TSP fiduciary, a 1988 amendment established an exception from such actions for Board members and the Executive Director. The 1988 amendment was passed, in part, in response to FRTIB’s concerns about obtaining fiduciary insurance. According to the then-Executive Director, it would be difficult to buy adequate insurance for these TSP fiduciaries, as FRTIB officials expected TSP to become the largest plan of its kind in the country. Congress took this action in the face of concerns that, without protection, Board members would resign and that they would be hard to replace. With regard to plan participants’ recourse, participants can take civil action against private plan fiduciaries and all FRTIB fiduciaries, including Board members and the Executive Director. Under ERISA, available remedies include awards for plan losses through monetary damages and restoring any profits made from a fiduciary’s improper use of plan assets. Fiduciaries of private plans may guard against the legal risks of personal liability by having fiduciary liability insurance, which the fiduciary, the plan, or the employer may purchase. Fiduciary liability insurance provides reimbursement for costs related to legal actions for breach of their fiduciary responsibilities, including the costs of defending and settling actions or awards of monetary damages. DOL officials said that although fiduciaries of private pension plans may have insurance to largely insulate them from the personal risks associated with their personal liability as fiduciaries, they still face financial risks in certain circumstances due to policy limits or exclusions. For example, fiduciary liability insurance often includes coverage exceptions for intentional harm, criminal acts, or self-dealing. Similarly, under FERSA, TSP participants or beneficiaries may bring civil actions against Board members or the Executive Director, as well as other TSP fiduciaries, for breaching their plan duties or engaging in prohibited transactions. The 1988 amendment provided that any such claims against a Board member or the Executive Director will be defended by the Attorney General of the United States and, if he certifies that the Board member or Executive Director was acting as a TSP fiduciary, deemed claims under the Federal Tort Claims Act (FTCA). As a result, rather than any monetary relief awarded in such cases being paid personally by any Board member or Executive Director who may commit a breach (or through applicable fiduciary liability insurance), it would be paid out of the Judgment Fund established to pay claims under the FTCA. According to DOL officials, treating claims against a Board member or the Executive Director in this way provides TSP participants with a greater ability to obtain monetary relief than that available to participants in other pension plans. In addition, DOL officials told us that without the special liability protections, DOL could be in the unusual position of suing FRTIB— another federal entity—and receiving assistance with prosecutions from the Department of Justice, which is also responsible for defending Board members or the Executive Director. TSP has been relatively free from any allegations that TSP fiduciaries have breached their fiduciary duties or engaged in prohibited transactions. DOL and FRTIB officials were aware of only one civil claim against the Board, which is currently pending in federal district court. The Board has less discretion than private sector plan sponsors in setting investment policy because the investment options available to TSP participants are largely outlined in law, whereas private sector plan sponsors are responsible for choosing which investment options to offer participants. FRTIB may select the particular indexes for the funds to follow as well as review the investment options and suggest additional funds. However, Congress must amend FERSA to approve a change in TSP investment options offered to participants. FRTIB has limited discretion in setting investment policy because FERSA largely sets the investment options available to TSP participants. DOL and FRTIB officials noted that FERSA serves as TSP’s overall investment policy. FERSA states that FRTIB shall establish a government securities investment fund, fixed income investment fund, a common stock index investment fund, a small capitalization stock index investment fund, and an international stock index investment fund. For the index funds, FERSA states that the Board shall invest in a portfolio designed to replicate the performance of a commonly recognized index for that fund. For the government securities investment fund, FERSA states that the Secretary of the Treasury is authorized to issue special interest-bearing obligations of the United States for the purchase by TSP. FERSA has other investment policy provisions, such as who can exercise voting rights associated with the ownership of stocks held by TSP. FRTIB has developed individual policies for each fund. These policies, which FRTIB reaffirms quarterly, provide the rationale for selecting the fund’s investments. Factors influencing the policies include the level of risk and return, low costs, and the legislative history of FERSA. A consultant to FRTIB reported in January 2006 that the indexes that FRTIB selected were appropriate and changes to certain indexes would not be cost-effective. Table 1 shows FERSA requirements and FRTIB’s policies for each fund. In the past, FRTIB has periodically conducted a major review of its investment policy and suggested additional funds for TSP to Congress besides the initial G, F, and C Funds. FRTIB’s process for reviewing and suggesting additional funds has included investment analysis, consideration of industry practices, and communication with Congress and the Employee Thrift Advisory Council, which represents participants. For example, in the early 1990s, FRTIB analyzed possible funds to add to the lineup of options for participants to invest in, based on factors like diversification, risk and return, cost, and administrative issues. It submitted a legislative proposal in 1995 to add funds for international stocks (the I Fund) and for stocks in small and medium-sized U.S. companies (the S Fund), and Congress amended FERSA in 1996 accordingly. In 2005, FRTIB introduced Lifecycle funds without an amendment to FERSA because it determined that the Lifecycle funds are combinations of the five existing funds tailored to different time horizons for withdrawal. FRTIB developed these funds partly based on its analysis of inefficient participant behavior whereby participants were not periodically shifting, or rebalancing, their investment portfolio or diversifying their balances among the five funds, which the Lifecycle funds would do automatically for the participant. In 2005, given congressional interest in having FRTIB study the desirability of adding new funds, FRTIB hired an outside consultant to analyze the existing TSP options, who recommended in 2006 that FRTIB not add any additional funds to the plan. According to FRTIB, having relatively few TSP options based on broad- based indexes encourages participation and limits costs. Private plans under ERISA have considerable latitude in selecting investment options for their plans. According to DOL, an important part of the fiduciary duties of acting prudently and solely in participants’ interest involves selecting investment options. ERISA requires plan fiduciaries to use prudence in selecting and monitoring funds for participants, and to offer diversified funds. Within these parameters, private plans can offer a wide array of options for participants. Unlike TSP, private plans can decide, among other things, the number and types of funds, whether to include funds that specialize in one sector, like telecommunications, or those that track a specific market index. Besides funds tracking a specific market index, which are one kind of passively managed funds, private plans can offer actively managed options, in which the investment manager selects particular investments trying to obtain higher than average returns. Private plan sponsors also may offer employer stock. Further, private plans can also offer features like a self-directed brokerage option, which allows participants to invest in individual stocks or mutual funds. Given that private plans have greater discretion than TSP to select options, many private plans have adopted an investment policy statement to guide their decision-making process. According to a 2005 industry survey, 79 percent of responding plans had an investment policy statement. While these statements are not required by ERISA, DOL has issued regulations about written statements of investment policy. The regulations note that a statement may set guidelines about investment decisions for the investment manager. According to one industry association, besides clarifying the intended goals and performance of the plan, the statement— which may include the process for selecting, monitoring, and altering investments—can guide future decisions and limit liability by showing that fiduciaries are following a prudent process. FRTIB, OPM, and staff of employing federal agencies have responsibility for educating TSP participants about their retirement plan and other retirement issues, and responsibilities vary for private and state and local government employee plans. FRTIB has responsibility for providing information to TSP plan participants to facilitate informed decision making about what level of contribution to make and how to invest those contributions. OPM is required to establish a training program for all retirement counselors and to develop, in consultation with FRTIB, a retirement financial literacy and education strategy for federal employees. Retirement counselors are employed by federal agencies, and they provide employees with information on their retirement benefits, including information about TSP. ERISA requires private retirement plan sponsors to provide certain documents to participants, such as a summary plan description, but many plans provide more information than is required. State and local government employee plans’ education requirements vary, but all of the plans we studied are required to provide participants with benefit statements. They also make other types of information available to participants, such as tools for calculating retirement needs. FERSA requires FRTIB to provide participants with periodic statements about their accounts and a summary description of the plan’s investment options to facilitate informed decision making. To further inform participants about the plan, FRTIB provides additional information, such as how to roll over or transfer funds from other plans into TSP, information on agency matching contributions, TSP’s loan program, and the monthly returns of TSP funds and their related indexes. FRTIB provides this information on TSP’s Web site. According to FRTIB, the TSP Web site is its primary method for communicating with participants, but information is also available by telephone, and in written materials. The TSP Web site also includes a retirement calculator that participants can use to estimate how much they will need to save each year to meet their retirement goals, and a quarterly newsletter. For example, the newsletter’s January 2007 feature article was titled “Pension Reform Law Benefits TSP Participants,” and included information about provisions in the Pension Protection Act of 2006 that apply to TSP. In addition to the educational materials available on the TSP Web site, FRTIB occasionally sends mailings to TSP participants. For example, mailings were sent to participants raising awareness about the new Lifecycle funds. OPM is responsible for providing general retirement education to federal employees, including TSP participants, and it does this primarily through training retirement counselors at federal agencies, who provide federal employees with information on retirement benefits, including TSP. Retirement counselors’ roles were expanded with passage of the Thrift Savings Plan Open Elections Act of 2004. To implement the act, OPM’s training will include information about retirement financial literacy and education. According to information provided by OPM, it will provide comprehensive training on the tools and resources it is developing, such as the retirement readiness index, an age-based profile containing information about an employee’s state of readiness according to various dimensions. As of April 2007, OPM had produced and made available on its Web site a retirement video. According to OPM, the video provides an overview of critical information federal employees need to know as they plan for their retirement. OPM is required to consult with FRTIB about its implementation of the act. In addition to retirement counselors, federal agencies have TSP agency coordinators that, among other things, inform eligible employees of TSP options and benefits, maintain TSP informational materials, and respond to inquiries from active employees. TSP officials offer training to agency coordinators. Sometimes individuals serve as both agency coordinators and retirement counselors. The Employee Retirement Income Security Act of 1974 (ERISA) requires plan sponsors to give plan participants in writing the information they need to know about their retirement benefit plans, including plan rules, financial information, and documents on the operation and management of the plan. ERISA requires sponsors of private retirement plans to make available to participants the following: an annual report, which is a summary of an annual financial report that most plans must file with the Department of Labor; a summary plan description, which provides information about what the plan provides and how it operates, such as when an employee can begin to participate, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits; and account statements one or more times per year or upon request. A 2005 industry survey found that many private plan sponsors provide additional educational information, not required under ERISA, for such purposes as increasing employee participation, increasing satisfaction with their plans, and improving asset allocation. They provide this information through enrollment kits, seminars and workshops, fund performance sheets, newsletters, retirement calculators, and Internet and intranet sites. For example, the private plan sponsor we spoke with provides one-on-one financial and investment counseling to its employees through a service provider. Additionally, almost half of the plans that responded to the industry survey indicated that they offer participants investment advice. State and local government employee pension plan sponsors are required to educate their participants in a manner consistent with the state or local requirements and plan documents that govern their plans. Each of the four plans we studied require that a statement be sent to participants periodically or at the participant’s request. At least two of the plan sponsors provide participants with summary plan descriptions, and at least one plan sponsor requires that participants be sent an annual report. Local and state officials expressed the importance of providing plan participants with information on a broad range of services and topics, for example, how to make contributions and the array of investment options. Each plan sponsor provides some information on its Web site; such information may include answers to frequently asked questions, forms, and information about investment options and retirement planning conferences. All of the officials we spoke with provide some type of general retirement information or non-plan-specific information to participants, such as retirement calculators. Three of the plan sponsors make general retirement information available to their participants through service providers. Through FERSA, Congress established FRTIB to administer TSP and charged DOL with establishing a program to carry out audits to determine the level of TSP compliance with FERSA requirements. According to DOL, its audit findings and recommendations provide details on all significant aspects of TSP operations, from the management of TSP investments to the information security of participants’ data, and can also shape future oversight of FRTIB and its service providers. Although FRTIB is required by law to provide Congress each year with a list of audits, including summaries of significant DOL audit findings, there have been times when DOL has had issues of concern with FRTIB outside of its audit findings. In such instances, DOL has no formal process to communicate its issues of dispute. Consequently, we previously recommended that Congress amend FERSA to require DOL to establish a formal process by which it can report to Congress issues of critical concern. Historically, communications between congressional committees of jurisdiction with FRTIB and DOL have been limited. Although Congress has occasionally held hearings where DOL and FRTIB officials have testified, such hearings are held irregularly, usually in response to a particular issue, such as abusive trading practices or when Congress was considering legislative changes to FERSA, such as adding an additional fund to TSP’s investment options. Congress created TSP as one of the basic elements of a new retirement system for federal workers. Since its inception, TSP has grown to become one of the largest defined contribution plans in the country, affecting the retirement of millions of current and former federal employees. As the size and complexity of TSP have grown, an appropriate level of oversight of FRTIB is critical to ensuring that federal workers’ retirement savings are properly managed. We provided a draft of this report to the Federal Retirement Thrift Investment Board (FRTIB), the Department of Labor (DOL), and the Office of Personnel Management (OPM) for review and comment. FRTIB suggested that the report will be useful to the continued improvement of the TSP, and expressed appreciation for our constructive approach in conducting the review. Both FRTIB and DOL provided technical comments, which we have incorporated where appropriate. FRTIB’s written comments are reproduced in appendix II. As agreed with your staff, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Executive Director of FRTIB, the Secretary of DOL, and the Director of OPM, appropriate congressional committees, and others who are interested. 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 have any questions about this report, please call me at (202) 512-7215. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix III. To compare the Federal Retirement Thrift Investment Board’s (FRTIB) education responsibilities with those of other plan sponsors, we reviewed documents and interviewed officials representing sponsors of five defined contribution plans—four government employee pension plans and one private plan. The plans we studied were selected from a list of the 200 largest U.S. employee retirement plans as reported by Pensions & Investments, a trade journal for plan sponsors and other investors, as of September 30, 2005. Plans were selected based on three criteria—plan assets, plan type, and absence of fiduciary malfeasance. TSP is the largest defined contribution plan in the nation. The plans we studied, while having significantly fewer assets than TSP, were among the largest in total defined contribution plan assets. The five plans had assets ranging from approximately $3 billion to $21 billion. The plans we studied, like TSP, are participant directed, that is, investors make investment decisions and plan fiduciaries may receive limited liability from the results of these decisions. Additionally, we reviewed Pension & Investments Online and LexisNexis, and could find no citations over the last 2 years for fiduciary malfeasance for the five plans we studied. The four government employee pension plans we studied are a state supplemental 401(k) plan, a state 401(k) plan for all newly hired employees, a university plan that includes a 401(a) plan and a tax deferred 403(b) plan, and a large city supplemental deferred compensation plan with a 401(k) plan. The private plan was a Fortune 100 company. We contacted seven private pension plans, but only one agreed to speak with GAO staff. The private plan sponsor we spoke with was willing to participate in our study, and its characteristics may or may not reflect the characteristics of other private pension plans. The interviews we conducted with plan sponsors are solely for illustrative purposes and are not generalizable. In addition to the contact named above, the following individuals made important contributions to this report: Tamara Cross, Assistant Director; Ramona Burton; Lara Laufer; Patrick Bernard; Matthew Saradjian; Roger Thomas; Rachael Valliere; Walter Vance; and Craig Winslow.
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The Thrift Savings Plan (TSP), a retirement savings and investment plan for federal workers, held approximately $210 billion in retirement assets for 3.7 million participants, as of February 2007. TSP is managed by the Federal Retirement Thrift Investment Board (FRTIB). In light of questions about TSP oversight, we examined (1) the current structure for overseeing FRTIB, (2) how the statutorily defined fiduciary responsibilities of FRTIB compare to the responsibilities of private plan sponsors and how FRTIB fulfills its responsibilities, (3) how FRTIB's investment policies differ from those of private plan sponsors, and (4) FRTIB's statutory responsibilities to educate plan participants about TSP and other retirement issues and how these responsibilities compare with those of private and state and local government employee plan sponsors. The Department of Labor (DOL) and Congress oversee FRTIB. In accordance with the law establishing TSP, DOL conducts regular audits to determine the level of compliance with laws and regulations as well as to ensure the efficiency and effectiveness of operations. Congress requires FRTIB to submit its annual budget and other reports, and to undergo an independent financial audit. However, Congress has not held regular FRTIB oversight hearings. Also, DOL does not submit its audit reports directly to Congress, and has not yet been provided with a mechanism to communicate issues of critical concern to Congress. FRTIB's fiduciary duties are similar to those of fiduciaries of private sector plans. To act prudently and solely in the interest of plan participants, FRTIB has implemented policies and practices in several of the areas mentioned in DOL's guidance for private sector plans. However, unlike the law governing private plans, the Federal Employees' Retirement System Act of 1986 (FERSA)--the law that governs the administration of TSP--contains special liability protections for Board members and the Executive Director. FRTIB has less discretion than private sector plan sponsors in setting investment policy because the investment options available to TSP participants are largely outlined in law, whereas private sector plan sponsors are responsible for choosing which investment options to offer participants. TSP's authorizing statute specifies the number and types of funds available to participants, and requires that some of these funds track indexes, which are broad, diversified market indicators. FRTIB chooses the particular indexes for the funds to track, reviews the investment options, and suggests additional funds. Changing TSP investment options requires legislation. FRTIB and the Office of Personnel Management (OPM) are responsible for educating participants about TSP and general retirement issues, while the private and state and local government employee plan sponsors that we interviewed are governed by different rules. By statute, FRTIB is charged with developing educational materials for participants about TSP-specific issues. FRTIB also assists OPM, which is required to provide general retirement education to federal employees and train retirement counselors at federal agencies to provide information to federal employees. Private plan sponsors as well as the state and local government employee plan sponsors that we spoke with are responsible for educating participants about their plans, but often supply general retirement information as well. As the size and complexity of TSP have grown, an appropriate level of oversight of FRTIB is critical to ensuring that federal workers' retirement savings are properly managed. GAO previously recommended that Congress consider amending FERSA to require DOL to establish a formal process by which the Secretary of Labor can report to Congress issues of critical concern about actions of the Executive Director and Board members.
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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 (NESDIS) 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, 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. Five GOES satellites—GOES-11, GOES-12, GOES-13, GOES-14, and GOES- 15—are currently in orbit. Both GOES-11 and GOES-13 are operational satellites, with GOES-11 covering the west and GOES-13 the east. GOES-14 is currently a backup for the other two satellites should they experience any degradation in service. The final satellite in the series, GOES-15, is undergoing a post-launch test period until October 2010, at which time it will also be put in on-orbit storage mode. GOES-12 is at the end of its service life, but is being used to provide coverage of South America. The GOES-R series is the next generation of satellites that NOAA is planning; the satellites 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. However, in September 2006, 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. In light of the cancellation of the Hyperspectral Environmental Suite, NOAA decided to use the planned Advanced Baseline Imager to develop certain satellite data products that were originally to be produced by this instrument. The agency estimated that the revised program would cost $7 billion. Subsequently, NOAA made several other important decisions about the cost and scope of the GOES-R program. In May 2007, NOAA had an independent cost estimate completed for 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 was an increase of $670 million from the previous estimate. Further, in November 2007, to mitigate the risk that costs would rise, program officials decided to remove selected program requirements from the baseline program and treat them as contract 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). For example, program officials eliminated the requirement to develop and distribute 34 of the 68 envisioned products, including aircraft icing threat, turbulence, and visibility. Program officials included the restoration of the products, latency, and refresh rates as options in the ground system contract that could be acquired at a later time. Program officials later reduced the number of products that could be restored as a contract option (called option 2) from 34 to 31 because they determined that two products were no longer feasible and two others could be combined into a single product. See table 3 below for an overview of key changes to the GOES-R program. NOAA’s original acquisition strategy was to award contracts for concept development 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 concept development 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 and ground system contracts. In addition, to reduce the risks associated with developing technically advanced instruments, NASA awarded contracts for concept development for five of the planned instruments. NASA subsequently awarded development contracts for five instruments and, upon completion and approval by NASA, these instruments will be provided to the prime contractor responsible for the spacecraft of the GOES-R program. NASA will then work with the spacecraft contractor to integrate and test these instruments. 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 system 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 System Project Office, managed by NOAA, oversees the Core Ground System contract and satellite data product development and distribution. In April 2009, we reported that a key instrument had experienced technical challenges that led to cost overruns and schedule delays. Specifically, the Advanced Baseline Imager experienced problems with the quality of components in the focal plane module, mirrors, and telescope. As of November 2008, the contractor had incurred a cost overrun of approximately $30 million and delayed $11 million worth of work. In addition, we found that the contractors for both the Advanced Baseline Imager and the Geostationary Lightning Mapper programs had not documented all of the reasons for cost and schedule variances in certain cost reports. At the time, we recommended that NOAA improve its ability to oversee contractor performance by ensuring that the reasons for cost and schedule variances are fully disclosed and documented. Over the past year, NOAA has improved its ability to oversee contractor performance by, for example, ensuring that the reasons for cost and schedule variances are fully documented in contractor monthly variance reports. In that same report, we also found that NOAA had delayed key GOES-R program milestones, including the launch of the first satellite, which was delayed from December 2014 to April 2015. Program officials attributed these delays to providing more stringent oversight before releasing the request for proposals for the spacecraft and ground system, additional time needed to evaluate the contract proposals, and funding reductions in fiscal year 2008. We reported that, as a result of these delays, NOAA may not be able to meet its policy of having a backup satellite in orbit at all times. Specifically, in 2015, NOAA expected to have two operational satellites in orbit, but it would not have a backup satellite in place until GOES-R is launched. As a result, any further delays in the launch of the first satellite in the GOES-R program would increase the risk of gaps in satellite coverage. The GOES-R program has continued to make progress in the development of its major projects, but key instruments have experienced technical issues and significant work remains to be completed. Further, key program milestones, including the launch dates for the first two satellites in the series, have been further delayed. As a result, NOAA may not be able to meet its policy of having a backup satellite in orbit at all times, which could lead to a gap in satellite coverage if an existing satellite fails prematurely. NOAA and NASA have made progress on the procurement of its two major projects—the flight project and the ground project. The flight project includes contracts for the development of the five key instruments and spacecraft while the ground project includes contracts for the development of key systems needed for the on-orbit operation of the satellites, receipt and processing of information, and distribution of satellite data products to users. For the flight project, between September 2004 and December 2008, the GOES-R program awarded contracts for the five key instruments and spacecraft. The contractors are making progress in completing key milestones in developing these components. However, due to bid protests of the award of the spacecraft contract in December 2008, work on the contract did not begin until August 2009. As a result of these delays, NOAA later approved a 6-month delay in the launch date for the first satellite (GOES-R), from April 2015 to October 2015, and the second satellite (GOES-S), from August 2016 to February 2017. Program officials stated that the estimated program life-cycle cost estimate remains steady at $7.67 billion. Table 4 describes the development contracts for the flight project, including their contract award date, and their cost and schedule estimates. For the ground project, a contract for one of three key subcomponents, the Core Ground System, was awarded in May 2009, and contracts for the two other subcomponents are planned to be awarded in July 2010. The Core Ground System is of critical importance because it provides for command and control and ground processing capabilities for GOES-R satellites and instruments. Table 5 describes the development contracts for the ground project, including their contract award date, and their cost and schedule estimates, while figure 4 depicts the schedule for both the overall GOES-R program as well as the flight and ground projects. The GOES-R program has continued to make progress on the development of the spacecraft and five key instruments. After starting work on the spacecraft contract in August 2009, the contractor worked to establish the initial cost and schedule baseline and completed a key program milestone intended to demonstrate that the spacecraft concept meets mission requirements. The contractor is currently conducting preliminary design activities and plans to assess the readiness of the program to proceed with detailed design activities in January 2011. In addition, three instruments, the Extreme Ultraviolet/X-Ray Irradiance Sensor, the Solar Ultraviolet Imager, and the Space Environmental In-Situ Suite have recently completed critical design reviews. Completion of this review is intended to demonstrate that the instruments’ detailed design is appropriate to support proceeding to full- scale fabrication, assembly, integration, and testing. Two other instruments—the Advanced Baseline Imager and the Geostationary Lightning Mapper—have experienced significant technical issues, which have resulted in cost increases and schedule delays to the contractors’ performance baselines. The Advanced Baseline Imager program has experienced technical issues primarily related to underestimating the design and development complexity of two components—the focal planes and telescope, which led to cost increases and delays in developing the prototype model. As a result, in September 2009, the program office rebaselined the cost and schedule targets of the Advanced Baseline Imager program. This increased contract costs from the most recent estimate of $375 million to $537 million, an increase of $162 million, and delayed the completion of the prototype model from March 2010 to December 2010. Program officials reported that the rebaseline did not affect the instrument’s completion date and that they have sufficient contingency reserves to address the cost overruns experienced to date, meaning that these system-specific cost overruns will not affect the overall GOES-R program’s cost. The program is currently testing the prototype model and plans to conduct an updated critical design review in January 2011 to validate any required design changes as a result of testing. The Geostationary Lightning Mapper experienced technical issues primarily related to underestimating the design complexity of the instrument, as well as an architecture change that significantly increased the electronics design and fabrication cost. As a result, in March 2010, the program office rebaselined the cost and schedule targets of the Geostationary Lightning Mapper program, which increased contract costs from $71 million to $157 million, an increase of about $86 million, and delayed the contract completion from June 2012 to September 2012—a 3- month delay. According to GOES-R program officials, contingency funds are available to cover these changes and they will not affect the overall cost or schedule of the GOES-R program. In addition, the program replaced the development of a prototype model with an engineering development unit, which requires less rigorous development procedures and testing requirements. For example, the planned engineering development unit is not required to undergo comprehensive environmental testing to validate that the instrument will meet mission objectives in the launch and space environment. According to GOES-R program officials, this decision was made to reduce program risk because the schedule for development of the prototype model and production model would have otherwise overlapped—thus reducing the inherent benefits of a prototype model. However, the lack of a prototype model increases the risk that design issues that would have been identified during more comprehensive testing will surface in the production model, when it is too late to make changes. The status and program-identified risk level of each of the components of the flight project is described in table 6. Our analysis of contractor-provided earned value management data showed that most components of the flight project were on track between May 2009 and April 2010. Specifically, contractors for three instruments— the Extreme Ultraviolet/X-Ray Irradiance Sensor, the Space Environmental In-Situ Suite, and the Solar Ultraviolet Imager—and the spacecraft are generally meeting cost and schedule targets. The other two instruments, the Advanced Baseline Imager and the Geostationary Lightning Mapper, are meeting their revised cost and schedule targets since completing their rebaselining efforts in September 2009 and March 2010, respectively. Development of the ground project is under way. After awarding the contract for the Core Ground System in May 2009, the contractor has been conducting system definition activities and plans to conduct a preliminary design review in February 2011 to assess the readiness of the program to proceed with detailed design activities. However, the awards of two additional ground project contracts have been delayed and important work remains to be completed. For example, contract award for the GOES-R Access Subsystem has slipped 6 months, from January 2010 to July 2010. These delays were due, in part, to delays in releasing the request for proposals. Award of the antennas contract has also been delayed by 3 months. Both contracts are critical to ensuring that GOES-R data are received, stored, and distributed to users. The status and program-identified risk level of each of the components of the ground project is described in table 7. Our analysis of contractor-provided earned value management data for the Core Ground System indicates that cost and schedule performance were generally on track between June 2009 and April 2010. Between these dates, the contractor for the Core Ground System completed work slightly under budget. Over the last few years, NOAA has delayed the satellite launch dates several times. We previously reported that, since 2006, the launch of the first satellite had been delayed from September 2012 to April 2015—a slip of more than 30 months. These delays were due, in part, to delays in releasing the requests for proposals for the spacecraft and Core Ground System and additional time needed to evaluate the contract proposals. Since our last report, NOAA further delayed key GOES-R program milestones by 6 months, including the dates when the first two satellites in the series would be available for launch. These recent delays were due to bid protests of the award of the spacecraft contract in December 2008, which delayed the start of work until August 2009. In order to allow sufficient time for the 72-month development cycle required for the spacecraft, NOAA approved a 6-month delay in the launch dates for the first two satellites in the series. Table 8 identifies the delays in the satellite launch dates over time. While NOAA’s policy is to have two operational satellites and one backup satellite in orbit at all times, continued delays in the launch of the first GOES-R satellite could lead to a gap in satellite coverage. This policy proved useful in December 2008, when NOAA experienced problems with GOES-12, but was able to use GOES-13 as an operational satellite until the problems were resolved. However, beginning in April 2015, NOAA expects to have two operational satellites in orbit (GOES-14 and GOES-15), but it will not have a backup satellite in place until GOES-R is launched and completes an estimated 6-month post-launch test period—resulting in a 12- month gap during which time a backup satellite would not be available. Figure 5 below depicts this gap in backup coverage. If NOAA experiences a problem with either of its operational satellites before GOES-R is in orbit and operating, it will need to rely on older satellites that are beyond their expected operational lives and therefore may not be fully functional. Any further delays in the launch of the first satellite in the GOES-R program would likely continue to increase the risk of a gap in satellite coverage. While federal policy and industry best practices call for the development of plans for continuing essential operations during a disruption or emergency, NOAA has not developed adequate continuity plans for its geostationary satellites for the period of time when there will be no backup in orbit. Planning for the continuity of operations facilitates the performance of an organization’s essential functions during emergency events or other situations that disrupt normal operations. Federal policy requires agencies to develop and document continuity of operations plans for essential functions that provide, among other things, a description of the resources, staff roles, procedures, and timetables needed for the plan’s implementation. NOAA has defined providing satellite imagery in support of weather forecasting as one of its essential functions. NOAA has developed continuity plans for the ground systems used to operate and process data from geostationary satellites. Specifically, NOAA’s continuity plans for its Satellite Operation Control Center and its Environmental Data Processing Center describe plans to transfer critical functions to a backup facility during an emergency. Both of these continuity plans contain, among other things, descriptions of the alternate locations for performing key functions, resources, and implementation procedures. In addition to planning for the continuity of its ground systems, NOAA has established a policy to ensure the continuity of its geostationary satellites—and high-level plans if that policy is not met. As previously mentioned, NOAA’s policy is to have two operational satellites and one backup satellite in orbit at all times. That way, if an operational satellite fails, the backup satellite would be moved into place to pick up operations. However, if there is no backup satellite in orbit—as is expected to be the case during the year leading up to when GOES-R becomes operational—NOAA officials stated that they would move the single remaining operational satellite to the middle of the continental United States. According to NOAA officials, this would provide sufficient coverage of the continental United States, but would provide limited coverage of the Atlantic and Pacific Oceans (see fig. 6). In addition, NOAA would contact other nations to request that a spare geostationary satellite, if available, be positioned to provide temporary coverage of the coastal regions, as well as the oceans. However, NOAA has not established continuity plans for its geostationary satellites that describe the resources, staff roles, procedures, and timetables needed for the plan’s implementation. This is important because there are many procedures and coordinating activities that NOAA would need to perform to ensure the continuity of geostationary satellite data in the event of a satellite failure with no backup available. For example, the transition to a single satellite would require NOAA, at a minimum, to inform users of changes to the in-orbit configuration through various methods, including users groups and Web site postings. Alternatively, the transition to an international satellite would require modifications to the software code of several processing systems to account for expected differences in spectral channels, refresh rate, resolution, and coverage areas due to the repositioning of the satellites. Further, all geostationary satellite data products would need to be reverified and validated to account for differences in product coverage. Lastly, NOAA would have to notify GOES data users of differences in satellite capabilities, such as the loss of space weather instruments and data, and changes to viewing angles caused by satellite positions that are different from current GOES locations. For example, the orbital location of an international satellite positioned in a backup configuration may provide a less comprehensive view due to the more severe observing angle over the United States. In addition, NOAA’s lack of continuity plans has precluded the agency from documenting and communicating the operational impact of its plans to reduce to a single satellite and rely on an international satellite. For example, a single satellite configuration would reduce coverage of the Atlantic and Pacific Oceans where satellite data provide critical warnings of approaching severe weather, such as tropical cyclone and hurricane activity. According to air traffic officials from the Federal Aviation Administration, the reduction to a single satellite would have a significant impact on the agency’s ability to make informed aviation planning decisions over the ocean areas surrounding the continental United States. In addition, transitioning to an international satellite would be dependent on the availability of foreign satellites and it could take several months to reposition an international satellite to provide backup coverage. Furthermore, foreign satellites lack capabilities currently available to GOES users, such as instruments that provide space weather information. For example, the National Weather Service’s (NWS) Space Weather Prediction Center relies solely on space weather data from GOES for two- thirds of its data products, which are critical to providing warnings of severe space weather that may impact airline and maritime communication, satellite operations, and astronaut safety. According to the Deputy Director of the Office of Satellite Operations, continuity plans for geostationary satellites have not been established because the transition to single satellite and to an international satellite has been done previously. Specifically, in 1989, after the failure of GOES-6, NOAA repositioned GOES-7 to the middle of the continental United States. Subsequently, in 1991, the European Organisation for the Exploitation of Meteorological Satellites and the European Space Agency repositioned the Meteosat-3 satellite to backup NOAA’s aging GOES-7 satellite in order to provide coverage of the Atlantic Ocean in case GOES-7 failed before a replacement could be launched and placed into operation. While this accomplishment has merit, current GOES and their related ground processing systems are increasingly complex and have enhanced capabilities as compared to earlier satellites, such as ability to capture and process higher resolution images of weather patterns and atmospheric measurements. In addition, there are likely new staff who will not be able to rely on the 1989 and 1991 experiences. Establishing continuity plans that describe the resources, staff roles, procedures, and timetables needed for the plans’ implementation (as required by federal policy) would better ensure that NOAA can continue to provide these critical capabilities in the event of a satellite failure. Without continuity plans, NOAA may not be able to fully meet its mission- essential function of providing satellite imagery in support of weather forecasting. This could have a devastating affect on the ability of meteorologists to observe the development of severe storm conditions, such as hurricanes and tornados, and track their movement and intensity to reduce or avoid major losses of property and life. In addition, the loss of a single satellite could affect many satellite data users outside NOAA, including the Federal Aviation Administration, which use satellite- provided weather data for air traffic management, and the U.S. Forest Service (within the U.S. Department of Agriculture), which uses satellite- provided weather data to predict and prevent wildfires and mitigate their damage. NOAA has identified key GOES data users and involved internal users in defining and prioritizing the GOES-R program requirements, but lacks a comprehensive approach for eliciting and prioritizing the satellite data needs of external users. Further, while NOAA has taken steps to communicate program status and changes to all GOES data users, important changes to currently available GOES data products have not been adequately communicated to external users. Until these weaknesses are addressed, NOAA faces the increased risk that its satellite acquisitions may not meet the needs of key GOES data users. Leading organizations routinely identify relevant operational users and involve these users in key program activities, including requirements definition. Moreover, best practices call for eliciting the needs of operational users and developing these needs into prioritized requirements. Prioritized requirements should serve as the basis for determining project scope and can help to ensure that requirements critical to key users are addressed quickly. Key GOES data users can be categorized into three tiers. The first tier includes internal NOAA users that depend on GOES data for their primary mission, such as NWS. The second tier includes other federal agencies that depend on GOES data for their primary mission, such as the Department of Defense and the Federal Aviation Administration. The third tier includes all other users that receive GOES data, including private industry and universities. See table 9 below for descriptions and examples of each tier of GOES data users. In formulating the GOES-R program, NOAA primarily involved internal NOAA users (tier 1) in requirements definition activities, but did receive input from one other federal agency, the Department of Defense. Beginning in 1998, NOAA collected high-level system requirements from NWS. Over the next few years, NOAA continued to collect and refine these requirements by including input from other NOAA offices, including NESDIS, NOAA Ocean Service, NOAA Research, NOAA Fisheries, and NOAA Marine and Aviation Operations. Also, in February 2003, the Department of Commerce requested that the Department of Defense provide a consolidated list of its environmental information needs, including those data needs that could be met by geostationary satellites. This input, combined with that of NOAA’s offices, served as the basis for the 2004 GOES-R Program Requirements Document, which represented a preliminary set of GOES-R requirements. In June 2007, prior to entering the development phase of the GOES-R program lifecycle, the Deputy Undersecretary for Commerce Oceans and Atmosphere approved a baseline set of prioritized GOES-R requirements (known as the Level 1 Requirements). Efforts to prioritize the Level 1 Requirements were led by a working group of representatives from various NOAA organizations. This working group categorized the requirements into four priority levels according to the importance of each requirement to NOAA, as well as the requirements contribution to the GOES-R series. However, other than the Department of Defense’s input into the 2004 version of the requirements, external users that rely on GOES data were not adequately involved in the GOES-R requirements definition or prioritization process. According to NOAA officials, input to the requirements from other federal agencies (tier 2) and other interested users (tier 3) was collected via casual conversations between NOAA offices and these users, as well as during GOES User Conferences, which were held to educate and obtain input from prospective GOES-R users. While these methods are reasonable for eliciting input from tier 3 users, federal agencies that rely on GOES data to meet unique mission requirements warrant documented input to the GOES-R requirements. For example, the U.S. Forest Service relies on GOES for fire monitoring and detection capabilities to sustain an estimated 193 million acres of the nation’s forests and grasslands. According to U.S. Forest Service officials, the lack of a structured process for their agency to provide input into the requirements definition process has made it difficult to ensure that its requirements have been and will be implemented. Further, NOAA did not account for the priority data needs of other federal users in prioritizing the Level 1 requirements. As previously mentioned, the priorities of the requirements were established by the GOES-R requirements working group. However, this group only includes membership from NOAA offices, such as NWS and NESDIS, and does not include membership from other federal agencies. According to GOES-R program officials, the Level 1 Requirements are intended to reflect the priorities of NOAA users, primarily those of NWS, and the assumption is that other users will adapt to the data provided by NOAA. However, given the unique missions of other federal agencies and their reliance on GOES data to meet their missions, input into the prioritization of GOES-R requirements is critical to ensure that GOES-R will meet the needs of their organizations. The lack of involvement by federal agencies in GOES-R requirements definition and prioritization is due to weaknesses in NOAA’s processes for defining and prioritizing satellite data requirements. Specifically, the lack of a structured process for eliciting the data needs of key operational users inhibits NOAA’s ability to produce prioritized requirements that reflect the needs of other federal agencies that depend on these satellites. Without improvements in these processes, NOAA’s satellite acquisitions may not fully meet the needs of important GOES data users. While NOAA has taken steps to communicate program status and changes to internal and external GOES data users, important changes to currently available GOES data products have not been communicated to key external users. According to industry best practices, programs should regularly communicate program status to relevant operational users. Moreover, best practices call for identifying and documenting deviations from plans and communicating significant issues to relevant operational users. NOAA has taken steps to communicate program status and changes to GOES data users. For example, the GOES-R requirements working group was established to identify and represent NOAA user requirements and serves as a forum for communication of GOES-R requirements status and changes with internal NOAA users. Another initiative, known as the GOES- R Proving Ground, engages the NWS forecast and warning community in preoperational demonstrations of selected capabilities anticipated from GOES-R. Through this program, NWS users are given the ability to test and evaluate expected GOES-R capabilities, such as lightning detection, before the satellites are operational. Lastly, GOES User Conferences are held to educate and obtain input from any prospective GOES users, including other agencies, universities, and industry. However, the GOES-R program has undergone significant changes over the course of its acquisition lifecycle, and these changes have not been communicated to GOES data users outside of NOAA. As previously mentioned, in 2007, program officials removed requirements from the baseline program to treat them as a contract option that could be exercised if funds allow (known as Option 2). These changes resulted in a baseline program of 34 satellite data products and 31 Option 2 products. However, NOAA did not communicate the removal of these products to external federal agencies. In addition, 9 Option 2 products are currently available to GOES data users, which means that users may lose access to these products if the contract option is not exercised. These 9 products are critical to measuring cloud properties, infrared radiation, and sulfur dioxide in the atmosphere. However, NOAA did not inform external federal agencies about the potential loss of these products. See figure 7 for a description of the 9 currently available products removed from the GOES-R program baseline. According to GOES-R program officials, the decision to make these products part of the contract option was based on NOAA’s input and was approved by the requirements working group. However, key GOES data users at other federal agencies that currently rely on these products have not been involved in, nor told of, these changes. For example, the U.S. Department of Agriculture uses cloud-based products (such as cloud liquid water) to develop weather forecasts used by farmers and radiation-based products (such as upward longwave radiation) for streamflow simulation modeling. In addition, the Department of Defense relies on the cloud- based products (such as cloud type and cloud heights) as input into weather prediction models for forecasting of high-altitude winds, which are used to navigate ships and planes. If the contract option is not exercised, these agencies will not have access to these GOES data products that they currently utilize. If this occurs, GOES-R program officials stated that GOES data users may be able to get these products via the Internet from NESDIS, but added that the details for this alternative have not been determined because the program expects to receive approval from NESDIS to exercise this contract option by December 2010. Given that these products are currently available to GOES data users, any significant changes to these products should be communicated to these users to ensure that they have sufficient time to implement workarounds or determine other sources for the data. Without communicating significant changes, other federal agencies may lose access to critical data products needed to meet mission requirements. Over the last few years, the GOES-R program has continued to make progress on key development efforts, but much work remains to be completed. While the GOES-R program has awarded most development contracts, two instruments have experienced technical challenges that led to contract cost increases, and significant work remains on the program’s flight and ground projects. In addition, continued delays in the launch date of the first two satellites in the GOES-R series have endangered satellite continuity because these delays extend the time in which there will not be a backup satellite in orbit. Any further delays in the launch of the first satellite in the GOES-R program increases the risk of a gap in satellite coverage. The risk of a gap in coverage is further exacerbated because NOAA has not established adequate continuity plans. While NOAA plans to reduce to a single satellite and, if available, rely on an international satellite, these plans have weaknesses, including a lack of continuity plans needed to support geostationary satellite operations during an emergency. Until these weaknesses are addressed, NOAA faces a potential 12-month gap where it may not be able to provide critical geostationary data needed for predicting global and local weather events in the event of a satellite failure. Finally, NOAA has taken steps to identify GOES data users, prioritize their data needs, and communicate program changes, but has not adequately involved or communicated with key external users. For example, while NOAA involved internal users in its process for defining and prioritizing the GOES-R requirements, improvements are needed in these processes to ensure that other federal agencies that rely on GOES data have a means to provide documented input to the requirements and the prioritization of those requirements. Further, while NOAA has taken steps to communicate with GOES data users, it has not established processes to notify other federal agencies of GOES-R program status and significant changes. Until these improvements are made, important GOES users may lose access to critical data products and future GOES acquisitions may not meet the mission requirements of these users. To improve NOAA’s ability to maintain geostationary satellites continuity and improve efforts to involve key GOES data users, we recommend that the Secretary of Commerce direct the NOAA Administrator to ensure that the following three actions are taken: Develop and document continuity plans for the operation of geostationary satellites that include the implementation procedures, resources, staff roles, and timetables needed to transition to a single satellite, an international satellite, or other solution. Establish processes for satellite data requirements definition and prioritization to include documented input from external federal agencies that rely on GOES data on future satellite acquisitions. Establish and implement processes to notify these agencies of GOES-R program status and changes. We received written comments on a draft of this report from the Secretary of Commerce, who transmitted NOAA’s comments. The department agreed with our recommendations and identified plans to implement them. For example, the department stated that NOAA will develop a plan for transitioning to a single satellite that leverages existing contingency agreements with its international partners. In addition, the department stated that NOAA will document a process to define and prioritize the requirements of other federal agencies and provide these users with updates on GOES-R program status and changes. The department’s comments are provided in appendix II. 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 or your staffs have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to (1) determine the status of the Geostationary Operational Environmental Satellite-R (GOES-R) series acquisition, including cost, schedule, and performance trends; (2) evaluate whether the National Oceanic and Atmospheric Administration (NOAA) has established adequate contingency plans in the event of delays; and (3) assess NOAA’s efforts to identify GOES data users, prioritize their data needs, and communicate with them about the program’s status. To determine GOES-R acquisition status, we evaluated various programmatic and technical plans, management reports, and other program documentation. We reviewed the cost and schedule estimates (including launch dates), planned system requirements, and monthly executive-level management briefings. We also interviewed agency officials from NOAA and the National Aeronautics and Space Administration (NASA) to determine key dates for future GOES-R acquisition efforts and milestones and progress made on current development efforts. Furthermore, we analyzed the earned value data on development efforts contained in contractor performance reports obtained from the program. To perform this analysis, we compared the cost of work completed with budgeted costs for scheduled work for a 12-month period to show trends in cost and schedule performances. To assess the reliability of the cost data, we compared it with other available supporting documents (including monthly program management reviews); electronically tested the data to identify obvious problems with completeness or accuracy; and interviewed program officials about the data. For the purposes of this report, we determined that the cost data were sufficiently reliable. We did not test the adequacy of the agency or contractor cost-accounting systems. To evaluate whether NOAA has established adequate contingency plans, we analyzed relevant continuity planning documentation, agreements with international partners, and meeting reports from the Coordination Group for Meteorological Satellites. In addition, we compared NOAA’s continuity of operations plans to federal policy and industry best practices to determine the extent to which the plans will ensure the continuity of critical functions related to geostationary satellites in the event of a satellite failure. We met with NOAA officials responsible for continuity of operations planning and coordination with international partners, as well as GOES data users within NOAA and at other federal agencies to determine the potential impact of NOAA’s plans on their data needs. To determine the adequacy of NOAA’s efforts to identify GOES users, prioritize their data needs, and communicate program status, we analyzed relevant program documents, including acquisition plans, user requirements, and GOES user group meeting minutes. We compared NOAA’s efforts to industry best practices to determine the extent to which users were appropriately identified and involved in program activities. We also interviewed key users of GOES data to determine whether NOAA’s efforts to identify and prioritize their data needs and communicate program status and changes were adequate. In consultation with NOAA officials, we identified key GOES users at organizations within NOAA and other federal agencies that depend on GOES data for their primary mission. We selected three organizations within NOAA that are primarily responsible for environmental satellite data acquisition, processing and exchange, and environmental research. These organizations include the National Weather Service, National Environmental Satellite, Data and Information Service, and the Office of Oceanic and Atmospheric Research. We also identified federal government users outside of NOAA with the largest funding levels for meteorological operations in fiscal year 2009. These agencies were the Department of Defense and the Department of Transportation (including the Federal Aviation Administration). On the basis of discussions with GOES-R program officials and the Office of the Federal Coordinator for Meteorology, we then selected additional federal agencies that rely extensively on GOES data to meet their mission requirements. These agencies include the Department of the Interior (including the U.S. Geological Survey and Bureau of Reclamation), and the U.S. Department of Agriculture (including the U.S. Forest Service). We primarily performed our work at the Department of Defense, Department of the Interior, Department of Transportation, NOAA, NASA, and U.S. Department of Agriculture offices in the Washington, D.C., metropolitan area. In addition, we conducted work at Department of Defense weather agencies in Offutt Air Force Base, Nebraska and Stennis Space Center, Mississippi. We conducted this performance audit from October 2009 to September 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, individuals making contributions to this report included Colleen Phillips (Assistant Director), Clayton Brisson, William Carrigg, Neil Doherty, Rebecca Eyler, Franklin Jackson, Jonathan Ticehurst, and Adam Vodraska.
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The Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), with the aid of the National Aeronautics and Space Administration (NASA), is to procure the next generation of geostationary operational environmental satellites, called Geostationary Operational Environmental Satellite-R (GOES-R) series. The GOES-R series is to replace the current series of satellites, which will likely begin to reach the end of their useful lives in approximately 2015. This new 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 acquisition; (2) evaluate whether NOAA has established adequate contingency plans in the event of delays; and (3) assess NOAA's efforts to identify GOES data users, prioritize their data needs, and communicate with them about the program's status. To do so, GAO analyzed contractor and program data and interviewed officials from NOAA, NASA, and other federal agencies that rely on GOES data. NOAA has made progress on the GOES-R acquisition, but key instruments have experienced challenges and important milestones have been delayed. The GOES-R program awarded key contracts for its flight and ground projects, and these are in development. However, two instruments have experienced technical issues that led to contract cost increases, and significant work remains on other development efforts. In addition, since 2006, the launch dates of the first two satellites in the series have been delayed by about 3 years. As a result, NOAA may not be able to meet its policy of having a backup satellite in orbit at all times, which could lead to a gap in coverage if GOES-14 or GOES-15 fails prematurely. Even though there may be a gap in backup coverage, NOAA has not established adequate continuity plans for its geostationary satellites. To its credit, NOAA has established a policy to always have a backup satellite available and high-level plans if that policy is not met. Specifically, in the event of a satellite failure with no backup available, NOAA plans to reduce to a single satellite and, if available, rely on a satellite from an international partner. However, NOAA does not have plans that include processes, procedures, and resources needed to transition to a single or an international satellite. Without such plans, NOAA faces an increased risk that users will lose access to critical data. While NOAA has identified GOES data users and involved internal users in developing and prioritizing the GOES-R requirements, it has not adequately involved other federal users that rely on GOES data. Specifically, NOAA's processes for developing and prioritizing satellite requirements do not include documented input from other federal agencies. Further, since 2006, the GOES-R program has undergone significant changes (such as the removal of certain satellite data products), but these have not been communicated to federal agencies. Until improvements are made in NOAA's processes for involving key federal users, these users may not be able to meet mission requirements. GAO is recommending that NOAA address weaknesses in its continuity plans and improve its processes for involving other federal agencies. In commenting on a draft of this report, the Secretary of Commerce agreed with GAO's recommendations and identified plans for implementing them.
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SBA provides funding and assistance to individuals and businesses after disasters declared by either the President or SBA. Administered by SBA’s Office of Disaster Assistance (ODA), the Disaster Loan Program is the primary federal program for funding long-range recovery for nonfarm businesses that are victims of disasters and is the only form of SBA assistance not limited to small businesses. Disaster victims—including homeowners and renters, as well as businesses—initially register with the Federal Emergency Management Agency (FEMA) for assistance. FEMA automatically refers applicants whose income exceeds certain income thresholds to SBA’s Disaster Loan Program. SBA’s Disaster Preparedness and Recovery Plan (DPRP) outlines how the agency conducts operations in support of federal disaster response efforts. The plan is intended to ensure a broad scope of coordination, awareness, and support throughout the organization, and it describes how SBA conducts its disaster-related missions. The execution of SBA’s disaster-related mission, as set forth in the DPRP, involves both response and recovery—including the recovery functions performed by SBA’s Disaster Loan Program. The Small Business Act authorizes SBA to make available several types of disaster loans, including two types of direct loans: physical disaster loans and economic injury disaster loans. Physical disaster loans: These loans are for permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property. They are available to homeowners, renters, businesses of all sizes, and nonprofit organizations. These loans are intended to repair or replace the disaster victims’ damaged property to its predisaster condition up to a certain capped amount (see table 1). Almost any business concern or charitable or other nonprofit entity whose property is damaged in a declared disaster area is eligible to apply for a physical disaster loan; however, businesses in agriculture-related industries—also known as agricultural enterprises—are not eligible. Economic injury disaster loans (EIDL): These loans provide small businesses that are not able to obtain credit elsewhere with necessary working capital until normal operations resume after a disaster declaration. The loans cover operating expenses the business could potentially have paid had the disaster not occurred. The Small Business Act restricts EIDLs to small businesses and private nonprofit organizations. protect property and the environment, and meet basic human needs after an incident has occurred. The Recovery framework refers to capabilities necessary to assist communities affected by an incident to recover effectively, including, but not limited to, rebuilding infrastructure systems; providing adequate interim and long-term housing for survivors; restoring health, social, and community services; promoting economic development; and restoring natural and cultural resources. Table 1 describes the characteristics of each of these two types of loans. Not all businesses are eligible for both types of loans. Businesses of all sizes may apply for physical disaster loans, but only small businesses are eligible for an EIDL.damage from a disaster cannot apply for a physical disaster business loan but may still apply for an EIDL, and any small business that applies Small businesses that did not sustain physical for a physical disaster business loan can also be considered for an EIDL. Such applicants may be approved for a physical disaster business loan but denied for an EIDL, or vice versa. Business owners may apply in person at a FEMA-established Disaster Recovery Center, at an SBA-established Disaster Loan Outreach Center or Business Recovery Center, by mail, or via SBA’s Electronic Loan Application system. SBA requires applicants seeking either type of business disaster loan to submit a variety of documents as part of their application package, including the most recent federal income tax return, a signed copy of the Internal Revenue Service (IRS) tax information authorization Form 8821, a schedule of liabilities, and a current (dated There within 90 days of the application) personal financial statement. are also additional filing requirements for applicants seeking an EIDL, such as monthly sales figures for the past 3 years and a request for a written explanation of the economic loss caused by the declared disaster. To fulfill SBA documentation requirements, each principal owning 20 percent or more of the applicant business and each general partner or managing member must also provide a signed personal financial statement and Form 8821. Further, each affiliate of the business must provide a signed Form 8821. Affiliates include, but are not limited to, business parents, subsidiaries, or other businesses with common ownership or management. For the complete list of required documents for a business disaster loan application, see SBA’s website, http://www.sba.gov/content/disaster-loan-paper-applications, accessed on September 4, 2014. of these states was granted four separate extensions for physical disaster business loans (though none for EIDLs), and the final application deadlines for New York and New Jersey were April 13, 2013, and May 1, 2013, respectively. SBA’s regulations contain underwriting criteria that require, among other things, reasonable assurance of repayment, satisfactory credit, and satisfactory character. The regulations state that SBA must have reasonable assurance that all disaster loan applicants can repay their loans based on SBA’s analysis of the applicants’ credit or personal or business cash flow. The regulations also state that SBA is prohibited from lending to businesses that are engaged in lending or speculation or engaged in any illegal activity. SBA disaster loan application processing involves several stages (see fig. 1): Application entry stage. During the application entry stage, SBA screens all incoming applications to determine if they are acceptable. Staff members at SBA’s Processing and Disbursement Center (PDC) enter any application information submitted in paper format into the Disaster Credit Management System (DCMS), and where necessary, coordinate and consolidate any supplemental documentation received into one application per applicant. SBA can also make automatic declines and pre-loss verification declines at this stage. Loss verification stage (physical disaster loans). After the application entry stage, physical disaster loan applications move to the loss verification stage, while EIDL applications proceed directly to the application processing stage. During the loss verification stage, loss verifiers conduct on-site damage inspections for physical disaster loan applications to estimate the cost of restoring damaged property to predisaster condition. The verified loss becomes the basis for the loan amount. Application processing stage. Once the loss verification is complete, an application moves to the application processing stage, where loan officers check for duplication of benefits and assess the applicant’s credit history and ability to obtain credit elsewhere. Loan officers also examine other applicant eligibility criteria, including compliance with child support obligations and history on other federal debt, such as student loans. Loan officers use a financial analysis tool within DCMS to determine if the applicant has the ability to repay the loan. Legal review stage. For secured loans, legal staff members review the draft loan authorization and agreement for sufficiency of collateral instruments and other legal concerns. They also create a loan- closing checklist—a list of the requirements necessary to generate the loan closing and other legal documents. Attorneys enter a legal concurrence into DCMS, which obligates the loan funds through an interface with SBA’s accounting system. Legal support staff members prepare closing documents and mail them to the applicant or nearest Disaster Recovery Center. Closing and disbursement. For Hurricane Sandy loans, SBA could make a maximum initial disbursement, in the absence of collateral, of up to $14,000 for physical disaster business loans and $5,000 for EIDLs, once the agency received signed closing documents from the applicant. SBA could make a maximum initial disbursement of up to $50,000 for physical disaster loans and full disbursements for EIDLs, once all requirements were met. SBA generally makes subsequent disbursements on physical disaster loans based on the applicant’s needs and how they spent prior disbursements. SBA procedures also generally require small businesses to arrange for and obtain all loan funds within 6 months from the date of the loan authorization and agreement. Following Hurricane Sandy, SBA received disaster loan applications from 9 states and Puerto Rico, with the majority of the 15,745 business disaster loan applications generated by businesses in New Jersey and New York. See figure 2 below for a map of highly impacted counties in New Jersey and New York and information on business disaster loan applications from these counties. Congress enacted the Small Business Disaster Response and Loan Improvements Act of 2008 to expand steps taken by SBA after Hurricane Katrina and require new measures to help ensure that SBA would be prepared for future disasters. The act included three provisions requiring SBA to issue regulations to establish new guaranteed disaster programs using private sector lenders: Expedited Disaster Assistance Loan Program (EDALP). EDALP would provide small businesses with expedited access to short-term guaranteed loans of up to $150,000. Immediate Disaster Assistance Program (IDAP). IDAP would provide small businesses with interim guaranteed loans of up to $25,000 with a loan decision within 36 hours. Private Disaster Assistance Program (PDAP). PDAP would make guaranteed loans available to homeowners and small businesses in an amount up to $2 million. See table 2 for characteristics of these loan programs. Following Hurricane Sandy, SBA did not meet its timeliness goal of processing business loan applications from receipt to loan decision within 21 days for a number of reasons, and a backlog of applications developed rapidly. SBA officials said the agency was challenged by a large, unanticipated volume of applications early in its response to the disaster. In addition, SBA relied on inaccurate estimates of how quickly staff could process applications, which delayed its decision to increase the numbers of staff to process the applications. SBA also faced challenges related to its information system, among others. According to SBA, the agency is taking steps to address some of the challenges it faced after Hurricane Sandy. However, SBA has not revised its disaster planning to reflect the unanticipated volume of early applications it received. As a result, SBA risks continuing to be unprepared for a large number of disaster loan applications to be submitted at the beginning of a disaster response. Following Hurricane Sandy, SBA did not meet its goal to process business loan applications within 21 days from application receipt to loan decision. As shown in figure 3, SBA took an average of 45 days for physical disaster business loan applications and 38 days for EIDL applications. The average processing time for disaster business loans peaked in March 2013 (5 months after the storm); business loans for which SBA reached a decision in March 2013 had been in processing for an average of nearly 60 days. One year after the storm, SBA’s processing times for business loan applications still exceeded its goal of 21 days. Following Hurricane Sandy, SBA met its goal to provide first loan disbursements to 95 percent of borrowers within 5 days of loan closing. On average, SBA provided first disbursements to approved businesses within 5 days of closing. According to SBA officials, loan funds are generally provided within four disbursements over a period of time after closing. While there are no timeliness goals associated with closing a loan, borrowers who have been approved for a disaster loan have 60 calendar days from the date of the loan authorization agreement to close it. In order to close the loan, borrowers must sign and return all documents required for an initial disbursement, which is then reviewed by SBA’s Chief Legal Advisor. For Hurricane Sandy, it took on average an additional 66 days from approval to close a physical disaster business loan and an additional 43 days for an EIDL. A backlog of applications that were “in processing” (meaning those SBA had received but for which it had not yet made a loan decision) grew rapidly over the course of SBA’s response to the disaster. Figure 4 illustrates the backlog of applications that developed over the course of SBA’s response to Hurricane Sandy. As of January 2014, SBA officials noted that five home applications, five physical disaster loan applications, and two EIDL applications remained in processing. SBA said that in the aftermath of Hurricane Sandy, it was challenged by a high volume of loan applications submitted at a faster rate than it had experienced in previous disasters. SBA’s initial estimates of when it would receive applications differed from when it actually did receive them. To prepare for a disaster, SBA uses assumptions about the volume and timing of the applications it expects to receive based on historical data— known as the “application intake curve.” SBA inputs these assumptions into forecasting models that predict the staff levels necessary to meet processing needs. According to the application intake curve for Hurricane Sandy, SBA estimated that application submission would peak about 7 to 9 weeks after Hurricane Sandy. However, as shown in figure 5, SBA began receiving business applications earlier. According to SBA, the early spike in applications occurred because a majority of applications were submitted electronically rather than on paper, which resulted in a large volume of applications within a few days of the disaster. SBA stated that the earlier receipt of electronic submissions was caused by the convenience and speed of the Internet-based application as well as the elimination of postal handling time. While SBA created electronic loan applications to simplify and expedite the application process and continues to encourage submitting applications electronically, SBA noted that it did not anticipate receiving such a large volume of electronic loan applications early in its response following Hurricane Sandy. Based on its experience in fiscal year 2012, SBA initially estimated that it would receive between 11,000 and 21,600 business disaster loan applications after Hurricane Sandy and 36 percent of all disaster applications would be submitted electronically. Following Hurricane Sandy, SBA received 15,745 business disaster loan applications, and 55 percent of all disaster applications were submitted electronically. SBA also initially estimated that it would receive a certain percentage of each business loan type electronically, and these estimates were lower than the actual submissions (as shown in table 3). In addition, SBA was unprepared for the use of multiple entry points through which applications could be submitted electronically. According to SBA officials, applicants could submit application documents electronically in a piecemeal fashion via numerous portals, including computer stations set up at each Disaster Loan Outreach Center and personal computers. In contrast, SBA noted that paper applications would only be accepted if all forms and documentation were submitted to the Processing and Disbursement Center (PDC). Because of the various entry points for electronic applications, SBA officials said that the PDC experienced difficulties in consolidating the application documents, which caused delays in processing the electronic applications. According to SBA, the agency is taking steps to process electronic application submissions more effectively for future disasters based on its experience with Hurricane Sandy. Specifically, SBA officials noted that the agency is consolidating the number of entry points through which supporting documentation can be submitted electronically and is improving DCMS to allow documents from SBA follow-up requests to now be submitted electronically instead of in paper form. In addition, SBA officials noted that the agency expects to build an electronic portal where applicants can check the status of their applications and whether documents have been received. SBA officials noted that these efforts began in October 2013 and said they will be monitoring their effectiveness as they continue to automate and streamline the consolidation process. Although SBA is making technological improvements, it has not updated its key disaster planning documents—namely the DPRP and ODA Playbook—to reflect the early volume of application submissions received after Hurricane Sandy and the potential impact that a similar experience could have on staffing, resources, and forecasting models for future disasters. Federal internal control standards state that management should identify risk and that risk identification methods may include, among others, forecasting and strategic planning. Once risks have been identified, they should be analyzed for their possible effect. Risk analysis generally includes estimating the risk’s significance, assessing the likelihood of its occurrence, and deciding how to manage the risk and what actions should be taken.primary goals of forecasting and modeling are to predict as accurately as possible the application volume that will result from a disaster and the timing of when applications will be received. Without taking its experience with early application submissions after Hurricane Sandy into account in its plans, SBA risks continuing to be unprepared for a larger number of disaster applications to be submitted at the beginning of a future disaster response, potentially resulting in delays in receipt of loan funds for disaster victims. One factor that affected the timeliness of SBA’s disaster assistance was inaccurate expectations for the rate at which SBA staff could process loan applications, which caused SBA to delay its decision to increase staff levels. ODA officials said that the PDC communicated inaccurate production estimates to ODA headquarters, which led to delays in increasing staff levels to respond to the early influx of applications. According to ODA officials, management at PDC and ODA participated in daily conference calls during Hurricane Sandy to discuss, among other things, production levels of loan officers and any need to increase staff. ODA officials said that PDC management projected an average productivity level of 3 home loan applications a day per loan officer and 1.5 business loan applications a day per loan officer, for a combined average of 2.25 disaster loan applications a day. However, this productivity expectation was not met over the course of the response. According to ODA officials, the PDC loan officers were actually completing a combined average of 1.5 loan applications a day per loan officer, yet continued to maintain in communications with ODA that they could meet their initial productivity expectations. Because these estimates were based on production benchmarks established after Hurricane Katrina, ODA officials noted that they relied on the PDC’s production estimates and delayed their decision to increase staff. However, ODA officials said they later recognized that the past disaster production rate was not an appropriate indicator of production following Hurricane Sandy due to, among other things, differences in the types of businesses impacted and the larger number of approved applications. As shown in figure 6, although the number of business applications received peaked in December 2012, ODA ultimately added loan officers at its Sacramento loan center in mid-December 2012 and its Buffalo center in the beginning of March 2013, past the peak months of business application receipt. Per the DPRP, SBA has the flexibility to incrementally add pre-identified staff to its workforce in order to tailor its response to the size of the disaster and number of loan applications expected. According to SBA, during the peak of staffing in March 2013, about a fifth of the loan processing staff belonged to its core or permanent staff; the remaining 80 percent were either pre-identified processing staff or new hires. Further, ODA officials noted that most of the additional processing staff members, particularly those in the Sacramento center, were new hires because it was more cost-effective to hire loan officers from the area than to incur costs of transporting pre-identified staff from various locations. As a result, SBA’s decision to increase its workforce to respond to the growing backlog was further delayed. Based on its experience with Hurricane Sandy, ODA told us that several changes have been made with regard to communication with the PDC and staffing increases. The PDC is now required to produce a new series of daily reports for ODA headquarters to increase transparency and improve communication during future disasters. Specifically, these reports include more detailed information on the PDC’s production rates, number of applications submitted, and size of the application backlog. ODA has also created a standard template for centers to request and justify additional staff to ensure that they provide consistent information about, among other things, current and expected performance. Further, SBA is determining if adding permanent loan processing staff in centers other than the PDC, such as those in Sacramento and Buffalo, is needed to respond to disasters. To address challenges with providing timely assistance following Hurricane Sandy, SBA made various changes to its loan processing approach, DCMS, and loan officer training. However, because SBA has not received a large volume of applications since Hurricane Sandy, it is too early to determine whether these changes will improve the timeliness of SBA’s response for future disasters similar to Hurricane Sandy’s magnitude. Loan Processing Approach: Following Hurricane Sandy, SBA processed loans in the order in which they were received, regardless of whether the applicant was a business or homeowner—referred to as a “first-in, first-out” approach. After Hurricane Sandy, SBA received over four times as many home loan applications as business applications, and these home loan applications were received earlier. As a result, business owners could have faced delays due to the large number of home loan applications submitted ahead of them. In August 2013, the Hurricane Sandy Rebuilding Task Force recommended that SBA create two separate application tracks for home and business disaster loans, which SBA implemented in October 2013. According to SBA officials, the agency had processed approximately 2,166 business disaster applications using the separate application tracks in an average of 12 days as of June 2014. DCMS Challenges: Over the course of its response, SBA encountered various challenges with DCMS, including server hardware crashes and periods of system latency (periods of slowness and freezing), which added to some delays faced by business owners in receiving disaster assistance. According to SBA, the agency is taking several steps to improve DCMS for future disasters. For example, SBA planned to institute a process for updating system equipment based on a consistent life-cycle by, among other things, conducting a baseline inventory and implementing a plan to replace outdated hardware. According to SBA officials, the inventory has been validated by center directors and the plan has been completed. In addition, SBA officials said that the agency has made improvements to its DCMS Help Desk, which responds to loan officers who experience system issues. These improvements include implementing a tiered approach to addressing system issues and better ensuring that the Help Desk is used by all centers in a standardized way. Loan Officer Training: As mentioned previously, most of the additional processing staff, particularly those at the Sacramento center, were new hires, but SBA found that these new loan officers were not effectively trained to quickly respond to the backlog of business applications. According to SBA, loan processing production was not fully realized immediately following the increase in staff because it took new loan officers longer than expected to fully learn how to process loan applications. In addition, loan officers were not converted into business loan officers until they demonstrated proficiency in processing home loans. Further, these loan officers required additional specialized training to learn how to process a business loan within DCMS. According to SBA, this strategy was ineffective because it was implemented at the peak of receiving and processing applications. SBA has taken steps to revise its loan officer training for future disasters to be more production-oriented rather than focusing on DCMS use. According to SBA officials, the PDC developed a revised training course for processing business loans in May 2014 that is required for all loan officers. As of July 2014, three classes of approximately 18 loan officers each have completed the training. Additionally, SBA officials noted that it has reorganized its loan officers into two groups that specialize in processing home and business loans based on the previously mentioned changes made to its loan processing approach. Select Small Business Development Centers and local business organizations in New York and New Jersey that we met with identified two main challenges that affected the timeliness of SBA’s assistance from the perspective of small businesses applying for loans: time-consuming loan documentation requirements and lack of SBA follow-up. According to SBA officials, the agency is taking actions to address these two challenges for future disasters. Nearly all 14 SBDCs and local business organizations we met with noted that meeting the application’s documentation requirements was time- consuming and onerous to business owners. For example, 11 of the 14 entities we met with told us that gathering the necessary documentation to complete an application was difficult given the physical damage caused by Hurricane Sandy. Further, 6 of the 14 entities noted that follow-up requests for additional or updated documentation by SBA prolonged the application process and loan decision. As discussed previously, SBA requires business applicants to submit a variety of documents in order to make a loan decision, including the most recent federal income tax returns, a signed copy of the IRS tax information authorization Form 8821, a current (dated within 90 days of the application) personal financial statement, and a schedule of liabilities, among others. According to SBA, additional requests for documentation usually occur when either information needed to make a decision is missing or information provided was not sufficient. For example, many business owners submit their most recent federal income tax returns, but do not include this information for their affiliates, which is required to make a loan decision. In addition, tax returns are often requested—in addition to the IRS Form 8821, which provides SBA access to an applicant’s previous tax transcripts—because they provide loan officers with more detailed information that may be needed to make a loan decision. SBA officials said that the agency is taking several steps to streamline the documentation requirements for applicants and improve the process to submit additional information. Specifically, SBA has examined the entire loan application process in order to identify and eliminate documents that do not help loan officers make a decision on an application. According to SBA officials, the proposed changes to the required documentation have been drafted and will be incorporated in the next iteration of SBA’s disaster loan program standard operating procedures by the end of 2014. Also, as previously mentioned, SBA officials told us that the agency plans to consolidate entry points through which electronic loan applications can be submitted and improve DCMS so that applicants can submit certain documents from follow-up requests electronically rather than sending paper copies in the mail. Further, SBA took steps to reduce documentation requirements for applicants with strong credit scores by amending regulations to allow the agency to rely on credit scoring rather than cash flow when determining Under these new regulations, SBA has an applicant’s ability to repay.the option to base its repayment ability determination on either the applicant’s cash flow or credit score. According to SBA, by removing the requirement to analyze cash flow for applicants with strong credit scores in order to determine ability to repay, the agency can process these applications more expeditiously. Further, SBA stated that applicants with strong credit scores will not be required to submit further information documenting their personal and business cash flows to SBA. Finally, SBA noted that credit scoring can help SBA dedicate staff to applicants that do not have strong credit and reduce the overall processing time for loan applications. SBA pursued these legal changes to determining repayment ability in response to recommendations made by the Hurricane Sandy Rebuilding Task Force as well as its experience with the Sandy Alternative Processing Program (SAPP), in which selected home loan applications were processed in a similar manner after Hurricane Sandy. Over half of the entities we met with said that business owners noted that there was a lack of SBA contact after submitting their applications, and many owners were unaware of the status of their application throughout the process, including whether or not it had been received at the PDC. Additionally, five of the entities noted that there was a lack of continuity with loan officers or case managers over the course of the application process. experienced up to eight different loan officers or case managers during the process. In addition, these five entities reported that submitted documentation and information were lost when loan officers and case managers changed. According to SBA, a loan officer is responsible for making loan application decisions and a case manager is responsible for closing and disbursing the loan. required to supervise newer staff. In this case, the PDC will notify the applicant of the change in loan officer or case manager as soon as possible.SBA officials told us that some documents can be misplaced during the application process due to the multiple ways applicants can submit information to the PDC. In addition, some documents may not be misplaced; rather, they may not yet have been entered into DCMS and may not be available for loan officers to view. According to SBA officials, efforts to process electronic application submissions more effectively will address these issues. As part of this project, as previously mentioned, officials said SBA expects to create an electronic portal that will share information with applicants on the status of their applications and documents received, which should increase transparency and communication during the loan application process. SBA’s overall approval rate for Hurricane Sandy business loan applications was 42 percent, which was lower than those for Hurricanes Katrina, Rita, and Wilma, higher than that for Hurricane Ike, and comparable to the approval rate for Hurricane Irene. For Hurricane Sandy and each of the five previous disasters we examined, lack of repayment ability and unsatisfactory credit history were the two primary reasons why SBA declined business loan applications. Application withdrawal rates and loan cancellation rates were both higher for Hurricane Sandy than for the five previous disasters we examined. In comparison to the five previous disasters we selected, the overall approval rate for business loan applications for Hurricane Sandy was lower than those for Hurricanes Katrina, Rita, and Wilma, higher than that for Hurricane Ike, and comparable to the approval rate for Hurricane Irene. The overall approval rate for Hurricane Sandy business loan applications, including both physical disaster loans and EIDLs, was 42 percent. The approval rate for physical disaster loan applications was 45 percent, while the approval rate for EIDLs was 28 percent. For physical disaster loan applications specifically, the approval rate for Hurricane Sandy was lower than those for Hurricanes Katrina and Wilma, but higher than those for Hurricanes Ike and Irene, and comparable to that for Hurricane Rita. The approval rate for EIDL applications resulting from Hurricane Sandy was lower than those for Hurricanes Katrina, Rita, Wilma, and Irene, but higher than the rate for Ike (see fig. 7). Hurricane Sandy resulted in the highest total approval rate of disaster loan applications in comparison to the five previous disasters we examined. The total approval rate for disaster loan applications includes home loan applications combined with physical disaster loan and EIDL applications. For Hurricane Sandy, the total approval rate was 53 percent. Lack of repayment ability and unsatisfactory credit history were the two primary reasons why SBA declined business loan applications following Hurricane Sandy and in each of the five previous disasters we examined. Following Hurricane Sandy, SBA received 14,938 business loan applications (excluding reconsiderations and appeals), and declined 5,663 applications as of January 31, 2014. Of these declined applications, lack of repayment ability was at least one of the reasons SBA cited on 2,644 applications (47 percent), while unsatisfactory credit history was at least one of the reasons SBA cited on 2,317 applications (41 percent). See figure 8 below for more information on the leading decline codes for Hurricane Sandy and previous disasters. Other reasons that Hurricane Sandy business loan applications were declined include unsatisfactory history on an existing or previous SBA loan or other federal obligation, unsatisfactory debt payment history, a finding that the business was not eligible due to recoveries from other sources, and availability of credit elsewhere, among others. SBA can cite more than one reason for declining a loan application. Of the 5,663 Hurricane Sandy applications that SBA denied, 1,020 (18 percent) had two or more decline codes applied. Of the 14,558 original Hurricane Sandy business loan applications that had reached a decision status by January 31, 2014, 4,715 (approximately 32 percent) were withdrawn by either SBA or the applicant—a withdrawal rate higher than those of the previous disasters we examined.withdrawal rates for these previous disasters ranged from approximately 18 percent (for Hurricane Ike) to approximately 23 percent (for Hurricanes Katrina and Wilma), as shown in figure 9. The According to SBA, factors affecting the withdrawal and cancellation rates for Hurricane Sandy include the footprint of the disaster area and the availability of alternative sources of recovery (e.g., insurance coverage and grants). The Hurricane Sandy footprint covered areas with higher rates of insurance coverage compared to previous disasters. Additionally, officials told us that the rollout of programs funded by the Department of Housing and Urban Development’s Community Development Block Grant program (CDBG) began earlier than in past disasters, and that state grantees—specifically New Jersey and New York—obtained CDBG funds and accepted applications for their respective state grant programs shortly after the disaster struck. More than 6 years after Congress passed the Small Business Disaster Response and Loan Improvements Act of 2008, SBA has not piloted nor implemented three guaranteed disaster loan programs, which were therefore unavailable in response to Hurricane Sandy. Therefore, the potential effectiveness of these programs remains unclear. As previously discussed, the act mandated the creation of the Immediate Disaster Assistance Program (IDAP), the Expedited Disaster Assistance Loan Program (EDALP), and the Private Disaster Assistance Program (PDAP). According to SBA officials, the agency opted to implement IDAP first, because the loan limit is lower than that of EDALP and PDAP and funds were appropriated to pilot this program. A majority of entities with whom we spoke said that a program like IDAP (i.e., a loan up to $25,000 with a 36-hour application approval time) would be useful, as it could provide business owners with a short-term infusion of capital to complete tasks such as debris removal, repairing physical damage, and purchasing inventory. As previously discussed, on average, it took SBA 45 and 38 days to process physical business disaster loan and EIDL applications resulting from Hurricane Sandy, respectively (from application receipt to loan decision). As such, it took additional time for funds to be disbursed to an applicant approved for a direct disaster loan—time that could impact whether a business seeks other financing options or remain in operation. In a July 2009 report, GAO reported that SBA was planning to implement pilot programs for IDAP and EDALP to test applicable program requirements and to see how private lenders would administer the programs. GAO also reported that SBA requested funding to carry out the requirements for these two programs in the President’s budget for fiscal year 2010. SBA received subsidy and administrative cost funding totaling $3 million in the 2010 appropriation, which would allow the agency to pilot test about 600 loans under IDAP The agency also issued regulations for IDAP in October 2010. In May 2010, SBA also told GAO that its goal was to have the pilot for IDAP in place by September 2010. In addition, a SBA report noted in June 2012 that IDAP would be ready to be put into operation by the end of that year. However, as of August 2014, the pilot program for IDAP had not been conducted. According to SBA officials, the program has not been implemented for two primary reasons: (1) information technology challenges and (2) feedback from lenders indicating that program requirements may hinder lender participation in the program. First, the electronic systems that would be used to process IDAP applications did not interface smoothly with one another. According to SBA officials, IDAP’s readiness was, in part based on the ability of E-Tran (the 7(a) program’s electronic loan processing system) to interface with DCMS (the Disaster Loan Program’s Officials said that a new information electronic loan processing system). technology system is being developed—SBA One—and that it is more efficient to make DCMS interoperable with the new system to process IDAP applications than to make enhancements to E-Tran.anticipates that SBA One will be operational by early 2015. Second, SBA told us that they received feedback from lenders indicating challenges that may discourage lenders from participating in the program, although SBA’s documentation of this feedback is limited. In March 2010, SBA organized a forum with 11 lenders in the Gulf Coast to obtain their views on IDAP. Lenders stated that the program had to have simple eligibility determination, as well as confirmation that a potential IDAP borrower had applied for an SBA disaster loan before the lender would approve an IDAP loan. Lenders also expressed concerns about the possibility of guarantee denials if an applicant did not take out an SBA disaster loan. In addition, according to SBA, in 2010 the agency also consulted with Iowa lenders in flood-prone regions within the state via conference calls and lenders expressed similar concerns about IDAP. However, both the Gulf Coast forum and the conference calls with Iowa lenders were not documented at the time the lender outreach was conducted. As such, SBA officials must rely on the memory of staff who were present for the discussions. In response to our request for information on SBA’s outreach to these lenders, in July 2014, SBA provided a one-page summary on the outreach to both the Gulf Coast and Iowa lenders. The summary included a list of the Gulf Coast lenders that participated but not the Iowa lenders, and the discussion of lenders’ concerns was limited. If an applicant receives an IDAP loan before being declined for a direct disaster loan (through the Disaster Loan Program), the applicant is required to repay the loan not earlier than 10 years after the date of final disbursement 15 U.S.C. § 657n(d)(2). SBA regulations state that the maturity of an SBA IDAP loan must be at least 10 years from the date of final disbursement, but no more than 25 years. 13 C.F.R. § 123.703(d)(2). the one-time fee may not exceed $250 and an IDAP lender generally may not charge a borrower any additional fees. According to SBA officials, they also did not document lender feedback from this outreach effort. SBA officials told us that feedback on IDAP requirements was obtained from three banks, although officials could recall the identity of only one bank. In July 2014, SBA officials told us that the agency is still trying to conduct the IDAP pilot by attempting to identify solutions to increase lender participation. However, officials also noted that the lenders they met with were not willing to participate in IDAP (or an IDAP pilot) without changes to the statutory servicing term and the SBA regulatory program fee. Based on lender feedback, SBA officials said that the current statutory requirements, such as the 10-year loan term, make a product like IDAP undesirable and that lenders are not likely to participate in IDAP unless the loan term is decreased—for example, to between 5 and 7 years. However, revising statutory program requirements requires congressional action. SBA officials said that they have not discussed the feedback received from lenders with Congress. As a result, Congress does not have this information about SBA’s challenges with and plans to pilot and implement IDAP. Further, SBA officials told us that the agency plans to use IDAP as a guide to develop EDALP and PDAP, and until challenges with IDAP are resolved, SBA does not plan to implement these two programs. In addition, federal internal control standards state that all transactions and other significant events should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. Documentation should also be readily available for Although SBA obtained feedback from lenders on their examination.willingness to participate in IDAP, documentation of these discussions was limited and SBA has not conducted a formal documented evaluation of lenders’ feedback that would establish the basis for proposed changes to requirements for Congress to consider. Without an appropriately documented evaluation of its outreach to lenders, SBA may not have complete and reliable information on which to base its reporting to Congress about its challenges with implementing the programs required by the act. More generally, we previously recommended that SBA develop an implementation plan and report to Congress on the agency’s progress in addressing all requirements within the act and include milestone dates for completing implementation and any major program, resource, or other challenges the agency faces as it continues efforts to address requirements in the act. As of September 2014, the agency had not implemented this recommendation. Not having an implementation plan in place for addressing the remaining requirements and not reporting to Congress on related challenges can lead to a lack of transparency about the agency’s progress toward implementing these programs and its ability to adequately prepare for and respond to disasters. Following Hurricane Sandy, SBA did not meet its application processing goal for a number of reasons. SBA said it was challenged by a high volume of loan applications early in its response to the disaster primarily due to the use of electronic applications, as well as technological and other issues. Although electronic loan applications were created to simplify and expedite the application process and SBA has continued to encourage submitting applications electronically, SBA did not anticipate receiving such a large volume of electronic loan applications early in its response following Hurricane Sandy and was unprepared to process them. While SBA officials told us the agency has taken steps to respond to these challenges, it has not revised its disaster planning documents— including the Disaster Preparedness and Recovery Plan and ODA Playbook—to reflect the unexpected volume of early applications and its potential impact on staffing, resources, and forecasting models. Federal internal control standards state that management should identify risks and take action to manage them. Without taking the large volume of applications it received shortly after Hurricane Sandy into account in its disaster planning documents and analyzing the risk that trend may pose for timely disaster response, SBA risks being unprepared for a similar experience following future disasters, which may result in delays in providing loan funds to disaster victims. Due to lender feedback and technology challenges, SBA has yet to pilot IDAP and has not implemented IDAP, EDALP, and PDAP as required by Congress in the Small Business Disaster Response and Loan Improvements Act of 2008. SBA has also not developed an implementation plan for addressing the act’s requirements, as GAO recommended in 2009. This plan was to include, among other things, challenges the agency faces in implementing the act’s requirements. Private sector lenders have given SBA feedback on barriers to their willingness to participate in IDAP, such as statutory program requirements that could make the make the loans undesirable for lenders. However SBA has not conducted a formal documented evaluation of lenders’ feedback that would establish the basis for proposed changes to requirements for Congress to consider. In addition, SBA has not provided lenders’ feedback and its evaluation of that feedback to Congress—the entity that could remove potential barriers to SBA’s implementation of the program. As a result, SBA may lack reliable information to share with Congress about what program requirements should be revised to encourage lender participation. Such information could, for example, be obtained by conducting further outreach to lenders and documenting this outreach in accordance with federal internal control standards. Without sharing information with Congress on challenges to implementing IDAP, SBA may continue to face difficulties in implementing programs intended to provide assistance to disaster victims. In order to address potential risk to SBA’s ability to provide timely disaster assistance in the future, based on the agency’s experience from Hurricane Sandy, we recommend that the Administrator of SBA direct the Office of Disaster Assistance to take the following action: Revise SBA’s disaster planning documents to anticipate the potential impact of early application submissions on staffing and resources for future disasters, as well as the risk this impact may pose for SBA’s timely disaster response. In order to provide Congress with reliable information on challenges SBA has faced in implementing IDAP, we recommend that the Administrator of SBA direct the Office of Capital Access to take the following two actions: Conduct a formal documented evaluation of lenders’ feedback that can inform SBA and Congress about statutory changes that may be necessary to encourage lenders’ participation in IDAP. Report to Congress on the challenges SBA has faced in implementing IDAP and on statutory changes that may be necessary to facilitate SBA’s implementation of the program. We provided a draft of this report to SBA for review and comment. SBA provided written comments, which are described below and reprinted in appendix IV. SBA generally agreed with all recommendations presented in this report. In response to SBA’s comments addressing our first recommendation, we added information to the report on the role of electronic application submissions in the unanticipated large volume of applications SBA received early in its response to Hurricane Sandy. In response to our recommendation that SBA revise its disaster planning documents to anticipate the potential impact of early application submissions on staffing and resources for future disasters, SBA agreed with the importance of incorporating this information into its planning documents. In addition, SBA stated that it has already taken steps to document and address the early volume of application submissions. For example, SBA noted that the most recent Disaster Planning and Recovery Plan (DPRP) released in June 2014 addresses the increased usage of the electronic application and the resulting impact of early application submissions on staffing and resources due to both the convenience and speed of the Internet-based application and to the elimination of postal handling time. SBA further stated that it believes the agency has already met this recommendation. While SBA has acknowledged the impact of early application submissions on staffing and resources, SBA has not yet developed details of how it will incorporate its experience with Hurricane Sandy throughout its disaster planning to better address resource and staffing needs resulting from early application submissions. Thus, we maintain that SBA should take additional action to fully address this recommendation. SBA stated that it plans to go further and incorporate the early application submissions in the next update of the ODA Playbook and in other ODA planning documents. It will be important for SBA to follow through on these plans in order to reduce the risk that increased early application submissions pose to SBA’s ability to deliver timely disaster assistance. In response to our recommendations that SBA conduct a formal documented evaluation of lenders’ feedback on IDAP, and report to Congress on challenges to implementing the program, SBA agreed that its Office of Capital Access (OCA) has not performed a formal documented evaluation of IDAP. SBA further stated that OCA intends to conduct such an evaluation that will include feedback from a variety of lenders and will use the information to identify potential changes to the statute, current regulations, procedures, and forms for IDAP. SBA acknowledged that the focus of our report was on its assistance to small businesses following Hurricane Sandy; however, SBA noted that its mission to provide disaster loan assistance is not limited to small businesses but also extends to businesses of all sizes, private nonprofit organizations, homeowners, and renters. Specifically, SBA noted that about 83 percent of loan applications received after Hurricane Sandy were for home disaster loans, which caused a significant impact on the agency’s overall response. In our report, which specifically reviewed SBA’s assistance to small businesses following Hurricane Sandy, we acknowledge that SBA disaster assistance is not limited to small businesses and home loan applications comprised about 80 percent of all Hurricane Sandy disaster applications. Our report also notes that business owners could have faced delays due to the large number of home loan applications submitted ahead of them and that one process improvement SBA made after Hurricane Sandy was to revise its loan processing approach to create two separate tracks for home and business disaster loan applications. Finally, consistent with information provided in the report, SBA summarized various other process improvements that the agency has implemented to mitigate the challenges faced during Hurricane Sandy and for future disasters. The draft report that we sent to SBA for comment also described many of these changes. For example, we note in our report that SBA is taking several steps to streamline the documentation requirements for applicants and improve the process to submit additional information. However, as stated in our report, because SBA has not received a large volume of loan applications since Hurricane Sandy, it is too early to determine the extent to which these changes will improve the timeliness of SBA’s response to future disasters with a magnitude similar to that of Hurricane Sandy. 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 SBA and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our objectives were to examine (1) the timeliness of the Small Business Administration’s (SBA) disaster assistance to small businesses following Hurricane Sandy and the factors that affected SBA’s timeliness, (2) the loan approval rates for small businesses and reasons for decline following Hurricane Sandy, in comparison with those of previous disasters, and (3) the extent to which SBA has implemented loan programs mandated by the Small Business Disaster Response and Loan Improvements Act of 2008. To evaluate the timeliness of disaster assistance to small businesses, we obtained and analyzed data from SBA’s Disaster Credit Management System (DCMS) on the average number of days it took SBA to process Hurricane Sandy business loans. Specifically, we analyzed the number of days from application receipt to loan decision, loan approval to closing, and closing to first loan disbursement. For analyses on the timeliness of disaster assistance, we used information on all loan application decisions, including information on reconsidered and appealed applications. To assess whether SBA met its timeliness goal of processing applications, we reviewed key documents, such as SBA’s Disaster Preparedness and Recovery Plan (DPRP), to identify any timeliness goals SBA has established and compared the DCMS data with such goals. Further, we reviewed work conducted by the SBA Office of Inspector General (OIG) to assess any changes SBA has made to setting and communicating goals related to timely disaster-loan processing. To identify factors that affected SBA’s timeliness of disaster assistance following Hurricane Sandy, we reviewed an internal assessment of SBA’s response to Hurricane Sandy as well as key SBA documents that outline agency roles and responsibilities for responding to a disaster, including the Disaster Assistance Program Standard Operating Procedures, DPRP, and Office of Disaster Assistance (ODA) Playbook. We also obtained and analyzed DCMS data on the number of business loan applications received after Hurricane Sandy by type of submission method (electronic or paper) and in processing from October 2012 to January 2014 to assess the extent to which identified factors affected SBA’s timeliness. Further, we interviewed SBA officials from the ODA, Processing and Disbursement Center, and Office of Disaster Planning to obtain their perspectives on challenges that SBA faced in providing disaster assistance and efforts taken to respond to those challenges. To obtain information on the factors that affected the timeliness of SBA’s assistance from the perspective of small businesses applying for loans, we spoke with selected Small Business Development Centers (SBDC) and other local organizations, such as chambers of commerce in New York and New Jersey, the states most heavily impacted by Hurricane Sandy. These selected entities were located in the counties that (1) were highly impacted based on assessments and reports by the Federal Emergency Management Agency (FEMA) and Department of Housing and Urban Development and (2) generated the most SBA business loan applications after Hurricane Sandy. We attempted to contact at least one SBDC and one local organization in each selected county. However, one SBDC and the local business organizations contacted in one county declined to be interviewed. Therefore, we spoke to a total of 14 entities (6 SBDCs and 8 local business organizations). While the results of these interviews could not be generalized to all counties and states affected by Hurricane Sandy, they provided insight into challenges SBA faced in providing timely assistance to small businesses. To calculate the loan approval rates for small businesses following Hurricane Sandy, we obtained and analyzed DCMS data on approvals and declines. Specifically, we divided the number of approved applications by the total number of approved and declined applications.Because physical disaster loans are not restricted to small businesses, we were not able to determine the physical disaster loan approval rate for small businesses. To evaluate the reasons why business loan applications were declined or withdrawn following Hurricane Sandy, we obtained DCMS data on the codes applied to declined and withdrawn applications and identified the most prevalent codes. To identify the reasons why approved business loans were cancelled following Hurricane Sandy, we obtained DCMS data on the codes applied to cancelled loans and identified the most prevalent cancellation codes. To compare the application approval and withdrawal rates, the reasons for decline, and the loan cancellation rates following Hurricane Sandy with those of previous disasters, we selected the five largest disasters since 2005 based on disaster loan application volume and performed the same analyses of the relevant DCMS data. The five disasters we selected were Hurricanes Katrina, Rita, Wilma, Ike, and Irene. We interviewed SBA officials to confirm that the Disaster Loan Program’s procedures for how data elements are defined, entered, and maintained remained substantially unchanged during this time period. To assess the reliability of DCMS data, we (1) performed comparisons across the data SBA provided to identify any obvious errors in accuracy and completeness; (2) reviewed related documentation such as the DCMS data dictionary and data verification documentation; and (3) worked with appropriate agency officials to identify any data problems. When we found discrepancies, such as unpopulated fields or data entry errors, we notified agency officials and worked with these officials to correct the discrepancies before conducting our analysis. We determined that the data were sufficiently reliable for the purposes of our report. To examine the extent to which SBA has implemented loan programs mandated by the Small Business Disaster Response and Loan Improvements Act of 2008, we reviewed the act, other relevant legislation, and draft guidance for the Immediate Disaster Assistance Program. Further, we interviewed SBA officials from ODA and the Office of Capital Access to obtain their perspectives on SBA’s efforts to implement the Immediate Disaster Assistance Program (IDAP) and related challenges because IDAP is the only one of the three mandated guaranteed loan programs for which SBA has issued regulations. We conducted this performance audit from August 2013 through September 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: New Jersey and New York Hurricane Sandy Business Disaster Loan Applications Received and Approved and Dollar Amounts (as of January 2014) The table below outlines the number of Hurricane Sandy business disaster loans that were received and approved and the dollar amounts of approved loans for highly impacted counties in New York and New Jersey. This table does not include all counties that were impacted by Hurricane Sandy and all counties that received SBA business disaster loans. The following tables include decline, withdrawal, and cancellation codes—as described in SBA’s Standard Operating Procedures, Appendixes 3, 4, and 9—that are used for physical disaster loan applications (both home and business), and Economic Injury Disaster Loan applications. In addition to the contact named above, Marshall Hamlett (Assistant Director), Shamiah T. Kerney (Analyst-In-Charge), Vaughn Baltzly, John McGrail, Marc Molino, Christine Ramos, Jennifer Schwartz, and Andrew Stavisky made key contributions to this report.
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On October 29, 2012, Hurricane Sandy made landfall, causing an estimated $65 billion in damage. SBA administers the Disaster Loan Program, which provides physical disaster loans (used to rebuild or replace damaged property) and economic injury disaster loans (used for working capital until normal operations resume) to help businesses and individual homeowners recover from disasters. In the aftermath of Hurricane Sandy, Congress passed the Disaster Relief Appropriations Act of 2013, which appropriated $779 million to SBA for disaster loans and administrative expenses. GAO was asked to review SBA's assistance to small businesses following Hurricane Sandy. This report examines (1) the timeliness of SBA's disaster assistance to small businesses; (2) the loan approval rates for small businesses and reasons for decline for Hurricane Sandy and previous disasters; and (3) the extent to which SBA has implemented programs mandated by the Small Business Disaster Response and Loan Improvements Act of 2008. GAO analyzed SBA data on application processing; reviewed documentation related to SBA's planning, relevant legislation, and regulations; and interviewed SBA officials. Following Hurricane Sandy, the Small Business Administration (SBA) did not meet its timeliness goal for processing business loan applications. From application receipt to loan decision, SBA took an average of 45 days to process physical business disaster loans and 38 days for economic injury loans, both of which exceed SBA's 21-day application processing goal. SBA said it was challenged by an unexpectedly high volume of loan applications that it received early in its response to the disaster, in addition to other challenges, such as technological issues. SBA estimated that application submissions would peak about 7 to 9 weeks after Hurricane Sandy, but it received a larger volume of applications than were expected prior to that period. While SBA officials told GAO that the agency has taken steps to respond to some challenges, it has not revised its disaster planning documents—including the Disaster Preparedness and Recovery Plan—to reflect the early volume of application submissions received after Hurricane Sandy and the potential impact a similar experience could have on staffing, resources, and forecasting models for future disasters. Federal internal control standards state that management should identify risks and take action to manage them. Without taking its experience with early application submissions after Hurricane Sandy into account in its disaster planning documents and analyzing the potential risk early submissions may pose for timely disaster response, SBA may be unprepared for a large volume of applications to be submitted quickly following future disasters, which may result in delays in loan funds for disaster victims. SBA approved 42 percent of business loan applications following Hurricane Sandy. This rate was lower than those of Hurricanes Katrina, Rita, and Wilma, higher than that of Ike, and comparable to that of Irene (the five disasters that generated the most SBA disaster loan applications since 2005). For Hurricane Sandy and for previous disasters, SBA declined business loan applications primarily because of applicants' lack of repayment ability and credit history. SBA has not implemented the guaranteed disaster loan programs Congress mandated in 2008, including the Immediate Disaster Assistance Program (IDAP)—a bridge loan program through private sector lenders providing disaster victims with up to $25,000 with a 36-hour application approval period. SBA officials told GAO they are trying to implement IDAP but have received feedback from lenders that some program requirements—such as a statutory minimum 10-year time frame for servicing the loan under certain circumstances—may discourage lenders from participating. However, SBA has not conducted a formal documented evaluation of lenders' feedback that would establish the basis for proposed changes to requirements for Congress to consider. Without an appropriately documented evaluation of its outreach to lenders, SBA may not have complete and reliable information on which to base its reporting to Congress about its challenges with implementing the programs required by the act. GAO recommends that SBA revise its disaster planning documents, conduct a formal documented evaluation of lenders' feedback on IDAP, and report to Congress on challenges to implementing the program. SBA generally agreed with GAO's recommendations.
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A firm must meet several initial eligibility requirements to qualify for the 8(a) program (a process known as certification), and then meet other requirements to continue participation. In general, a concern meets the basic requirements for admission to the program if it is a small business that is unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and U.S. citizens, and which demonstrates the potential for success. Table 1 summarizes the key requirements. Participation in the 8(a) program lasts 9 years, and once it is completed, a firm and the individual cannot reapply. The 9-year program tenure is divided into two stages—a developmental stage covering years 1 through 4, and a transitional stage covering years 5 through 9. During the transitional years, firms are required to meet certain activity targets for non-8(a) contracts to ensure they do not develop an unreasonable reliance on the program. Additionally, firms in the 8(a) program are eligible to receive sole-source and competitively awarded set-aside federal contracts. As part of the 8(a) program, SBA developed the Mentor-Protégé Program, in which experienced firms mentor 8(a) firms to enhance the capabilities of the protégé, provide various forms of business developmental assistance, and improve the protégé’s ability to successfully compete for contracts. To qualify initially as a protégé, an 8(a) firm must meet one of three conditions: (1) be in the developmental stage of the 8(a) program, or (2) never have received an 8(a) contract, or (3) be of a size that is less than half the size standard corresponding to its primary standard industry code. The mentor and protégé enter into a written agreement that sets forth the protégé’s needs and details the assistance the mentor commits to provide to address those needs. SBA must review and approve the initial agreement and annually evaluate specific mentor-protégé requirements. SBA’s 8(a) program is delivered collaboratively by two departments of SBA. The Office of Business Development (OBD) is responsible for policy formation and the certifications of 8(a) applications, approval of mentor- protégé applications, as well as the approval of existing 8(a) firms that are exiting the program (early graduations, approval of changes of ownership, approval of voluntary withdrawals, approval of terminations, and suspensions). OBD is also responsible for the virtual training and relevant policy briefings provided to SBA staff across the country responsible for executing the 8(a) program on an ongoing basis throughout the year. The Office of Field Operations (OFO) is responsible for supporting the business development specialists, tasked with executing the 8(a) program, who are located in 68 district offices across the country. Selected BDSs will have 8(a) firms assigned to them. The BDSs work directly with 8(a) firms to help prepare business plans; provide technical assistance; review continuing eligibility; coordinate with resource partners that provide counseling, training, loans, and other assistance to small businesses; and coordinate additional assistance and training for firms through another SBA program. BDS staff also conduct annual reviews of the firms’ progress in implementing business plans and analyze firms’ year-end financial statements, income tax returns, and records of contracting activity for certain compliance requirements, including program eligibility. The purpose of the annual reviews is to determine if firms continue to meet eligibility requirements and to identify business development needs. SBA long has been required by statute to complete annual reviews of all firms. As of fiscal year 2008, SBA had 182.5 full-time-equivalent BDS staff. SBA relies primarily on its annual reviews of 8(a) firms to ensure the continued eligibility of firms enrolled in the program, but we observed inconsistencies and weaknesses in annual review procedures related to determining continued eligibility for the program. For example, we found that SBA did not consistently notify or graduate 8(a) firms that exceeded industry averages for economic success or graduate firms that exceeded the net worth threshold of $750,000. The lack of specific criteria in the current regulations and procedures may have contributed to the inconsistencies that we observed, and SBA has taken steps to clarify some, but not all, of these requirements in a recent proposed rule change. Although BDSs have been challenged to perform all their responsibilities—in particular the statutory requirement to perform annual reviews on 100 percent of 8(a) firms—SBA has not yet assessed its workload to ensure it could carry out its responsibilities as we recommended in our 2008 report. SBA recently has implemented new procedures intended to streamline terminations that may address some of these inconsistencies that we identified with the lack of termination actions taken against firms that did not submit annual review documents as required. Finally, we found that SBA did not maintain an accurate inventory of Mentor-Protégé Program participants and did not document some annual oversight activities of these firms. As a result of these inconsistencies and weaknesses, there is increased potential that firms that no longer meet SBA 8(a) continuing eligibility requirements could be allowed to continue in the program and receive 8(a) contracts. In a substantial number of cases we reviewed, SBA staff failed to complete required annual review procedures intended to assess fundamental eligibility conditions, such as the firm’s net worth, used to determine if participants continue to meet the criteria for being economically disadvantaged. SBA may terminate firms found to be ineligible based on several conditions, including failure to submit required documentation for the annual review process or failure to maintain ownership and control by a disadvantaged individual. SBA may also graduate firms that have successfully completed the program by substantially achieving the targets, objectives, and goals in their business plans prior to the expiration of their program terms, and demonstrated their ability to compete in the marketplace without assistance from the program, or where one or more of the disadvantaged owners no longer are economically disadvantaged (a process known as early graduation). Criteria used to determine continuing eligibility and associated conditions such as economic disadvantage include factors such as personal assets, income, and net worth, while criteria used to determine if a firm successfully met targets and objectives include exceeding industry averages for economic success and owners making excessive withdrawals of company funds or other assets. We selected a random sample of files from each of the five district offices we visited to determine if district offices’ practices for monitoring 8(a) firms were consistent with requirements in regulations, policies, and procedures. Specifically, we estimated that for the five district offices, SBA failed to complete one or more annual required review procedures 55 percent of the time. Our estimates were based on a statistical sample of 123 annual review files from a population of 672 files. Of the 123 files sampled, we identified 67 instances where SBA failed to complete one or more annual review procedures related to eligibility determinations (a 55 percent rate). We tested seven specific annual review requirements relating to continuing eligibility: (1) notifying 8(a) firms that they had exceeded industry averages for economic success, (2) reviewing or graduating 8(a) firms or providing an explanation for retention if they had exceeded industry averages for 2 consecutive years, (3) reviewing net worth or graduating firms in which individuals exceeded the net worth threshold of $750,000, (4) performing eligibility reviews when required for such cases as a change in the firm’s ownership, (5) completing the required annual reviews, (6) obtaining required supervisory reviews (and signatures), and (7) imposing remedial actions or obtaining waivers for firms not meeting business activity targets. Table 2 shows information on the extent to which SBA did not complete these annual review requirements. Taking action when a firm exceeded industry averages for economic success by notifying firms that exceeded four of seven industry averages for 1 year graduating or explaining retention of firms that exceeded four of seven industry averages for 2 consecutive years Reviewing net worth or graduating firms in which individuals exceeded adjusted net worth limitations Performing required eligibility reviews because of a change in the firms’ ownership Imposing remedial actions or obtaining waivers for firms not meeting business activity targets Exceeding industry averages: Officials from two of the five district offices told us that while the guidance requires notifying 8(a) firms when they have exceeded industry averages for economic success, in practice the districts have been using discretion in notifying the firm after the first year in which this condition occurs. SBA procedures identify exceeding industry averages as a criterion for considering that the firm has met its goals and therefore may no longer be economically disadvantaged. The notification is intended to make participants aware that they may be subject to early graduation proceedings if they exceed industry averages for 2 consecutive years. SBA procedures state that if the firm exceeds industry averages for 2 consecutive years, the participant no longer can be considered economically disadvantaged unless the BDS provides evidence that early graduation is not warranted because of compelling reasons. Officials from these district offices explained that they did not follow these procedures, even though they were required, because they did not think that exceeding industry averages always indicated that participants no longer were economically disadvantaged. The level of staff knowledge about calculations for industry averages and the way in which staff entered the calculations into information systems also may have contributed to failures to meet this requirement. One district office told us it was not clear how the ratios were calculated. We also found errors in the calculations of industry averages at another district office. As we discuss in more detail later in the report, the industry ratio calculations require the BDS to manually enter data into a template that will then calculate the ratio of the firm’s performance against that of industry. As shown in table 2, we estimate that staff failed to complete this requirement in about 26 percent of the cases in which a notification letter was required, and in about 4 percent of cases in which industry averages were exceeded for 2 consecutive years. Reviewing net worth or graduating firms in which individuals exceeded adjusted net worth limitations: One of the clearest indicators of economic disadvantage that SBA uses is the net worth requirement. The regulations specifically state that for continued eligibility after admission into the program, adjusted net worth must be less than $750,000. Our file review shows that SBA retained an estimated 7 percent of the firms we sampled, in which there was no evidence that staff reviewed the firms’ net worth, or retained firms in the program despite their exceeding the net worth limits. Similarly, in our companion report investigating the potential for 8(a) program fraud and abuse, we identified cases in which SBA’s files clearly indicated that the firms were not eligible for the 8(a) program, yet SBA staff failed to terminate or graduate the firms from the program. Later in this report we discuss different factors that may have contributed to the retention of firms that clearly appeared to be no longer eligible, including the BDSs’ dual role of advocacy for and monitoring of the firms and workload constraints. Completing eligibility reviews: We estimated that about 4 percent of our file sample contained no evidence that SBA staff had performed a separate required eligibility review. Eligibility reviews are required in cases in which the BDS has reason to question a participant’s eligibility, including a change in the firm’s ownership (the factor we used for our analysis). Eligibility reviews are critical because they could uncover program participants that no longer met control and ownership eligibility requirements. Representatives from one district office we visited explained that these reviews were a low priority compared with other responsibilities, such as completing annual reviews and initial certifications. Completing annual reviews: Although SBA is statutorily required to perform annual reviews of 100 percent of 8(a) firms, we estimated that in about 2 percent of our sample, the files contained no evidence that SBA had performed the annual reviews. For example, in two cases, a district office had no record on file that annual reviews had been performed, and in three other cases it had bundled 2 years of reviews because of a change in the internal deadline for completing annual reviews (it skipped an annual review). Our sample of 123 files included only firms that received contracts. As a result, SBA could be unaware that a potentially ineligible firm had received contracts because it had not performed an annual review. We also identified a few instances in which SBA failed to follow procedural requirements related to the annual reviews, including not consistently documenting supervisory reviews in one district and failing to take remedial actions for firms not meeting their business activity targets. Documenting supervisory reviews: One district office did not always have the required supervisory signatures on the BDSs’ annual review recommendations. Of the 64 files that we sampled in that district, 20 lacked evidence of supervisory review signatures. That is, it appeared that only a BDS recommended a firm’s retention or dismissal from the program. Overall, we estimated that SBA did not meet this requirement for about 23 percent of the files in the five district offices. The noncompliance rate in this district may be attributable to the large size of its 8(a) portfolio—about 20 percent of all active fiscal year 2008 8(a) firms. According to district officials, the office also had competing priorities, such as the need to review applications for the Mentor-Protégé Program. Nevertheless, SBA officials were not properly monitoring their staff in these cases. Without the quality controls intended by the supervisory reviews, SBA has limited assurances that the annual reviews are fulfilling their intended purpose. Imposing remedial actions or obtaining waivers for firms not meeting business activity targets: In about 10 percent of the files we reviewed, district offices did not submit required documentation of remedial actions or a waiver when a firm in the transitional phase of the program did not meet its business activity targets. The remedial action is intended as an incentive for firms to obtain non-8(a) contracts so that they will be prepared to compete in the marketplace without the assistance of the 8(a) program upon graduation. Firms are required to achieve their targets or otherwise are not eligible to receive 8(a) sole-source contracts. By not notifying firms and setting up a remedial plan when required, the BDSs’ actions did not appear to be consistent with a key business development activity intended to help firms develop and exit from the program. Furthermore, SBA could be providing opportunities for potentially ineligible firms to receive sole-source contracts. Our file review results and interviews with district office officials identified numerous instances in which staff did not consistently apply objective standards relating to eligibility determinations. SBA lacks specific criteria in its current regulations and procedures that relate to some of the eligibility requirements such as determining whether a firm should be graduated from the program when it exceeds size standards, industry averages (such as total assets, net sales, working capital, or pretax profit), limits for personal compensation and assets, and excessive withdrawals. Furthermore, SBA guidance directs staff to rely on Office of Hearings and Appeals (OHA) decisions to use as thresholds for eligibility criteria, such as total assets and total compensation, in order to make eligibility determinations. However, as we noted in our related investigation, agency staff did not follow case law consistently. More specifically, we estimate that 17 percent of the firms had exceeded one or more eligibility criteria for 2 consecutive years, indicating that the firms may have been outgrowing the program, but were recommended by SBA for retention. Although each criterion in and of itself may not be a determinant for early graduation based on the current regulations, each is an important factor in determining if these firms continue to meet eligibility requirements and if they should remain in the program. SBA considers the totality of circumstances to determine whether a firm has met its goals and objectives and should be recommended for early graduation. In two cases in one district office, firms had exceeded both average compensation limits and the limits for excessive withdrawals for 2 consecutive years, and still were recommended for retention. The District Director and staff at the district office agreed that the two cases were red flags and that the firms should have been recommended for early graduation or termination. In another example, at a different district office, one firm that, over its 8- year tenure in the 8(a) program. had exceeded (1) industry averages for 5 years (in 2 of these years, the firm could have been considered for early graduation because it exceeded industry averages for 2 consecutive years), (2) compensation limits by having an average salary of more than $200,000 for 2 years, (3) the size standard for its primary North American Industry Classification System code, (4) and made excessive withdrawals in 1 year, but in each year was recommended for retention. This firm had more than $16 million in contracts by its sixth year in the program. We also found inconsistencies in the use of third-party sources to verify firm-reported data. For instance, two districts told us they reviewed third- party sources such as Internal Revenue Service (IRS) tax transcripts, debarments, and bank information such as withdrawals more routinely as part of their annual review, while two other districts told us they had not performed any third-party verification. At least in part, these inconsistencies can be attributed to lack of specific guidance or criteria regarding the need for third-party verification. Overall, the regulations state that SBA may terminate a firm on the basis of discovering false information, but contain few specific requirements to consult third-party sources for continuing eligibility. For example, participants must submit the IRS 4506-T transcript request form as part of the annual review requirements, which allows SBA to request tax return information. Additionally, the regulations suggest that staff should consult the federal list of debarred and suspended firms, since such firms are ineligible for admission to the 8(a) program. However, we found little evidence of regulatory requirements to obtain other third-party verifications. As noted in our report on the potential for 8(a) program fraud and abuse, validating data against other government or third-party sources is a fraud preventive control meant to keep ineligible firms from entering the program. However, we found that SBA relied heavily on self-reported information from the firms during the initial certification and annual reviews, with limited data validation performed after the firms had entered the program. Additionally, in that report we make a recommendation to assess the feasibility of using additional third-party data sources and site visits, based on random or risk-based criteria, to allow more independent verification of firm-reported data. SBA recently proposed changes to its Small Business Size and 8(a) Business Development Regulations to address technical issues as well as make more substantive changes resulting from its experience in implementing the current regulations. The agency last updated most of these regulations in 1998. According to a senior SBA official, these changes are intended to help SBA administer the program more effectively. The proposed rules would introduce more detailed guidance and allow for less staff judgment, particularly for the standards that appeared to be associated with the inconsistencies in the annual review procedures in our review of 8(a) case files. For example, the proposed regulations define more specific thresholds for considering an individual’s personal assets and compensation, and whether a firm has exceeded size standards. However, the proposed regulations do not introduce more specific requirements relating to exceeding industry averages, and would increase staff flexibility to make judgments relating to excessive withdrawals. Furthermore, the proposed rule changes do not address under what circumstances or to what extent staff should verify firm- reported information with third-party sources. According to SBA, the proposed rules attempt to address areas where the current regulations needed more clarity to ensure consistency with SBA policy as well as areas where the current regulations may unreasonably restrict participants. For example, the proposed rule changes allow for flexibility in judgment regarding excessive withdrawals because SBA believes that it is important that SBA look at the totality of the circumstances in determining whether to include a specific amount as a withdrawal in an effort to prevent some firms from circumventing excessive withdrawal limitations. However, the lack of specific criteria in the current regulations and procedures reduces assurances that the BDSs are making consistent and objective determinations about 8(a) firms’ continued eligibility in the program. BDSs devote significant time and resources to complying with the statutory requirement to perform annual reviews on 100 percent of 8(a) firms, a fact that affects the time and resources they can devote to other 8(a) activities. Monitoring the firms’ continuing eligibility for the 8(a) program is just one of many responsibilities of the BDS. The BDS also has an advocacy role—maintaining an ongoing responsibility to assist the participant in developing the business to the fullest extent possible. This includes striving to increase both the dollar value and the percentage of 8(a) contracts through communication of procurement activities, training, and counseling. SBA guidance requires the BDS to be the primary provider in helping firms develop business plans, seek loans, and receive counseling on finances, marketing, and management practices. Officials in all five of the district offices we visited indicated that they met the 100 percent annual review goal for fiscal year 2008 but stated it was a time- and resource-intensive process. For example, district staff estimated that the annual review process consumed from about 40 to 70 percent of their time. BDSs in the district offices told us their individual portfolios ranged from about 30 to 140 firms, depending on their experience level. Three districts noted that BDS turnover resulted in newer staff initially taking more time to process reviews and having smaller portfolios while they were learning their job. One of the districts told us that all available staff in the district office, including staff not assigned to the 8(a) program, had to assist in completing and processing annual reviews in order to meet the review goal. District office staff also told us that they spent a significant amount of time and resources following up with 8(a) firms to have them submit required documentation such as tax and business financial information, which also slowed the review process. District offices indicated that firms that did not have contracts were especially prone to submitting documents late because annual reviews were not a priority for them. These delays, in turn, reduced the amount of time that the BDSs had to spend on firms that exhibited a high risk of misrepresentation or noncompliance with 8(a) eligibility requirements— monitoring necessary for effective program oversight. Furthermore, in our November 2008 report we noted that demands of the annual review process and resource constraints affected SBA’s ability to conduct other program activities. For this report, some districts noted that the annual review goal affected their ability to perform site visits; follow up on issues that warranted more attention, such as red flags identified in the prior year’s annual review; and conduct other core business development activities. For instance, the frequency of site visits varied in the five offices we visited. One district office told us that staff were able to conduct site visits for all firms, but another district conducted site visits for about half of its firms, and the remaining districts performed site visits on a limited basis, citing circumstances such as a firm transferring into the district or confirming that a firm was operating at a bona fide place of business. Another district stated that staff do not have time to follow up on red flags such as concerns identified in prior annual reviews because of the emphasis on meeting the annual review goal. Another district also told us that meeting the 100 percent annual review goal has limited the district’s ability to get out and educate agencies and firms. This included providing outreach and awareness training. Finally, another district told us the annual reviews have affected its ability to provide developmental assistance and services to address the 8(a) firm’s needs. The officials also stated that it was hard to develop working relationships with the firms because of the amount of work reports, projects, and other duties assigned. Although BDSs have been challenged to perform all their responsibilities, SBA has not yet assessed their workload to ensure they could carry out their responsibilities, as we recommended in our 2008 report. As we reported, SBA did recognize specifically that staffing constraints affected its ability to perform annual reviews. For example, according to its 2006 Performance and Accountability Report, a main contributing factor in the agency’s inability to complete annual reviews of all 8(a) firms was a lack of staff resources in the district offices. However, since our previous work in 2008, the emphasis on meeting annual review compliance requirements has strained staff capacity to conduct other core activities for the 8(a) program. By not assessing BDS workloads, SBA may be bypassing opportunities to better support the mission of the 8(a) program—that is, to develop and prepare small disadvantaged firms for procurement and other business opportunities. In addition, the lack of time to follow up on issues of concern identified in prior-year reviews also undermines SBA’s ability to carry out its monitoring responsibilities. On the basis of our file review, we observed instances in which firms were not compliant with 8(a) continuing eligibility requirements related to document submission, but remained in the program. Failure to submit documentation as required is the primary source of noncompliance in the 8(a) program, and is listed in the regulations as an example of good cause for termination. Our file review showed that business development staff frequently accepted incomplete, incorrect, and late documentation from firms and in many cases recommended the noncompliant firms for retention. Of the 123 firms we tested, 61 percent were noncompliant because of failures to submit documents as required, but staff recommended 3 percent for termination. According to the regulations and procedures, unless participants are also suspended in conjunction with termination proceedings, 8(a) firms remain eligible to receive program benefits and to compete for contracts during termination proceedings, a fact that affords them the opportunity for notice and an opportunity to appeal a termination decision. During interviews with district office staff, SBA officials acknowledged that some firms took more time than allowed to submit documents. One district office official stated that some firms did not take deadlines seriously and would delay the annual review process. District staff estimated that despite a 30-day deadline, most firms submitted documents within 30 to 45 days and in some cases, up to 60 days after their anniversary date. As mentioned earlier, our file review of 123 firms showed that 49 percent submitted late documentation. In one case, a firm failed to provide documents on time and SBA staff waited 4 months before recommending the firm for termination. After receiving the letter of intent to terminate, the firm took another 2 months to submit the requested documents. SBA then reinstated the firm after a total of 6 months’ delinquency. In another case, a firm failed to submit financial information, and business development staff sent the letter of intent to terminate shortly after the firm’s deadline passed. SBA waited another 6 months for the firm to submit the required documentation, which turned out to be incomplete, but upon receipt SBA chose to reinstate the firm. The next year, the firm submitted a personal financial statement identical to the previous year’s (including dates), but SBA did not take action. As previously discussed, the BDS’s role as an advocate for 8(a) firms may have contributed to a reluctance to terminate firms even if the BDSs had a basis for doing so. Staff in one district office explained they worked with firms before initiating the termination process, in an attempt to avoid termination and to achieve the program mission of preparing disadvantaged firms to compete in the market. Similarly, as noted in our companion report, SBA staff responsible for annually assessing the eligibility of participants were not actively looking for fraud and abuse in the program—and in some cases, staff supported firms despite eligibility concerns that we raised. Furthermore, our file review provides examples of reluctance to terminate noncompliant firms. An 8(a) firm sent an unsigned annual update form 3 months after its deadline. One month later, SBA recommended retention pending receipt of the firm’s remaining documents, such as the personal financial statement and tax returns required to demonstrate economic disadvantage. More than 2 months later, the firm provided partial financial documentation. Although SBA’s recommendation to retain the firm was based on expecting to eventually receive the firm’s remaining documents, these required documents still were outstanding at the time of our file review— which occurred approximately 1.5 years after the initial annual review deadline. As a result, it is unknown whether the firm was eligible to continue participating in the 8(a) program because SBA did not have the needed information to fully assess the financially disadvantaged status of the firm. We also have observed instances in which the BDS recommended termination but higher levels of management retained the noncompliant firms in the program. For example, one firm did not submit any annual review documentation and the BDS subsequently recommended it for termination. SBA headquarters disagreed with the determination and chose to retain the firm. However, there was no documentation in the file to explain the basis for this decision. In contrast to these cases, there has been an overall upward trend of firms exiting the 8(a) program through termination or voluntary withdrawal. According to headquarters officials, this trend is a result of the agency’s emphasis in recent years on fully meeting its statutory requirements to conduct annual reviews of all firms. By requesting the annual update from the firm in anticipation of completing the annual review, business development staff provide the firms an opportunity to demonstrate basic program compliance. Table 3 shows exit data trends over the past several years. The most recent data indicate a sharp increase in overall terminations and voluntary withdrawals from the 8(a) program. For example, from 2007 to 2008, the number of terminations increased more than threefold. Firms are given the option to withdraw from the program when faced with termination proceedings. SBA headquarters officials explained that some firms prefer a withdrawal instead of a termination on their record, and that the increase in annual reviews also increased this opportunity. Effective September 2009, SBA revised its 8(a) program procedures to shorten the termination process and improve internal controls. The procedural change shortens the termination process by 30 days to 135 days. While this falls short of the 75-day reduction SBA officials planned at the time of our November 2008 report, it may succeed in removing more ineligible firms from the program. It remains to be seen what effect this time reduction will have on termination as an eligibility control. To create the 30-day reduction in the termination procedure, SBA gave the district offices responsibility for sending letters of intent to terminate directly to the firms. Previously, district offices had to submit termination information to headquarters before an intent letter could be mailed. Because of this change, the district office primarily will be in charge of handling new documents the firm submits after receiving the intent letter. By giving the district offices direct responsibility for tracking documentation and communicating with the firm during this phase, SBA intends the process to be more streamlined and straightforward. While the new procedures reaffirm that firms may be terminated for good cause (as outlined in the program regulations), they provide no additional discussion of what factors or conditions would warrant termination. The 8(a) regulations to which the program procedures refer do provide examples of “good cause,” including a “pattern of failure” to make required submissions in a timely manner. However, they provide no examples or criteria for staff to use in determining what constitutes a pattern of failure. The lack of guidance may have contributed to staff decisions to retain or reinstate noncompliant firms. Issues such as data integration, compatibility, and functionality associated with SBA’s Business Development Management Information System (BDMIS) for the 8(a) program present challenges that affect effective program management. The agency has been planning to address some data integrity and compatibility issues with BDMIS and E-8(a), a database that provides business status and business contract activity for each participant in the 8(a) program. District office officials indicated that information discrepancies existed between the two systems and required dual data entry of some firm information. SBA officials stated they were reconciling the information in E-8(a) and BDMIS to address discrepancies. Additionally, the officials explained that some information had to be entered separately into the two systems but that they were moving toward a single data feed. The officials expected this change to occur by the end of the third quarter of fiscal year 2010. As of October 2008, BDMIS was operational in all district offices, allowing 8(a) participants to submit their annual review data electronically and the BDSs to review the documentation electronically. District staff identified benefits and challenges with the implementation of the online annual review process in BDMIS. For example, one district told us that learning the BDMIS system was challenging initially for some 8(a) participants and depended on participants’ skills and abilities to enter information into the system. Another district noted that a calculator that assesses a firm’s performance in its respective industry was a positive addition to the BDMIS system, allowing the BDS to move through reviews more quickly and efficiently. But the BDS still had to enter firm financial data manually into the calculator, a fact that could increase the likelihood for data entry errors. (The industry ratio calculations require the BDS to manually enter data into a template that calculates the ratio between the firm’s performance and that of industry.) For example, at one district we visited, we observed BDS staff manually entering industry performance ratios. District staff also told us that BDMIS’s functionality has been limited because the system did not allow staff to access complete firm information, such as contract and historical information, and develop reports. Some district offices also told us that the BDSs’ overall workload has not improved and that BDSs spend a significant amount of their time following up with 8(a) firms to submit relevant annual review documents. Despite these challenges, district staff with whom we spoke said BDMIS has been helping to achieve better organization and tracking and anticipated that when fully operational, it could save time and increase transparency. SBA officials also told us that they have been planning to upgrade BDMIS, which currently is operating in its first version. SBA expects to complete three upgrades by the end of the fiscal year 2010. As part of the upgrades, SBA plans to integrate an existing federal database, the Federal Procurement Data System-Next Generation, that contains contracting information that could help SBA staff to verify firms’ contracting information and enable district staff to run reports on their 8(a) firms. District staff told us they rely on the 8(a) firm and federal agencies to provide contract information that is used in the annual review to determine a firm’s ratio of 8(a) and non-8(a) contracts. As the firm matures, the goal for 8(a) firms is to increase the amount of non-8(a) contract work and decrease reliance on 8(a) contracts. However, one district explained that contract information such as contracts pending and awarded is recorded in E8(a) but the information is not complete because it does not contain obligation data. SBA’s planned system upgrades could improve the efficiency of annual reviews, particularly because they would likely address duplicative data entry, make more information readily available to staff, and decrease the amount of time spent on annual reviews. However, it is too early to tell whether these changes, once implemented and fully operational, would achieve their intended purposes. SBA did not maintain an accurate list of Mentor-Protégé Program participants. Specifically, the headquarters office has had difficulty verifying which firms actively participate in the program. An SBA headquarters official responsible for the program stated that staff added firms to a working list based on agreements once they were approved at headquarters. However, this list is not systematically updated when mentor-protégé agreements are extended or dissolved, which occurs at the district office level instead of at headquarters. While the list constituted the agency’s only central participation roster for the program, officials stated it was not meant to be used as an eligibility control. Most district offices that we visited kept their own lists, which occasionally were used to verify the headquarters list. One district office we visited did not compile a list of its mentor-protégé participants, but instead relied on individual program files and the list from headquarters for information. When we followed up with other district offices, we found contradictory or inconsistent data in comparison with those of headquarters. For example, the headquarters list showed two active mentor-protégé agreements for a district office that stated it had no active participants. Because there is no list of active mentor-protégé agreements, SBA may not be able to properly monitor 8(a) protégé firms that submit agreements with more than one mentor, or mentors that submit agreements with more than one 8(a) protégé. Currently, mentors may have more than one protégé if specially approved by SBA. At least 28 mentor firms appeared to have more than one protégé firm, but SBA was unable to confirm whether 5 of these mentors were authorized to do so. SBA has proposed new regulations that would limit mentor firms to a maximum of 3 protégé firms at a time. SBA also has proposed changes to the regulations that would allow protégé firms to have more than 1 mentor under limited circumstances. To date, the regulations have prohibited protégé firms from having more than one mentor at a time. However, we identified 12 protégé firms that appeared to have 2 mentors at the same time. SBA indicated that some of these relationships had been dissolved, but these firms remained on its list of approved mentor-protégé agreements. The current lack of data limits the agency’s ability to fully monitor the Mentor- Protégé Program. As a result, unauthorized partnerships could receive 8(a) set-aside contracts. Maintaining an accurate list of firms participating in SBA’s Mentor-Protégé Program is an important control mechanism to ensure participation only by eligible firms and that the agency has relevant and reliable information for management. Monitoring eligibility for the Mentor-Protégé Program is especially important because participants were more successful in earning proceeds from federal contracts in fiscal year 2008 than the larger pool of 8(a) firms. Mentor-protégé participants averaged $4.1 million in sales compared with $2.4 million for other 8(a) firms. As a group, these participants earned $638 million in fiscal year 2008. In addition to finding high-level data inconsistencies, including unverifiable participation lists and mentors and protégés with multiple agreements, we found cases in which SBA failed to properly document analysis and monitoring of the Mentor-Protégé Program. As part of our file review across five district offices, we tested 20 8(a) firms with mentor- protégé agreements. We focused on initial agreement information, annual updates, and recommendations. Our file review results showed that SBA staff failed to comply with certain initial review and annual review procedures for participants in 6 of the 20 mentor-protégé cases that we reviewed. These procedures include providing a written eligibility analysis and ensuring a signed supervisory review of the BDS’s recommendation. In our interviews with district office officials, we also found that Mentor- Protégé eligibility information had not been incorporated into BDMIS. District offices were not able to integrate initial approval recommendations and annual review monitoring with the firm’s general 8(a) eligibility information held electronically in BDMIS. As a result of the lack of documentation and the data limitations discussed above, SBA has not been able to properly oversee this program. SBA can receive information and complaints from other 8(a) firms, disgruntled 8(a) employees, and anonymous sources, but SBA does not maintain comprehensive data about complaints such as allegations that certain 8(a) firms may not comply with eligibility requirements. Although complaint information is not the primary mechanism for ensuring continuing program eligibility, it can be an additional tool for identifying fraud or wrongdoing. As we noted in our other GAO investigative report on the 8(a) program, detection and monitoring are crucial elements in a well-designed fraud prevention system. Complaints and other allegations regarding the eligibility of firms in the program can serve as red flags for SBA staff to take additional steps to ensure that firms continue to meet program requirements. District office officials told us that complaints received at the district receive an initial review (to determine if they warrant follow-up), which may include follow- up with other agencies and the specific firm to gather more information. SBA’s standard operating procedures instruct staff to refer to SBA’s Office of Inspector General (OIG) any possible criminal violations and other wrongdoing involving SBA programs, such as knowingly making or using a statement or document that is false, fictitious, or fraudulent. If warranted, complaints are to be referred to SBA’s OIG for possible investigation. One district told us that the district counsel reviews the evidence, and if the case has merit, the information is referred to the SBA OIG for further investigation. Two other districts told us the BDS will seek more information by checking with the contracting agency involved regarding the nature of the complaint or contacting the 8(a) firm for clarification before making a referral to OIG. However, because district staff do not collect and maintain comprehensive complaint information involving 8(a) firms, staff are not aware of the types and frequency of complaints across the agency, including potential eligibility concerns. Specifically, none of the five districts that we visited were able to provide us with a list of complaints or allegations that they received over the past year regarding the potential ineligibility of 8(a) firms in their districts. While OIG maintains general complaint information such as the name of the 8(a) firm and type of complaint, a senior OIG official told us that 8(a) complaints involving a single company generally did not rank high in priority for a review because of resource limitations and other priorities but that it might be considered in the OIG’s work- planning effort. OIG officials explained that the OIG ultimately also could refer a case to the U.S. Attorney for prosecution, but that the threshold for prosecutions was high and many cases did not meet that threshold. As a result, it appears that complaint data involving 8(a) firms are not being utilized to the full extent as a means to identify potential areas of concern such as program eligibility issues. Without a standard process for collecting and analyzing complaints, SBA staff—and the agency as a whole—lack information that could be used to help identify issues relating to program integrity and help improve the effectiveness of SBA oversight. SBA’s 8(a) program provides opportunities for participating firms to collectively receive billions of dollars in federal contracts on a competitive or noncompetitive basis. As a result, it is critical that SBA’s annual reviews of 8(a) firms are performed effectively to help ensure that only eligible firms are allowed to continue to participate in and benefit from the program. However, our file review at five district offices found inconsistencies in the annual review policies and procedures followed by SBA staff related to program eligibility. This suggests a need for greater monitoring by SBA and potentially a need for more guidance and training to ensure greater consistency in the performance of required annual review procedures. Furthermore, the lack of specific criteria in the current regulations related to eligibility determinants such as size standards and industry averages and the dual roles of the BDSs—providing oversight and being an advocate for the firm—may have contributed to the variation in annual review practices we observed. By clarifying guidance, further detailing or expanding procedures, and emphasizing the importance of quality controls, SBA could help eliminate ambiguities, improve the quality of reviews, and provide clearer criteria against which to judge eligibility and ensure that only intended recipients benefit from program participation. Workload constraints of BDS staff may have been a contributing factor to the inconsistencies and deficiencies identified in our review of annual review files in the five districts that we visited. While the annual review process is central to ensuring program integrity, SBA’s statutory requirement to conduct annual reviews of 100 percent of 8(a) firms also is time- and resource-intensive. The workload demands associated with the annual review process likely have affected the quality of these reviews as well as detracted from the time staff have been able to devote to other core 8(a) program responsibilities, ranging from technical assistance to mentoring. As we previously recommended and continue to believe, an assessment of the BDS workload could help ensure the BDSs can carry out their responsibilities and determine what mechanisms can be used to prioritize or redistribute their workload. Such an assessment also would be helpful in assessing the multiple roles and responsibilities of BDS staff, including ways to mitigate the conflicting roles of business development, and ensuring that only eligible firms are allowed to participate in the program. In a fiscally challenged environment and with workload constraints as a constant, it is important that the agency review staff and resource allocations and identify process efficiencies wherever possible. Changes that SBA recently made to termination procedures, coupled with the increase in terminations overall, may help to alleviate workload constraints for district office staff. As we noted in our November 2008 report, the inefficient termination process consumed scarce SBA resources and may have affected business development activities. District staff could take advantage of the revised, more efficient termination process to minimize time spent waiting for documents from firms and free up time for business development and other activities. However, SBA retained some firms that repeatedly did not submit required documentation for annual reviews. By monitoring the implementation of regulations relating to documentation requirements, SBA could help staff more readily identify firms for termination, reduce the time staff spent “chasing” documentation, and help improve the timeliness of annual reviews. Additionally, by providing specific examples in the regulations or procedures of what is considered to be a pattern of failure, staff would be able to better justify termination decisions. The agency also faces a number of challenges in effectively monitoring and managing the Mentor-Protégé Program, which is an important subset of the 8(a) program. For example, SBA headquarters and district offices could not agree or provide current and basic information on the total number of mentor-protégé agreements. Maintaining accurate information on participants is a basic and important control mechanism to monitor 8(a) protégé firms that submit agreements with more than one mentor, or mentors that submit agreements with more than one 8(a) protégé. By developing a centralized process to collect and maintain information on program participants, SBA would have a critical tool necessary to properly monitor and oversee the program. Finally, SBA also has an opportunity to develop another tool that could enhance its oversight of the 8(a) program. Currently, SBA lacks comprehensive data on complaints involving 8(a) firms because it does not systematically collect and analyze information on the nature of the complaints and their disposition. Although complaint data are not a primary mechanism to ensure program eligibility, continual monitoring is a key component in detecting and deterring fraud. By developing an agencywide process for documenting and analyzing complaints, SBA would have an information resource that could be used with other efforts to provide reasonable assurance that only eligible firms are participating in the program. To improve the monitoring of and procedures used in assessing the continuing eligibility of firms to participate in and benefit from the 8(a) program, we recommend that the Administrator of SBA take the following six actions: To help ensure greater consistency in carrying out annual review procedures and improve the overall quality of these reviews, we recommend that the SBA Administrator monitor, and provide additional guidance and training to, district offices on the procedures used to determine continuing eligibility, including taking appropriate action when firms exceed four of seven industry size averages, including notifying firms the first year and enforcing procedures relating to early graduation of firms that exceed industry averages for 2 consecutive years; obtaining appropriate supervisory signatures to finalize annual review submitting remedial action or a waiver for firms in the transition phase that did not meet business activity targets; graduating firms that exceed the net worth threshold of $750,000; performing timely eligibility reviews in required cases; and completing required annual reviews. To help reduce inconsistencies between districts and BDS staff in annual review procedures requiring judgment, we recommend that SBA review its existing 8(a) program regulations and its proposed changes with the intent of providing additional criteria and examples for staff when assessing key areas of program eligibility and determining whether a firm should be graduated from the program when it exceeds size standards, industry averages (such as total assets, net sales, working capital, or pretax profit), and limits for personal compensation and assets, and excessive withdrawals. To help address competing demands on 8(a) resources, SBA should assess the workload of business development specialists to ensure that they can carry out all their responsibilities. As part of this assessment, SBA should review the roles and responsibilities of the BDSs to minimize or mitigate to the extent possible the potentially conflicting roles of advocacy for firms in the program with the responsibility of ensuring that only eligible firms are allowed to continue to participate in the program. In addition, SBA should review the size of the 8(a) portfolio for all business development specialists and, if necessary, determine what mechanisms should be used to prioritize or redistribute their workload. To reduce the practice of retaining firms that fail to submit annual review documentation as required, SBA should monitor the implementation of regulations relating to termination to see if they are achieving their purpose or whether business development staff need further guidance in interpreting the regulations. SBA should consider providing specific examples of what might be considered a pattern of failure to submit documentation as required. To better manage and monitor participation in the Mentor-Protégé Program, including compliance with the number of allowable mentor and protégé firms, SBA should develop a centralized process to collect and maintain up-to-date and accurate data on 8(a) firms participating in the Mentor-Protégé Program. SBA should consider incorporating information on Mentor-Protégé approvals, extensions, and dissolutions in existing electronic data systems used for the annual review process. To more fully utilize and leverage third-party complaints to identify potentially ineligible firms participating in the 8(a) program, design and implement a standard process for documenting and analyzing complaint data. We requested SBA’s comments on a draft of this report, and SBA’s Associate Administrator of the Office of Government Contracting and Business Development provided written comments that are presented in appendix II. SBA agreed with each of the six recommendations and stated that some corrective measures have already been implemented and additional actions are planned to be implemented in the near future. For example, SBA stated it has implemented a comprehensive training curriculum, revised guidance for annual review procedures, and will provide additional examples that will assist staff in assessing key areas in making annual review determinations. SBA also indicated that it had begun to develop a routine centralized process to collect and maintain accurate data related to the Mentor-Protégé Program. Finally, SBA stated that it plans to assess BDS workload and develop a central repository for third-party complaints. 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 other interested congressional committees and the Administrator of the Small Business Administration. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your office 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 III. Our objectives were to (1) evaluate the procedures and processes that the Small Business Administration (SBA) has implemented to ensure that only eligible firms remain in the 8(a) program, and (2) assess the extent to which SBA used external mechanisms, such as complaints by other 8(a) firms, to help ensure that only eligible firms participate in the program. To evaluate the procedures and processes that SBA has implemented to help to ensure that only eligible firms participate in the 8(a) program, we reviewed applicable statutes and the legislative history of the 8(a) program, SBA’s regulations and guidance for administering the program, our previous reports, and studies of the program conducted by SBA, SBA’s Office of Inspector General (OIG), and external organizations. Additionally, we randomly sampled files for review at 5 selected district offices to assess SBA’s compliance with its eligibility review procedures for the 8(a) and Mentor-Protégé programs. We selected the 5 district offices based on the high dollar value of contract obligations in these districts and geographic diversity. Our sample population included firms that were active in the 8(a) program in fiscal year 2008 and had 8(a) contracts in fiscal year 2008. We identified these firms by using SBA’s list of active fiscal year 2008 8(a) firms and matching these data to the Federal Procurement Data System-Next Generation (FPDS-NG) to determine which of those firms had obligations. For our review, we excluded those firms that joined the program during calendar year 2008, because these firms would not yet have been in the program long enough to have an annual review on file. We also excluded Alaska Native Corporations, tribally owned, Native Hawaiian Organization-owned, other Native American-owned, and Community Development Corporation-owned firms because of the different 8(a) eligibility requirements applied to these entities. The results of our sample are generalizable only to the 5 district offices. We randomly sampled 123 8(a) firms from our population, and an additional 13 8(a) firms that had mentor-protégé agreements, which we judgmentally selected from SBA’s list of Mentor-Protégé firms as of September 2009. For each firm, we reviewed its most recent 2 years of annual reviews for the period 2007-2009, and any existing mentor-protégé agreements, related documents, and correspondence. We developed a data collection instrument (DCI) to collect key annual review data from each file. The DCI was pretested in 2 district offices and modified based on these tests. We also analyzed mentor- protégé data to identify protégé firms that may have multiple mentors, which are against regulation, and mentor firms that may have multiple protégés, which is allowable only when specially authorized by SBA. To identify these cases, we sorted the data by firm name and searched for duplicate matches. A total of 672 firms met our study criteria and are shown in table 4. We randomly selected the indicated number of cases within each regional office. We treated this as a stratified random sample and weighted the sample cases accordingly for our analysis. Our estimates are statistically representative for all files maintained in these 5 SBA regional offices. Because we treated our file review as a stratified random sample, we assumed our sample was only one of a large number that could have been drawn. Because each sample could have provided different estimates, we expressed our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual 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 based on the file review includes the true values in the sample population. The 95 percent confidence intervals for each of the estimates are summarized in table 5. We performed appropriate data reliability procedures for our sample testing at the 5 district offices and analysis of inappropriate mentor- protégé relationships. We compared SBA data with data from other sources such as FPDS-NG and the Central Contractor Registry, performed electronic testing, reviewed related documentation and internal controls, and performed interviews with knowledgeable agency officials. We determined that the data were sufficient to perform our sample testing and project our results to the 5 district offices in our population of 8(a) firms. We also determined through these methods that data relating to mentor- protégé participants were sufficient to report on descriptive statistics of mentor-protégé firms with contracts. The discrepancies we found in the general list of mentor-protégé participants are documented within the report. To assess the extent that external mechanisms exist, such as complaints by other 8(a) firms, to help ensure that only eligible firms participate, we interviewed agency and SBA Office of Inspector General officials, and we reviewed SBA OIG complaint data. We also interviewed officials in SBA’s Office of Business Development, Division of Program Certification and Eligibility, and district office staff to discuss their procedures for determining initial and continuing eligibility, oversight efforts, technical assistance offered, and mechanisms to help identify ineligible firms in the program. We conducted our work in Boston, Massachusetts; Denver, Colorado; San Antonio, Texas; San Francisco, California; and Washington, D.C., between May 2009 and March 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Harry Medina (Assistant Director), Carl Barden, Tania Calhoun, Janet Fong, Cindy Gilbert, Julia Kennon, Amy Moran Lowe, Barbara Roesmann, Verginie Tarpinian, and William Woods made key contributions to this report.
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The Small Business Administration's (SBA) 8(a) program helps eligible socially and economically disadvantaged small businesses compete in the economy by providing business development activities, such as counseling and technical assistance, and providing opportunities to obtain federal contracts on a set-aside basis. GAO was asked to review SBA's internal control procedures for determining 8(a) eligibility. Specifically, we (1) evaluated the procedures and processes that SBA has implemented to ensure that only eligible firms participate in the 8(a) program, and (2) assessed the extent to which SBA uses external mechanisms such as complaint information in helping to ensure that only eligible firms participate. To address these objectives, GAO reviewed SBA guidance and prior reports, interviewed SBA officials, and conducted site visits and file reviews of 123 randomly sampled 8(a) firms covering the most recent 2 years of annual reviews at five SBA locations. SBA relies primarily on its annual review of 8(a) firms to ensure their continued eligibility in the program, but inconsistencies and weaknesses in annual review procedures limit program oversight. GAO's review of a random sample of 8(a) firms identified an estimated 55 percent in which SBA staff failed to complete required annual review procedures intended to assess fundamental eligibility criteria, such as being economically disadvantaged. Multiple factors appear to have contributed to the inconsistencies identified, including the lack of specific criteria in SBA's current regulations and procedures that relate to some eligibility requirements such as determining whether firms exceed program thresholds for industry size averages, personal compensation, and personal asset limits. As a result, firms that may have outgrown the program continued to receive 8(a) program benefits. For example, GAO estimated that 17 percent of the firms we reviewed had exceeded one or more eligibility criteria for 2 consecutive years, but were recommended by SBA for retention. SBA has taken steps to clarify some, but not all, of these rules in recent proposed rule changes. SBA is required by statute to perform annual reviews on 100 percent of 8(a) firms but staff spent significant amounts of time trying to obtain annual review documents from firms--especially firms that did not have 8(a) contracts--which affected the timeliness of reviews. GAO identified a significant number of instances in which firms failed to submit annual review documents as required but still were recommended for retention. The Business Development Specialists' (BDS) dual role of advocacy for and monitoring of the firms may have contributed in part to the retention of ineligible firms. SBA has been addressing some data integrity and compatibility issues by enhancing its primary electronic system for annual review information. Finally, SBA did not maintain an accurate inventory of 8(a) Mentor-Prot?g? Program participant data, which limited the agency's ability to monitor these firms. SBA's program offices did not maintain comprehensive data on or have a system in place to track complaints on the eligibility of firms participating in the 8(a) program. District staff were not aware of the types and frequency of complaints across the agency. As a result, SBA staff lacked information that could be used with other information to help identify issues relating to program integrity and help improve the effectiveness of SBA oversight. Although complaint data are not a primary mechanism to ensure program eligibility, continuous monitoring is a key component in detecting and deterring fraud.
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least 70 countries. In addition, IRS pointed to certain current QI requirements that provide IRS with some information on fraud and illegal acts. However, as discussed in our draft report, we believe IRS could draw on existing auditing standards to establish a consistent definition of fraud and illegal acts for the purposes of the QI program. In addition, the provisions to which IRS refers rely in part on self-reporting by the QI and in part focus on “know your customer” rule violations alone. However, self-reporting by the QI is not equivalent to judgments by the auditors about whether there are indications that fraud or illegal acts have occurred. And the universe of potential fraud or illegal acts extends beyond potential violations of know your customer rules. Therefore we reaffirm our recommendation. Finally, IRS agreed that while there are benefits to electronic filing of tax Forms 1042 and 1042-S, IRS said such a requirement would be a burden for QIs that file only a few (3 or fewer) forms. IRS said it has implemented a procedure to include an application to electronically file for all QIs applying for or renewing participation in the program. If IRS were to require all QIs to electronically file, we believe any burdens filers of few forms would face could be addressed by offering them a waiver opportunity similar to waivers that are available to all institutions that are currently required to file electronically (those that file more than 250 returns). Requiring electronic filing whenever possible would reduce IRS’s costs and improve the timeliness and accuracy of data for program oversight. Money is mobile and once it has moved offshore, the U.S. government generally does not have the authority to require foreign governments or foreign financial institutions to help IRS collect tax on income generated in the U.S. from that money. In 1913, the United States enacted its first legislation establishing that U.S. persons and NRAs were subject to withholding at source before the investment income leaves U.S. jurisdiction. Subsequent legislation made withholding applicable to dividends and certain kinds of bond income earned by NRAs, foreign corporations, foreign partnerships, and foreign trusts and estates. IRS issued a comprehensive set of withholding regulations for NRAs in 1956. These regulations have been changed over the years to reflect statutory changes or perceived abuses by taxpayers. To attract foreign investment, the tax rules were further adapted to exclude several types of NRA capital income from U.S. taxation, such as capital gains from the sale of personal property, interest income from bank deposits, and “portfolio interest,” which includes U.S. and corporate debt obligations. The latter exemption helps finance the U.S. national debt by offering a U.S. tax free rate of return for foreigners willing to invest in U.S. bonds. Among the types of U.S. source investment income sent to NRAs, some are exempt from U.S. tax and some are taxable. Payors must report this income to IRS, withhold where appropriate, and deposit such tax with Treasury. Any entity required to perform these withholding and reporting duties is known as a “withholding agent.” For example, some types of income sent to NRAs, such as bank deposits and portfolio interest, are exempt from taxation by U.S. statute. Payors of this income do not have to withhold tax on this income but are required to report certain information to IRS about the amounts of income sent and to whom. Other types of investment income sent to NRAs, such as the gross proceeds on the sale of personal property (e.g., such as securities in a U.S. corporation), are also exempt from U.S. tax but financial intermediaries are neither required to withhold taxes on the income nor report information on the payment of the income to IRS. Some U.S. investment income, such as dividends, is subject to a statutory tax rate of 30 percent. Payors of this income generally are to withhold the 30 percent tax if the recipients do not reside in a nation that has negotiated a treaty with a lower tax rate or cannot show they are in fact residents in the treaty country. The payors also have to report to IRS certain information covering the amount of income sent and to whom. About $5 billion of this capital income was withheld for tax year 2003. Had the full 30 percent rate been applied to the entire $293.3 billion, about $88 billion would have been withheld, implying that about $83 billion of this income was exempt from tax or was taxed at lower tax treaty rates. Chains of payments are routine in modern global finance, and the QI system of reporting is designed to reflect this normal course of business. For example, a small local bank in a foreign country may handle the accounts of several owners of U.S. investments. The bank may aggregate the funds of each of these individual investors into an omnibus account which it, in turn, invests in a regional bank. The regional bank may handle a number of omnibus accounts which it, in turn, aggregates and invests in some U.S. securities. The return on these securities will flow out of the United States and reverse this chain of transactions until each of the original investors gets their pro rata share of profit. See figure 1 for examples of tiered financial flows. IRS established the QI program in 2000. Under the QI program, foreign financial institutions sign a contract with IRS to withhold and report U.S. source income sent offshore. The new regulations, which the QI program was intended to help administer, were designed to balance a number of objectives, including a system to routinely report income and withhold the proper amounts, dispense treaty benefits, meet the U.S. obligation to exchange information with foreign tax authorities, and encourage foreign investment in the United States. Under the QI program, foreign financial institutions voluntarily sign an agreement to withhold and report the appropriate amount of tax on the U.S. source income they send to their offshore customers. This entails determining the kind and amount of their clients’ U.S. source income, determining whether clients are eligible for benefits (which is determined by the client’s national residency), and then calculating, withholding, and reporting appropriate amounts to IRS. When customers wish to claim treaty benefits or exemptions, they must also submit to a QI or other withholding agent an IRS Form W-8BEN, known as a withholding certificate, or other acceptable documentation. On the withholding certificate the customer provides various identifying information and completes applicable certifications, including that the customer is a resident of a country qualifying for treaty benefits or exemptions and that any limitations on benefits provisions in the treaty are met. To determine whether a client is eligible for treaty benefits and exemptions, the QIs accept documentation declaring clients’ residency, most often a self- certified Form W-8BEN, and verify that with other documents accepted as part of their account-opening procedures, such as passports or national health cards, in accordance with the “know your customer” rules already established by the jurisdiction in which they are located. If there is insufficient documentation to adequately determine the treaty status of an account owner, the QI, a nonqualified intermediary, or a U.S. financial institution must use the presumption rules and apply backup withholding. Backup withholding is regulated separately, reported separately, and processed separately from routine NRA income and withholding. Furthermore, U.S. persons generally are taxed on their worldwide income. Their income and assets are withheld and reported separately and individually. One of the principal incentives for foreign financial institutions to become QIs is their ability to retain the anonymity of their client list. QIs may report customer income and withholding information for a group of similar recipients receiving similar benefits, known as “pooled reporting.” NQIs, on the other hand, must reveal the identity of their clients to upstream withholding agents through acceptable documentation in order for their customers to receive treaty benefits as well as interest and capital gains exemptions. Income owned by U.S. taxpayers held offshore may not be pooled and must be reported to IRS individually, either by the QI, NQI, or the last U.S. payor in a chain of payments. Payors of U.S. source income to U.S. taxpayers are not required to withhold from this income, but they must report the income on IRS Form 1099. U.S. taxpayers must report all of their current income on their income tax returns, including U.S. source and foreign source income, as well as ownership of foreign bank accounts and significant ownership in foreign corporations. QIs may opt out of primary withholding and reporting responsibilities for designated accounts—including those owned by U.S. persons—ceding those responsibilities and liabilities to financial institutions upstream in the chain of payments. Eventually, the responsibilities and liabilities associated with these accounts may fall to the last payor within the United States (and therefore within the jurisdiction of IRS). Most of the U.S. source income flowing offshore likely is sent to NRAs but some may be sent to U.S. persons. The income may be sent directly to NRAs located offshore, for example when a company pays dividends to a foreign stockholder, or may flow through one or more U.S. or foreign financial intermediaries, such as banks or brokerage firms. Since U.S. persons generally are taxed on their worldwide income, while NRAs are taxed only on certain U.S. source income, the difference in taxation, withholding, and reporting for NRAs and U.S. persons may motivate some U.S. individuals or businesses to seek to appear to be NRAs. Compared to U.S withholding agents, IRS has additional assurance that QIs are properly withholding the correct amount of tax on U.S. source income sent offshore. Because QIs are in overseas locations, they are more likely to have personal contact with NRAs or other persons who may claim exemptions or treaty benefits than would U.S. withholding agents. This direct relationship may increase the likelihood that the QI will collect adequate account ownership information and be able to accurately judge whether its customers are who they claim to be. Under the contract signed with IRS, QIs accept enhanced responsibilities for providing assurance that customers are in fact eligible for treaty benefits and exemptions. All withholding agents are expected to follow the same basic steps when determining whether to withhold taxes on payments of U.S. source income made to NRA customers. The withholding agents must determine the residency of the owner of the income and the kind and amount of U.S. source income, which governs the customers’ eligibility for no taxation (if the type of income is exempt from U.S. tax) or reduced taxation (if a lower taxation rate has been set in a treaty). However, under their contract, QIs must obtain acceptable account- opening documentation, such as a valid driving license, regarding the customer’s identity. When determining whether a customer qualifies for treaty benefits, the kinds of documents QIs may use are based upon the local jurisdiction’s “know your customer” rules. Because QIs agree to follow specified account-opening procedures, there is enhanced assurance that the residency and nationality of the account holder has been accurately determined and thus correct withholding decisions will be made. Further, when QIs do not actually perform withholding, the QIs adherence to the account-opening procedures gives greater assurance of proper customer identification than NQIs, who follow account-opening procedures of unknown rigor. Furthermore, and importantly, QIs agree to contract with independent external auditors to review the information contained in a sample of accounts, determine whether the appropriate amount of tax was withheld, and submit a report of the information to IRS. These reviews are discussed in greater detail later in this report. In contrast, U.S. withholding agents generally have not yet been subject to external reviews for this purpose. IRS officials believe that those U.S. withholding agents that participated in IRS’s 2004 Voluntary Compliance Program were effectively subject to external review because under the program they had to provide IRS essentially the same information that IRS would have reviewed in an audit. IRS is preparing to audit all of the U.S. withholding agents that did not participate in the Voluntary Compliance Program. However, because U.S. withholding agents generally rely on identity documentation from downstream intermediaries, even when U.S. withholding agents have been audited by IRS, there is less assurance that NRAs actually qualified for the benefits. Although account-opening and withholding procedures for QIs may give IRS greater assurance that treaty benefits are properly provided by QIs than by U.S. withholding agents, QIs provide IRS less information to use in targeting its enforcement efforts than do U.S. withholding agents because of their pooled reporting. NQIs also can pool results when reporting to upstream withholding agents but, as discussed earlier, must identify all of the individual customers for which they have provided treaty benefits. Although pooling restricts the information available to IRS on individuals receiving treaty benefits, to the extent that QIs do a better job of ensuring treaty benefits are properly applied up front, IRS has less need for after- the-fact enforcement. The accuracy of the pooled reporting by QIs is also subject to the external reviews of QIs’ contractual performance. The overwhelming portion of U.S. source income flows through U.S. withholding agents who may accept self-certifications of identity from indirect account owners that are forwarded by either QIs or NQIs. A high percentage of U.S. source income flows through U.S. withholding agents, but IRS has not determined how much of the income, or the associated withholding, to U.S. withholding agents flows through QIs versus NQIs. While QIs verify the self-certifications with other original account-opening documentation, and those accounts are reviewed externally, NQIs provide somewhat less assurance of proper withholding and reporting than exists under the QI program. On the other hand, most U.S. source income flows to treaty countries that have some working relationship with IRS. However, establishing a foreign corporation provides a legal mechanism for shielding the identity of the owner of income. Although the QI program provides IRS some assurance that tax benefits are being properly applied, a low percentage of U.S. source income flows through QIs. As shown in table 1, for tax year 2003, about 88 percent of U.S. source income reported to IRS was reported by U.S. withholding agents, not QIs. Thus, the overwhelming portion of this income flowed through channels that provide somewhat less assurance of proper withholding and reporting than exists under the QI program. More than 90 percent of the U.S. source income QIs sent their customers for tax year 2003, or nearly $34 billion, flowed through QIs that each handled $4 million or more of U.S. source income. These QIs and the income they handled were subject to external review (as discussed later in this report, smaller QIs can obtain a waiver from external reviews). Overall, QIs withheld taxes from U.S. source gross income at more than twice the rate of U.S. withholding agents, 3.7 percent versus 1.5 percent. Even though a high percentage of U.S. source income flows through U.S. withholding agents, IRS has not determined how much of the income, or the associated withholding, to U.S. withholding agents flows through to QIs versus NQIs. Indirectly owned account identity information received from NQIs is a particular weakness because, unlike QIs who contractually agree to verify W-8BEN information with know your customer information, NQIs may accept W-8BENs at face value and forward them to U.S. withholding agents. Therefore, indirect accounts expose the withholding agent and reporting activity to a greater potential for incorrect granting of tax exemptions or treaty benefits due to misinformation or fraud. In 2003, two Large and Mid-sized Business (LMSB) Industry Directives giving guidelines for withholding agent audits were published, which did not address the differences in reporting for direct and indirect account owners. IRS could, but has not yet, analyzed the amount of funds flowing through U.S. withholding agents that flow to QIs versus NQIs using information already reported on the Form 1042-S. The 1042-S includes two federal tax identification numbers—one for the payee and one for the payor—and IRS knows which identification numbers are assigned to QIs. Because the Form 1042-S information returns have not been routinely transcribed, IRS has not been able to automatically match the information return documents to the annual tax return data. Doing so may help IRS in assessing the Treasury’s exposure to unaudited documentation and exposure to tax benefits flowing to unaudited accounts. Additionally, this information might help policymakers decide whether documentation requirements should be modified for unaudited accounts or whether other changes should be made to improve the likelihood that tax benefits are properly determined. The jurisdiction of recipients is a major determinant of the applicable withholding rate. The U.S. maintains a network of bilateral tax treaties designed to set out clear tax rules applying to trade and investment between the two nations in order to promote the greatest economic benefit to the United States and its taxpayers. Treaties are intended to eliminate double taxation of taxpayers conducting economic activity in the two jurisdictions by allocating taxing rights between the two countries, establish a mechanism for dealing with disputes between the two taxing authorities, provide for exchange of tax information between the two tax authorities, and reduce withholding tax. Reductions in withholding tax are negotiated with each treaty partner individually and the benefits are reciprocal—so U.S. residents may benefit from a reduced tax rate for investing abroad, as foreign investors may be for investing in the United States. As of January 2007, there were 54 tax treaties in force, including all members of the Organization of Economic Cooperation and Development (OECD). In addition to treaty countries, the U.S. has other kinds of relationships with nontreaty countries. For example, the U.S. has signed numerous Tax Information Exchange Agreements (TIEA) with countries with which the U.S. does not have full reciprocal tax rate reduction treaties. TIEAs have less scale and scope than a tax treaty. Furthermore, a number of other countries have made formal commitments to the OECD to work toward the goals of tax administrative transparency and effective exchange of tax information with other countries’ tax authorities in order to countervail harmful tax practices. Having agreed to these principles, these countries are no longer considered to be “tax havens.” However, because of their continued unwillingness to agree to even these two principles, three countries remain on the OECD’s list of “uncooperative tax havens.” Although the vast majority of U.S. source income flows outside the QI system, the preponderance flows through countries with which the United States has tax treaties, as shown in figure 2. For tax year 2003, about 80 percent of U.S. source income flowed through treaty countries, with 88 percent of that flowing through U.S. withholding agents. The data indicate that persons in the treaty countries received the preponderance of U.S. source income and the lowest withholding rates, because of a combination of reduced withholding rates negotiated by treaty and residents receiving certain kinds of income that are exempt by statute. About $28 billion flowed through TIEA countries, and recipients received significant withholding tax reductions—without mutually beneficial treaties. Persons in jurisdictions committed to OECD’s principles, that is, “committed jurisdictions,” and OECD-identified “uncooperative tax havens” accounted for relatively little U.S. source income. As shown in table 2, withholding agents in other and undisclosed countries not falling into any of these categories received about $29 billion in U.S. source income for tax year 2003. These withholding agents dispensed about $8 billion in withholding tax reductions that year. A close look at the data points to some potential problems with the withholding and reporting activities for tax year 2003. Both U.S. withholding agents and QIs reported transactions in undisclosed jurisdictions or with unknown recipients within various countries. These transactions may reflect billions of dollars of reduced tax withholding without proper documentation or reporting to IRS, since eligibility for a reduced rate of withholding must be determined by the claimants’ documented nationality, residency, and type of investment. Regarding transactions with undisclosed jurisdictions, for tax year 2003 $19 billion of income was reported ($7.8 billion through U.S. withholding agents and $11.3 billion through QIs), on which $500 million was withheld ($100 million through U.S. withholding agents and $400 million through QIs) from undisclosed countries. The $500 million withheld represents a 2.7 percent withholding rate on this income. Since withholding at the 30 percent rate would have yielded about $5.7 billion in withheld taxes on the $19 billion in total income, the withholding agents may have erroneously underwithheld as much as $5.2 billion. IRS officials did not have information to explain why withholding was only $500 million on these transactions. Officials said that some of the money flowing to unknown or unidentified jurisdictions could be a by-product of QIs’ ability to pool accounts when reporting. For example, if recipients from two nations with the same treaty rates for the same type of income were in a QI reporting pool, the QI would not identify the differing jurisdictions. However, IRS officials did not have information to show to what extent this may have accounted for the QIs’ reporting of income flowing to unknown or unidentified jurisdictions. Nor did they have information that would explain why U.S. withholding agents reported money flowing to unknown or unidentified jurisdictions at a reduced withholding rate. Regarding U.S. withholding agents and QIs’ reported transactions with “unknown recipients” within various countries for tax year 2003, U.S. withholding agents and QIs reported a combined $7 billion of U.S. source income sent to offshore unknown recipients, from which about $233 million was withheld at a rate of 3.4 percent. The transactions with unknown or unidentified jurisdictions and with unknown recipients indicate a significantly reduced rate of withholding without proper documentation or reporting to IRS, since eligibility for a reduced rate of withholding must be determined by the claimants’ documented nationality, residency, and type of investment. If the 30 percent withholding rate should have been applied to all of the funds flowing to unknown recipients, about $2.1 billion should have been withheld, or about $1.9 billion more than what was withheld. IRS officials were also unable to explain why our data showed money flowing to unknown recipients and at low withholding rates. They suggested that the unknown recipients might result, in part, from discovery during external audits that the identities of some QI customers were not adequately documented. The QIs would pay the appropriate withholding at the 30 percent rate and issue a 1042-S for “unknown recipient” to prevent the customer from claiming a refund for monies that had not been withheld. Such corrected information on the amount withheld may not have been incorporated into the Statistics of Income (SOI) data base. In addition, IRS officials noted that the Form 1042-S is not clear about how to report tax payments for customers who are not adequately documented. IRS did not have any data or firm information to explain why U.S. withholding agents and QIs reported that $7 billion of U.S. source income was sent to unknown recipients in tax year 2003. Two approaches could help IRS determine whether and to what extent this reduced withholding on funds flowing to undisclosed jurisdictions and unknown recipients was proper. First, IRS could analyze data it collects to identify withholding agents who report withholding rates below 30 percent on funds flowing to these types of recipients. IRS officials said they have not done so in the past because the data are not routinely processed and any errors corrected. However, processing and error correction has occurred in several years, including most recently for tax year 2005. Second, using this information IRS could request enhanced external reviews of those QIs that report such withholding and could use the information both as a factor for selecting which U.S. withholding agents it will audit and to focus audit efforts on such reduced withholding. To the extent the enhanced external review of QIs or IRS audits of U.S. withholding agents reveal improper withholding, IRS then could take the appropriate steps to recover withholding taxes that should have been paid and to better ensure that U.S. taxes are withheld when account owners do not properly identify themselves. U.S. tax law enables the owners of offshore corporations to shield their identities from IRS scrutiny, thereby providing U.S. persons a mechanism to exploit for sheltering their income from U.S. taxation. Under current U.S. tax law, corporations, including foreign corporations, are treated as the taxpayers and the owners of their assets and income. Because the owners of the corporation are not known to IRS, individuals are able to hide behind the corporate structure. In contrast to tax law, U.S. securities regulation and some foreign money laundering and banking guidelines treat shareholders as the owners. Even if withholding agents learn the identities of the owners of foreign corporations while carrying out their due diligence responsibilities, they do not have a responsibility to report that information to IRS. However, if it provides them with actual knowledge or reason to know that the claim for reduced withholding in the withholding certificate or other documentation is unreliable for purposes of establishing residency, new supporting documentation must be obtained. Bilateral treaties may reduce or eliminate U.S. taxes on income that would otherwise be taxable to NRA recipients, including foreign corporations, but generally not for U.S. persons. Similarly, the U.S. tax exemption for foreign recipients of portfolio interest, created to encourage foreign investors to purchase U.S. government and corporate debt, eliminates their tax on this type of income. The exemption is not available to U.S. persons, persons who own 10 percent or more of the debtor corporation or partnership, or persons failing to meet certain other restrictions. Withholding agents, regardless of the type of institution, generally may accept a withholding certificate at face value, and so may grant treaty benefits or a portfolio interest exemption to a foreign corporation that is owned by a U.S. person or persons. IRS regulations permit withholding agents (domestic and QIs) to accept documentation declaring corporations’ ownership of income at face value, unless they have “a reason to know” that the documentation is invalid. Consequently, it may be possible for U.S. persons to establish a corporation offshore, submit a withholding certificate to the withholding agent(s) and receive a reduced rate of withholding. In situations where the foreign corporation is owned by a U.S. person or persons, it is incumbent upon the owners to report their corporate ownership and any income appropriately taxable to them on their own U.S. tax returns. There is no independent third-party reporting of that income to IRS. Generally, compliance in reporting income to IRS is poor when there is no third party reporting to IRS. Although no one knows the extent to which U.S. persons hide behind domestic and foreign corporations to escape tax on U.S. source income, a recent case shows that this can happen and substantial sums can be invested. This example occurred before the advent of the QI program, but illustrates how corporations can be misused. In summary: In April 2007, a federal grand jury indicted an adult entertainment mogul for income tax evasion. The government’s complaint alleges that this U.S. person, a resident of Nevada, produced, marketed, sold and distributed videotapes and DVDs through a business incorporated in Oklahoma and operating in California. He also formed a Nevada company to perform marketing, purchasing, and promotional activities on behalf of the Oklahoma/California company. Using nominee shareholders to conceal his ownership, the U.S. person also established an international business corporation in the Cayman Islands which was the named owner of a bank account in Bermuda and a brokerage account in California. The indictment alleges that the U.S. person had about $15 million transferred from the Bermuda bank account to the California brokerage account, which earned interest income that the U.S. person neither reported, nor for which he paid income taxes. In total, the U.S. government alleges that this U.S. person used a web of U.S. and offshore companies, bank accounts, and brokerage accounts to obscure his ownership, overstate business and personal expenses, and underreport more than $18 million of his true taxable income for the years 2002-2003. Foreign corporations received at least $200 billion, or 68.4 percent, of the $293.3 billion in total U.S. source income for tax year 2003 (see table 3). From this income, almost $3 billion was withheld (a withholding rate of 1.4 percent), representing more than $57 billion of treaty benefits and exemptions. About half of all foreign corporate investment in the United States that year was in debt instruments, which are paid U.S. tax free to qualified investors. The preponderance of tax withheld from corporations was derived from dividends. Because QIs agree to have external auditors perform oversight of their compliance with required procedures, IRS has greater assurance that taxes are properly withheld and treaty benefits are properly dispensed by QIs than by U.S. withholding agents or NQIs. However, within their limited scope, auditors of QIs are not responsible for following up on possible indications of fraud or illegal acts that could have a material impact on the matters being tested or reporting actual fraud and illegal acts detected, as they would under U.S. Government Auditing Standards. In addition, IRS obtains considerable data from withholding agents but does not make effective use of these data to ensure that withholding agents perform their duties properly. In designing the QI program, IRS, Treasury, and intermediaries and their representatives had the objective of achieving an appropriate balance to obtain reasonable assurance that QIs meet their obligations without imposing such a burden that intermediaries would not participate in the program. IRS generally does not have the legal authority to audit a foreign financial intermediary, but IRS requires specific periodic procedures to be performed by external auditors to determine whether QIs are documenting customers’ identities and accurately withholding and reporting to IRS. The QI agreement requires each QI to engage and pay for an external auditor to perform “agreed-upon procedures” (AUP) and submit a report of factual findings to IRS’s QI program office for the second and fifth years of the agreement. The QI selects the external auditor, but IRS must approve it after considering the external auditor’s qualifications and any potential independence impairments. IRS selected AUPs as the type of engagement to monitor QI compliance because of their flexible and scalable attributes. AUPs differ from a full audit in both scope of work and the nature of the auditor’s conclusions. As shown in table 4, in performing a full audit, an auditor gathers sufficient, appropriate evidence to provide assurance regarding the subject matter in the form of conclusions drawn or opinions expressed, for example, on whether the audited entity is in material compliance with requirements overall. Under AUPs the external auditor performs specific work defined by the party requesting the work, in this case, IRS. In general, such work would be specific but less extensive, and less expensive, than the amount of work an auditor would do to provide assurance on the subject matter in the form of conclusions or an opinion. Thus, withholding agents would likely be more willing to participate in the QI program with a required AUP review than a full audit, which they would have to pay for under the program requirements. AUPs can provide an effective mechanism for oversight when the oversight needs relate to specific procedures. IRS developed a three-phase AUP process to focus on key performance factors to address specific concerns while minimizing compliance costs. In phase 1 procedures, the external auditor is required to examine all or a statistically valid sample of accounts with their associated documentation and compile information on whether the QI followed withholding requirements and the requirements of the QI agreement. IRS reviews the data from phase 1 AUPs and determines whether significant concerns exist about the QI’s performance. If concerns exist, IRS may request that additional procedures be performed. For example, additional procedures may be requested if the external auditor identified potential problems while performing phase 1 procedures. IRS defines the work to be done in a phase 2 review based on the specific concerns raised by the phase 1 report. Phase 3 is necessary only if IRS still has significant concerns after reviewing the phase 2 audit report. In phase 3, IRS communicates directly with the QI management and may request a face-to-face meeting in order to obtain better information and resolve concerns about the QI’s performance. IRS cited high rates of documentation failure, underreporting of U.S. source income, and underwithholding as the three most common reasons for phase 3 AUPs. Data from the 2002 audit cycle shows that IRS required phase 2 procedures for about 18 percent of the AUPs performed. IRS moved to phase 3 procedures for 35 QIs, which is around 3 percent of the 2002 AUPs performed. Of the QIs that had phase 3 reviews, IRS met face-to-face with 13 and was ultimately satisfied that all but 2 were in compliance with their QI agreements. The remaining 2 were asked to leave the QI program. Since the QI program’s inception in 2000, there have been 1,245 terminations of QI agreements. Of the 1,245 terminations, 696 were the result of mergers or consolidations among QIs and not related to noncompliance with the QI agreements. Aside from the 2 terminations mentioned above, the remaining 549 terminations involved QIs that failed to file either an AUP report of factual findings or requests for an AUP waiver by the established deadline. IRS grants waivers of the AUP requirement if the QI meets certain criteria. A QI may be eligible for a waiver if it can demonstrate that it received not more than $1 million in total U.S. source income for that year. In order to be granted a waiver, the QI must file a timely request that includes extensive data on the types and amounts of U.S. source income received by the QI. Among items required with the waiver request are a reconciliation of U.S. source income reported to the QI and U.S. source income reported by the QI to IRS; the number of QI account holders; and certifications that the QI was in compliance with the QI agreement. IRS evaluates the data provided with the waiver request to determine if AUPs are necessary despite the relatively small amount of U.S. source income, and will deny the waiver request if the data provided raise significant concerns about the QI’s compliance with the agreement. About 3,400 QIs (around 65 percent of the QIs at that time) were approved for audit waivers in 2005. The largest 5 percent of the QIs accounted for about 90 percent of the withholding based on data from the 2002 audit cycle. Under current AUPs, the external auditors are required to report whether, based on information from the QI or its own information, the QI is in material violation of, or is under investigation for violation of “know your customer” rules applicable to the QI. However, one notable difference between the AUPs used for the QI program and AUPs that would be done under U.S. Government Auditing Standards is that the QI contract is silent on whether external auditors have to perform additional procedures if information indicating that fraud or illegal acts that could materially affect the results of the AUP review come to their attention. Absent specific provisions in the contract, the auditors perform the QI AUPs in accordance with the International Standard on Related Services (ISRS) 4400, which does not require auditor follow-up on indications of fraud or illegal acts. U.S. Government Auditing Standards are more stringent on this topic than the ISRS standards. These standards state that auditors should be alert to situations or transactions that could indicate fraud, illegal acts, or violations of provisions of contracts. If the auditor identifies a situation or transaction that could materially affect the results of the engagement, the auditor is to extend procedures to determine if the fraud, illegal acts, or violations of provisions of contracts are likely to have occurred and, if so, determine their effect on the results of the engagement. The auditor’s report would include information on whether indications of fraud or illegal acts were encountered and, if so, what the auditors found. As discussed previously, IRS defines the work to be done in a phase 2 review based on the specific concerns surfaced by the phase 1 report, which is done under the international standards. However, IRS may not have complete information for its decisions about phase 2 procedures, to the extent that AUP reports do not include information about situations or transactions that could indicate fraud, illegal acts, or violations of provisions of contracts that auditors encountered during the engagement. During the course of our work, IRS officials told us there were several reasons for not requiring external auditors to pursue evidence of fraud or illegal acts in the same manner as required by the U.S. Government Auditing Standards. First, QIs are located in about 70 countries and each country has its own definition and interpretation of fraud. Second, the negotiations involved in establishing the QI program resulted in focused procedures for discrete tasks and specifically excluded procedures involving the exercise of professional judgment. Third, in some countries identifying possible fraud can lead to significant adverse consequences for the audited entity, such as closing the business until the possible fraud is investigated. Due to the above reasons, the requirements of the U.S. Government Auditing Standards may be challenging to implement across international jurisdictions. However, the objectives can be met through a modified approach. IRS could draw on existing auditing standards to establish a consistent definition of fraud and illegal acts for the purposes of the QI program. For example, U.S. auditing standards define fraud as an intentional act involving the use of deception to obtain an unjust or illegal advantage. The external auditors could be required to report any indications of fraud or illegal acts that could significantly affect the results of the review and that could be readily identified by a qualified auditor in the course of performing normal AUP procedures. IRS then could review the indications of fraud or illegal acts and specify what procedures the auditors should follow in phase 2 to investigate the possible fraud or illegal acts. Finally, if there are situations in which the consequences of adding a requirement on indications of fraud or illegal acts to the QI contract could result in outcomes IRS officials judge to be inappropriate, the provision could be excluded from that contract. Data that IRS needs to effectively administer the QI program are not readily available for use and in some instances no longer exist. Consequently, IRS has difficulty ensuring that refunds claimed by withholding agents are accurate and is less able to effectively target its enforcement efforts. All withholding agents, whether QIs or not, are to report withholding information on their annual withholding tax returns (Forms 1042) and information returns (Forms 1042-S). Forms 1042 are filed on paper. Forms 1042-S may be filed electronically or on paper. The law requires withholding agents filing more than 250 returns to file electronically; consequently, most U.S. financial institutions file the information returns electronically, while most QIs file on paper. When returns are paper filed, IRS personnel must transcribe information from the paper returns into an electronic database in order to efficiently and effectively make use of the data. Data on both paper and electronically filed returns must also be reviewed for errors. Data from Forms 1042 have been routinely transcribed and checked for errors. However, since the inception of the QI program, IRS has not consistently entered information from the paper Forms 1042-S into an electronic database. In years when data were not transcribed, the unprocessed paper Forms 1042-S were stored at the Philadelphia Service Center in Philadelphia and then destroyed a year after receipt in accordance with record retention procedures. Additionally, for certain tax years, the electronically filed Forms 1042-S did not go through computerized error resolution routines. For tax year 2005 IRS’s Large and Midsize Business Division transferred $800,000 in funding to the service center to fund transcribing paper Forms 1042-S and performing error resolution for all Forms 1042-S. IRS officials anticipate funding 2006 transcription and error resolution although as of October 2007, this had not yet occurred. Figure 3 shows the dual processing procedures IRS uses for receiving, checking, and validating the Form 1042-S data it receives. IRS officials told us that LMSB would begin routinely funding transcription and error resolution in the future. Because the Form 1042-S data have not been routinely transcribed and corrected, IRS lacks an automated process to use the Form 1042-S information return data to detect underreporting on the Form 1042 or to verify refunds claimed. Forms 1042 are due in March and the withholding agents might report owing IRS more if they underwithheld the amount of tax their customers’ owed, or might claim a refund if they overwithheld. After performing simple consistency and math checks on the Forms 1042, IRS accepts the returns as filed and either bills withholding agents that did not include full payment or refunds amounts to those whose Forms 1042 indicates they overwithheld taxes due. Because the Form 1042-S information returns have not been routinely transcribed, IRS has not been able to automatically match the information return documents to the annual tax return data, which is one of IRS’s most efficient and effective tools to ensure compliance. IRS had planned to perform such automatic document matching, but suspended the plans for matching the Form 1042-S and Form 1042 data since funding has not been available to routinely transcribe Form 1042-S data. Therefore, when Forms 1042-S had been electronically filed or transcribed, IRS has only been able verify the accuracy of Forms 1042 by individually retrieving the 1042-S data stored in the Chapter Three Withholding (CTW) database, a time- consuming and seldom used process. When Forms 1042-S were not transcribed, IRS was only able to verify Forms 1042 by manually retrieving and reviewing the paper 1042-S. Further, for years when transcription did not occur, if a QI filed an amended return after the paper Forms 1042-S were destroyed, IRS could not even perform a manual verification and had to take the amended return claiming a refund at face value provided other processing criteria were met. IRS has no information to determine whether or how often such erroneous or fraudulent refunds might occur. Properly transcribed and corrected 1042-S data would have other uses as well. For instance, IRS officials said that such data could be used to check whether the AUP information submitted by QI withholding agents is reliable. For U.S. withholding agents, Form 1042-S information might be used to determine whether to perform audits. Several other units within IRS, as well as Treasury, the Joint Committee on Taxation, and congressional tax-writing committees also could use these data to research and evaluate tax policy and administration issues and to identify possibly desirable legislative changes. IRS’s QI program could have the data it needs to review AUP information if it were to require QIs to file electronically. Because withholding agents filing fewer than 250 returns are by law exempted from filing electronically, with the pooling of accounts offered under the QI regime most QIs end up filing paper returns as they have fewer than 250 returns. IRS officials said the statute would need to be changed to require QIs with fewer than 250 returns to file electronically. However, the QI contract states that the agreement may be amended by IRS if it determines that the amendment is needed for the sound administration of the internal revenue laws or regulations. Therefore, IRS could require QIs to file electronically as part of the QI contractual process and avoid the problems plaguing the processing of paper returns. Other obstacles identified during our work also appear to be surmountable. For example, QIs would incur additional costs to purchase the software to prepare the forms or engage electronic transmittal services, but the basic software can be obtained for less than $200. Although electronic transmittals sent from certain countries’ internet service providers may be blocked by IRS’s computer system firewall protections, an IRS official suggested that QIs facing this challenge could utilize the services of their third-party auditors to transmit the data electronically. The third-party auditors often are part of large, multinational auditing firms. Another concern is that in the short term IRS may experience an increased electronic filing error rate as QIs file electronically for the first time and go through a learning curve regarding IRS’s data formatting conventions. However, similar problems occurred when the QI program began and were addressed through taxpayer education. For those QIs for whom filing electronically would be an undue hardship, IRS could establish a process for granting waivers similar to the current procedures available for QIs already required to file electronically because they file more than 250 returns annually. Additionally, NQIs falling under the 250-or-more requirement and QIs not choosing not to assume primary withholding responsibilities could still file paper returns, but the smaller number of paper filers might then enable IRS to completely process the paper Forms 1042-S at a reduced cost. Regardless, to the extent QIs contractually agree to electronically file, IRS would have more information to use to manage the program and deter noncompliance and would incur less cost to enter any remaining paper returns into electronic databases. Whether tax is owed on U.S. source income flowing to foreign recipients depends on accurately identifying those recipients. The QI program’s features provide some assurance that financial intermediaries in other nations accurately identify recipients of U.S. source income and thereby correctly determine and withhold the proper amount of U.S. tax. However, because the vast majority of U.S. source income flowing to foreign recipients flows through U.S. withholding agents rather than QIs, their ability to accurately identify foreign recipients also is critical to the correct determination of U.S. tax liability. When dealing with indirect account holders, U.S. withholding agents may rely on the self-certified identity information (W-8 BENs) forwarded by QIs and NQIs for their customers, and NQIs may not have rigorous processes for identifying their account holders. Accordingly, the correct determination of U.S. tax liability may be at risk. IRS receives information on Forms 1042-S that could be used to determine what portion of U.S. withholding agents’ accounts are with, and U.S. source income goes to, NQIs and QIs, but it has not done the analysis. Doing so may help IRS in assessing the Treasury’s exposure to unaudited documentation and exposure to tax benefits flowing to unaudited accounts. This information might help policymakers decide whether documentation requirements should be modified for unaudited accounts or whether other changes should be made to improve the likelihood that tax benefits are properly determined. In addition, if certain NQIs account for a large portion of U.S. withholding agents’ accounts, IRS might be able to take steps to encourage them to join the QI program, and if certain countries are the source of a large portion of the accounts Treasury might focus efforts on improving applicable tax treaties or information exchange agreements. IRS Form 1042-S data on the flow of U.S. source income to foreign recipients in unidentified jurisdictions or to unknown recipients suggest potential problems with the withholding and reporting activities for tax year 2003. Both U.S. withholding agents and QIs reported transactions in unknown or unidentified jurisdictions as well as with unknown recipients across all jurisdictions. In general, lacking proper identification of a customer, including the customer’s residence, U.S. withholding agents and QIs should withhold at the 30 percent rate. Yet withholding on the money flowing to undisclosed jurisdictions and to unidentified recipients was 2.7 and 3.4 percent, respectively. If the 30 percent withholding rate should have been applied to all or a significant portion of the funds flowing to unknown jurisdictions or to unknown recipients, several billion dollars more in taxes should have been withheld. Although IRS officials suggested some scenarios exist where a specific jurisdiction might not be identified in reporting to IRS or where a QI might purposely use the term unknown recipient when reporting to IRS, they had no data to show that the funds flowing to undisclosed jurisdictions or unknown recipients were properly taxed. Although account-opening and withholding procedures for QIs may give IRS greater assurance that treaty benefits are properly provided, the effectiveness of those procedures is not assessed until the external auditors review a sample of accounts as required by the AUPs. However, the QI contract does not require the auditors to report indications of fraud or illegal acts that could materially affect the results of the AUP review. Under U.S. Government Auditing Standards, additional follow-up work is required in such cases. In the QI environment, this objective could be met through a requirement for auditors to report to the QI program office that they found indications of fraud or illegal acts, which the program office would consider in determining whether and to what extent phase 2 procedures should be conducted. Furthermore, to better administer all withholding and reporting activities (by QIs and U.S. withholding agents) IRS needs reliable 1042-S data. However, Form 1042-S data have not been completely processed every year. IRS officials point to a lack of available funding. In those years, the identity, jurisdiction, and income and withholding data generated by withholding and reporting agents are inadequate for use by IRS, Treasury, or Congress. These data would be available if IRS required QIs to file electronically as part of their contractual agreement and completed its processing. Although QIs might incur some additional expense, IRS would have readier access to more complete data as well as saving the resources currently devoted to perfecting and entering data reported on paper forms. Because such a requirement could be part of contracts with QIs, if in certain cases electronic filing is not feasible, the contract could exclude this provision. We recommend that the Commissioner of Internal Revenue Service do the following: Measure U.S. withholding agents’ reliance on self-certified documentation and use that data in IRS compliance efforts. Determine why U.S. withholding agents and QIs report billions of dollars in funds flowing to unknown jurisdictions and to unidentified recipients. Based on this determination, IRS should take appropriate steps to recover any withholding taxes that should have been paid and to better ensure that U.S. taxes are withheld when account owners do not properly identify themselves. Work to enhance AUPs by requiring the external auditor to report any indications of fraud or illegal acts that could significantly affect the results of the review. Under current AUPs, the external auditor is required to report whether, based on information from the QI or its own information, the QI is in material violation of, or is under investigation for violation of “know your customer” rules applicable to the QI. IRS should direct the head of the QI program office to expand this reporting requirement in the QI contractual agreement to require the external auditor to report any indications of fraud or illegal acts encountered while performing AUPs that could significantly affect the results of the review. This would give the QI program office the information necessary to pursue any indications of significant fraud or illegal acts identified during the AUP review through additional targeted procedures in phase 2 of the AUPs. Require electronic filing of forms in QI contracts whenever possible, thereby reducing the need to manually process data reported from abroad. Further, IRS should invest the funds necessary to perfect these data. The Acting Commissioner of Internal Revenue provided comments on a draft of this report in a December 7, 2007, letter, which is reprinted in appendix II. The Acting Commissioner generally agreed with our recommendations to improve the QI program, but in several cases her detailed comments are not fully consistent with our recommendations. IRS agreed it would be beneficial to investigate both the use of U.S. withholding agents’ reliance on self-certified identity documents and why withholding agents reported billions of dollars in tax benefits flowing to unknown jurisdictions and unidentified recipients. However, for the first recommendation, IRS’s detailed comments focused on examining the accuracy of the self-certified documents, rather than systematically measuring U.S. withholding agents’ exposure to unverified documentation to determine how large or small a challenge this documentation is to the integrity of the U.S. withholding system. Although better understanding the accuracy of self-certified documents is laudable, we believe a systematic measurement of agents’ reliance on such documents, which can be made with information IRS already receives, would both assist IRS in targeting enforcement efforts and inform policymakers’ judgments about the current reporting regime. For the second recommendation, the Acting Commissioner agreed to determine why withholding agents reported billions of dollars of tax benefits to unknown jurisdictions and unidentified recipients, and proposed to develop a methodology to determine the extent of this underwithholding. Regarding the third recommendation covering indications of fraud or illegal acts, although IRS agrees that QIs should provide information indicating fraud or illegal acts, it also states concern about defining fraud and illegal acts and requiring auditors to report such information when dealing with at least 70 countries, 60 of which are non-English-speaking. In addition, IRS pointed to certain current QI requirements that provide IRS with some information on fraud and illegal acts. However, as discussed in our draft report, we believe IRS could draw on existing auditing standards to establish a consistent definition of fraud and illegal acts for the purposes of the QI program. In addition, the provisions to which IRS refers rely in part on self-reporting by the QI and in part focus on “know your customer” rule violations alone. However, self-reporting by the QI is not equivalent to judgments by the auditors about whether fraud or illegal acts have occurred. And the universe of potential fraud or illegal acts extends beyond potential violations of “know your customer” rules. Therefore we reaffirm our recommendation. Finally, IRS agreed that there are benefits to electronic filing of tax Forms 1042 and 1042-S, but said such a requirement would be a burden for QIs that file only a few (3 or fewer) forms. IRS said it has implemented a procedure to include an application to electronically file for all QIs applying for or renewing participation in the program. If IRS were to require all QIs to electronically file, we believe any burdens filers of few forms would face could be addressed by offering them a waiver opportunity similar to waivers that are available to all institutions that are currently required to file electronically (those that file more than 250 returns). Requiring electronic filing whenever possible would reduce IRS’s costs and improve the timeliness and accuracy of data for program oversight. We have added language regarding the opportunity for seeking a waiver to the report based on IRS’s comment. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the issue date. At that time, we will send copies of this report to appropriate congressional committees and the Acting Commissioner of Internal Revenue. 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) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of this report are to (1) describe features of the Qualified Intermediary (QI) program intended to improve withholding and reporting, (2) assess whether weaknesses exist in the U.S. withholding system that complicate identifying beneficial owners of U.S. source income, and (3) determine whether weaknesses exist in QI external reviews and the Internal Revenue Service’s (IRS) use of program data. To address our objectives, we reviewed various IRS documents and interviewed IRS officials in the QI program office and U.S. withholding program audit staff, Large and Mid-sized Business (LMSB) International, and IRS Counsel, as well as Department of the Treasury (Treasury) officials in the Office of Tax Policy and FinCEN. Furthermore, we spoke with private practitioners involved in the development and implementation of the QI program. We reviewed various studies and reports on foreign investment and banking practices. We reviewed the auditing requirements contained in the QI agreement and other standards, such as the U.S. Government Auditing Standards and the international standards on agreed-upon procedures (AUP) and visited IRS’s Philadelphia Campus, which was responsible during our review for processing information returns submitted by some QIs. Withholding data used in this report were reported by withholding agents and edited by IRS. During the 2002-2003 period, paper withholding information returns were processed at IRS’s Philadelphia Campus and electronic returns and information returns were processed in Martinsburg, West Virginia. IRS’s Statistics of Income (SOI) staff collected this information, made several adjustments and additions to the data described below, and performed several quality control checks to the data. As a result, these were the most recent data available. Because payments may have flowed through tiers of intermediaries before reaching the owner of the income, SOI stratified payment information by the type of withholding agent. It then became possible to subtract payments made from one intermediary to another, eliminating possible double or multiple counting of one payment. Furthermore, withholding instructions issued under the new 2001 regulations required withholding agents to report U.S. source income and withholding information to IRS in whole dollar figures. However, not all agents followed these instructions, instead reporting income and tax figures in dollars and cents. This resulted in an error factor of 100 for some reported payments. In order to correct these errors, SOI compared income and tax totals for certain withholding agents with information from prior years for reasonableness, identifying 25 agents whose information required adjustment by a factor of 100. The IRS database was modified accordingly. We determined that these data were sufficiently reliable for the purposes of describing the QI program by (1) performing electronic testing for obvious errors in accuracy and completeness and (2) interviewing agency officials knowledgeable about the data, specifically about how the data were edited. We analyzed IRS data on U.S. source income that flowed overseas for tax years 2002 and 2003. The data do not include an unknown amount of activity that was unreported. In order to calculate tax benefits by type of recipient, by destination of account, and by income type, we multiplied the gross U.S. source income sent offshore by 30 percent, required by IRC Section 1441, and then subtracted the income actually withheld, and presumed to be sent to the Treasury. To measure the withholding rates by type of recipient, by destination of account, and by income type, we divided the actual monies withheld, and presumed to be paid to the Treasury, by the gross U.S. source income sent offshore. IRS AUP guidance requires third-party reviewers to sample QI accounts. IRS provides guidance on the sample size using a standard statistical formula and a decision rule. We reviewed the sampling methodology used in the AUPs and found that it was adequate to identify problems with the accounts. In addition to the contact person named above, Jonda Van Pelt, Assistant Director; Susan Baker; Amy Friedheim; Evan Gilman; Shirley Jones; Donna Miller; John Saylor; Joan Vogel; and Elwood White made key contributions to this report.
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U.S. source income flows to recipients offshore through foreign financial institutions and U.S. withholding agents. The Internal Revenue Service (IRS) established the Qualified Intermediary (QI) program to improve tax withholding and reporting on such income. QIs are foreign financial institutions that contract with IRS to withhold and report U.S. tax. GAO was asked to (1) describe program features, (2) assess whether weaknesses exist in the U.S. withholding system for U.S. source income, and (3) identify any weaknesses in QI external reviews and IRS's use of program data. GAO interviewed agency officials and private practitioners and reviewed the latest IRS data on U.S. source income flowing offshore. The QI program provides IRS some assurance that tax on U.S. source income sent offshore is properly withheld and reported. For example, QIs, located overseas, are more likely to have a direct working relationship with customers who claim tax benefits, such as reduced withholding, and agree to have independent parties review a sample of accounts and report to IRS. However, a low percentage of U.S. source income sent offshore flows through QIs. For tax year 2003, about 12.5 percent of the $293 billion in U.S. income flowed through QIs. The rest or about 87.5 percent flowed through U.S. withholding agents. While QIs are required to verify account owners' identities, U.S. withholding agents can accept owners' self-certification of their identity at face value. IRS does not measure the extent to which withholding agents rely on self-certification and use this data in its compliance efforts. In addition, U.S. persons may evade taxes by masquerading as foreign corporations. In 2003, 68.4 percent of U.S. income flowed through foreign corporations whose ownership is not reported to IRS. GAO's analyses showed that U.S. withholding agents and QIs reported billions of dollars in funds flowing to undisclosed jurisdictions and unknown recipients in 2003. Lacking proper identification, U.S. withholding agents and QIs should withhold taxes at the 30 percent rate. GAO found that withholding on these accounts was much lower than 30 percent. The contractually required independent reviews of QIs' accounts help provide assurance that taxes are properly withheld. However, the external auditors are not required to follow up on indications of fraud or illegal acts, as would reviews under U.S. Government Auditing Standards. As a result, IRS has less information on whether QIs are adequately preventing fraud or illegal acts. Further, while IRS obtains considerable data from information returns, it does not effectively use it to ensure proper withholding and reporting. IRS has not consistently entered data from paper information returns into a database and matched the data to tax returns to identify inappropriate disbursal of tax benefits. IRS could require electronic filing by QIs whenever possible.
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The LDA, as amended by HLOGA, requires lobbyists to register with the Secretary of the Senate and the Clerk of the House and file quarterly reports disclosing their lobbying activity. Lobbyists are required to file their registrations and reports electronically with the Secretary of the Senate and the Clerk of the House through a single entry point (as opposed to separately with the Secretary of the Senate and the Clerk of the House as was done prior to HLOGA). Registrations and reports must be publicly available in downloadable, searchable databases from the Secretary of the Senate and the Clerk of the House. No specific requirements exist for lobbyists to generate or maintain documentation in support of the information disclosed in the reports they file. However, guidance issued by the Secretary of the Senate and the Clerk of the House recommends that lobbyists retain copies of their filings and supporting documentation for at least 6 years after they file their reports. The LDA requires that the Secretary of the Senate and the Clerk of the House provide guidance and assistance on the registration and reporting requirements of the LDA and develop common standards, rules, and procedures for compliance with the LDA. The Secretary and the Clerk review the guidance semiannually. The guidance was last revised and published in December 2011. The guidance provides definitions of terms in the LDA, elaborates on the registration and reporting requirements, includes specific examples of different scenarios, and provides explanations of why certain scenarios prompt or do not prompt disclosure under the LDA. In meetings with the Secretary of the Senate and Clerk of the House, they stated that they consider information we report on lobbying disclosure compliance when they periodically update the guidance. The LDA defines a lobbyist as an individual who is employed or retained by a client for compensation, who has made more than one lobbying contact (written or oral communication to a covered executive or legislative branch official made on behalf of a client), and whose lobbying activities represent at least 20 percent of the time that he or she spends on behalf of the client during the quarter. Lobbying firms are persons or entities that have one or more employees who lobby on behalf of a client other than that person or entity. Organizations employing in-house lobbyists file only one registration. An organization is exempt from filing if total expenses in connection with lobbying activities are not expected to exceed $11,500. Amounts are adjusted for inflation and published in the LDA guidance. information on which federal agencies and House(s) of Congress the lobbyist contacted on behalf of the client during the reporting period; the amount of income related to lobbying activities received from the client (or expenses for organizations with in-house lobbyists) during the quarter rounded to the nearest $10,000; and a list of constituent organizations that contribute more than $5,000 for lobbying in a quarter and actively participate in planning, supervising, or controlling lobbying activities, if the client is a coalition or association. The LDA, as amended, also requires lobbyists to report certain contributions semiannually in the LD-203 report. These reports must be filed 30 days after the end of a semiannual period by each lobbying firm registered to lobby and by each individual listed as a lobbyist on a firm’s lobbying reports. The lobbyists or lobbying firms must list the name of each federal candidate or officeholder, leadership political action committee, or political party committee to which they made contributions equal to or exceeding $200 in the aggregate during the semiannual period; report contributions made to presidential library foundations and presidential inaugural committees; report funds contributed to pay the cost of an event to honor or recognize a covered official, funds paid to an entity named for or controlled by a covered official, and contributions to a person or entity in recognition of an official or to pay the costs of a meeting or other event held by or in the name of a covered official; and certify that they have read and are familiar with the gift and travel rules of the Senate and House and that they have not provided, requested, or directed a gift or travel to a member, officer, or employee of Congress that would violate those rules. The Secretary of the Senate and the Clerk of the House, along with the Office are responsible for ensuring compliance with the LDA. The Secretary of the Senate and the Clerk of the House notify lobbyists or lobbying firms in writing that they are not complying with reporting requirements in the LDA, and subsequently refer those lobbyists who fail to provide an appropriate response to the Office. The Office researches these referrals and sends additional noncompliance notices to the lobbyists, requesting that the lobbyists file reports or correct reported information. If the Office does not receive a response after 60 days, it decides whether to pursue a civil or criminal case against each noncompliant lobbyist. A civil case could lead to penalties up to $200,000, while a criminal case—usually pursued if a lobbyist’s noncompliance is found to be knowing and corrupt—could lead to a maximum of 5 years in prison. As in our prior reviews, most lobbyists reporting $5,000 or more in income or expenses were able to provide documentation to varying degrees for the reporting elements in their disclosure reports. Lobbyists for an estimated 93 percent of LD-2 reports were able to provide documentation to support the income and expenses reported for the third and fourth quarters of 2010 and the first and second quarters of 2011. Last year, we reported that lobbyists for an estimated 97 percent of LD-2 reports were able to provide documentation for income and expenses for the quarters under review. The most common forms of documentation provided included invoices for income and payroll records for expenses. According to the documentation lobbyists provided for income and expenses, we estimate that the amount disclosed was properly rounded to the nearest $10,000 and supported for 63 percent (59 of 93) of the LD- 2 reports; differed by at least $10,000 from the reported amount in 16 percent (15 of 93) of LD-2 reports; and had rounding errors in 21 percent (19 of 93) of LD-2 reports. Figure 1 illustrates the extent to which lobbyists were able to provide documentation to support selected elements on the LD-2 reports. Of the 100 LD-2 reports in our sample, 47 disclosed lobbying activities at executive branch agencies, with lobbyists for 19 of these reports providing documentation to support lobbying activities at all agencies listed. Table 1 lists the common reasons why lobbyists we interviewed said they did not have documentation for some of the elements of their LD-2 reports. The LDA requires a lobbyist to disclose previously held covered positions when first registering as a lobbyist for a new client, either on the LD-1 or on the LD-2 quarterly filing when added as a new lobbyist. Based on our analysis, we estimate that a minimum of 11 percent of all LD-2 reports did not properly disclose one or more previously held covered positions. This finding is consistent with last year’s report. Lobbyists for an estimated 86 percent of LD-2 reports filed year-end 2010 or midyear 2011 LD-203 contribution reports for all of the lobbyists and lobbying firms listed on the report as required. All individual lobbyists and lobbying firms reporting specific lobbying activity are required to file LD-203 reports semiannually, even if they have no contributions to report, because they must certify compliance with the gift and travel rules. Compared to our last review, fewer lobbying firms indicated that they plan to amend their LD-2 reports as a result of our review. This year, lobbying firms for 17 of the LD-2 reports in our sample indicated that they planned to amend their LD-2 reports as a result of our review. Last year, 21 lobbying firms indicated they planned to amend their LD-2 reports. As of March 2012, 9 lobbying firms have amended their LD-2 reports (compared to 12 lobbying firms last year). Specific reasons for filing amendments included the following: Decreasing reported income from $60,000 to $30,000 Increasing the reported income from $20,000 to $30,000 Changing the client’s name on the LD-2 report Adding additional information about the specific issues lobbied Adding contact with the House Removing reported contact with the Senate Adding a federal agency Adding covered positions Adding a lobbyist In addition, lobbying firms filed amendments for 3 (compared to 8 reports last year) of the LD-2 reports in our sample after being notified that their LD-2 reports were selected as part of our random sample but prior to our review. We estimate that overall, a minimum of 4 percent of reports failed to disclose one or more contributions.contributions listed on lobbyists’ and lobbying firms’ LD-203 reports against those political contributions reported in the FEC database to identify whether political contributions were omitted on LD-2 reports in our sample. The sample of LD-203 reports we reviewed contained 80 reports with political contributions and 80 reports without political contributions. Of the 80 LD-203 reports sampled with contributions reported, 12 reports omitted one or more contributions. Of the 80 LD-203 reports sampled with no contributions reported, 2 reports failed to disclose contributions listed in the FEC database. Of the 3,802 new registrations we identified from fiscal year 2011, we were able to match 3,357 reports filed in the first quarter in which they were registered. This is a match rate of 88 percent of registrations, which is consistent with our prior reviews. To determine whether new registrants were meeting the requirement to file, we matched newly filed registrations in the third and fourth quarters of 2010 and the first and second quarters of 2011 from the House Lobbyist Disclosure Database to their corresponding quarterly disclosure reports using an electronic matching algorithm that allows for misspelling and other minor inconsistencies between the registrations and reports. As part of our review, 90 different lobbying firms were included in our sample. Of the 90 lobbying firms, 86 reported that the disclosure requirements were “easy” or “somewhat easy” to meet. Of the 86 lobbying firms in our sample of LD-2 reports that said the requirements were “easy” or “somewhat easy” to meet, 61 lobbyists indicated that the requirements were “easy” and 25 indicated that the requirements were “somewhat easy” to meet. Compared to last year, fewer lobbyists told us that they found the quarterly reporting requirement difficult to meet. This year, 5 lobbyists we interviewed (compared to 10 lobbyists last year) said that it was difficult to file reports quarterly or difficult to meet the 20 day filing deadline. The deadline for filing disclosure reports is 20 days after each reporting period, or the first business day after the 20th day if the 20th day is not a business day. While most lobbyists we interviewed told us they thought that the terms associated with LD-2 reporting requirements were clear, a few lobbyists highlighted areas of confusion in applying some aspects of LDA reporting requirements. This is consistent with our prior report. We asked the lobbyists we interviewed to rate various terms associated with LD-2 reporting as being “clear and understandable,” “somewhat clear and understandable,” or, “not clear and understandable.” Figure 2 shows the terms associated with LD-2 reporting that the lobbyists were asked to rate and how they responded to each term. Table 2 summarizes the feedback we obtained from the lobbying firms in our sample of reports that rated the lobbying terms as either “not clear and understandable” or “somewhat clear and understandable.” The Office stated that it has sufficient resources and authority to enforce compliance with LDA requirements, including imposing civil or criminal penalties for noncompliance. In a prior report, we recommended that the Office develop a structured approach for the tracking and recording of enforcement activities for lobbyists whom the Secretary of the Senate and the Clerk of the House identify as failing to comply with LDA requirements.to track when referrals are received, record reasons for referrals, record actions taken to resolve them, and assess the results of actions taken. The system has allowed the Office to take actions to achieve compliance with the LDA. The Office uses the summary reports to track progress and quickly identify lobbyists that continuously fail to comply. In addition, the Office hired one contract staff member in September 2010 to work on lobbying compliance issues on a full-time basis. This has enhanced the Office’s ability to pursue enforcement actions by centralizing the process of checking and resolving referrals. The Office has 17 staff to assist with lobbying compliance issues on a part-time basis. As a result, the Office developed a system that allowed it To enforce LDA compliance, the Office has primarily focused on sending letters to lobbyists who have potentially violated the LDA by not filing disclosure reports as required. The letters request that lobbyists comply with the law by promptly filing the appropriate disclosure documents. Not all referred lobbyists receive noncompliance letters because some of the lobbyists have terminated their registrations, or lobbyists may have complied by filing the report before the Office sent noncompliance letters. In addition to sending letters, the contractor sends e-mails and calls lobbyists to inform them of their need to comply with the LDA requirements. Figure 3 describes the process and time frames of the Office’s enforcement efforts. Typically, lobbyists resolve their noncompliance issues by filing the reports or terminating their registration. Resolving referrals can take anywhere from a few days to years depending on the circumstances. Office officials said that they could not set strict time frames or deadlines for closing out pending cases because of these varying circumstances. In addition, they stated that setting strict deadlines might encourage noncompliance if a lobbyist believes that a referral will close out on a certain date if he or she never responds. Although the Office is concerned with all noncompliance, it places a greater emphasis on pursuing lobbyists and registrants who continue to lobby and avoid filing required disclosure reports. A similar approach to the LD-2 enforcement process is being developed for tracking and reporting noncompliance with LD-203 reporting. Since the enactment of HLOGA, both the Secretary of the Senate and the Clerk of the House have made quarterly referrals for noncompliance with the LD-2 requirements. Table 3 shows the number of referrals the Office received from both the Secretary and the Clerk for noncompliance with reports filed for the 2009 and 2010 reporting periods and the actions taken by the Office. As of January 25, 2012, the Office has received 118 referrals from the Clerk of the House for the first and second quarter for the 2011 LD-2 reporting period, but has not yet received any referrals from the Secretary of the Senate for the 2011 reporting period. As shown in figure 4, about 56 percent (312 of 561) of the lobbyists who received letters, phone calls, or e-mails from the Office for noncompliance for 2009 and 2010 LD-2 referrals have either filed reports or have terminated their registrations and are now considered compliant. Additionally, about 43 percent (243 of 561) are pending action because the Office did not receive a response from the lobbyist and plans to conduct additional research to determine if it can locate the lobbyist. The remaining 1 percent of (6 of 561) referrals did not require action because the lobbyist or client was no longer in business or the lobbyist was deceased. In addition, lobbyists were found to be compliant when the Office received the referral. This may occur when lobbyists have responded to the contact letters from the Secretary of the Senate and Clerk of the House after the Office has received the referrals. The Office has also received referrals from the Secretary of the Senate and the Clerk of the House for noncompliance with LD-203 reports. The Office sends noncompliance letters to the registered organizations and includes the names of the lobbyists who did not comply with the requirement to report federal campaign and political contributions and certify that they understand the gift rules. For noncompliance in the 2009 filing period, as of January 25, 2012, the Office has received LD-203 referrals from the Secretary of the Senate for 1,081 lobbyists. As of March 23, 2012, the Office received LD-203 referrals from the Secretary of the Senate for noncompliance in the 2010 filing period and from the Clerk of the House for the 2009 and 2010 filing periods; however, the Office is still processing the referrals. As of February 22, 2012, the Office has mailed 68 noncompliance letters to the registered organizations. The registered organizations may receive a noncompliance letter listing the name of more than one lobbyist. As a result, the number of letters sent will not match the number of referrals now compliant, pending, and with no action taken. However, 7 percent of (73 of 1,081) referrals did not require action because the lobbyist was no longer in business, deceased, or found to be compliant when the Office received the referral. This may occur when lobbyists have responded to the contact letters from the Secretary of the Senate and Clerk of the House after the Office has received the referrals. Table 4 shows the status of enforcement actions for LD-203 reporting after noncompliance letters were sent to registrant organizations for 2009. According to officials from the Office, many of the LD-2 pending cases represent lobbyists who are no longer lobbying or have never filed a disclosure report. Officials from the Office stated that they have been working more closely with the Senate and the House to remove these referrals before they are forwarded to the Office. The Office has mailed noncompliance letters to the registered organizations and included the names of the lobbyists who did not comply with the LD-203 requirement. However, Office officials said that there have been complaints within the lobbying community regarding responsibility for responding to letters of noncompliance with LD-203 requirements. They also said that many lobbyists who were not in compliance no longer lobby for the organizations affiliated with the referrals, even though these organizations may be listed on their original lobbyist registration. Organizations are not responsible for an individual lobbyist’s failure to comply with the LD-203 disclosure requirement, nor are they required to provide contact information for the noncompliant lobbyist. Because of these limitations, officials told us that the Office has very little leverage to bring individual lobbyists into compliance. Officials stated that many of the LD-203 pending cases remain open in an attempt to locate the individual lobbyists, and as a result, these referrals may take years to resolve. Since the enactment of the LDA in 1995, but before the 2008 implementation of HLOGA, the Office had settled with three lobbyists who failed to file and collected civil penalties totaling about $47,000. In November 2011, the Office settled its first enforcement case since the enactment of HLOGA in 2007 and reached a $45,000 settlement with a lobbying firm that had been referred to the Office repeatedly for failure to file disclosure reports. HLOGA increased the penalties for offenses committed after January 1, 2008. As stated earlier, a civil case could lead to penalties up to $200,000, while a criminal case—usually pursued if lobbyists’ noncompliance is found to be knowing and corrupt—could lead to a maximum of 5 years in prison. We previously reported that the Office planned to identify additional cases of repeat LDA noncompliance for civil enforcement review in the spring and summer of 2011. The Office conducted research and used the system it developed to identify and track lobbyists and firms that have a history of chronic noncompliance. As a result, the Office has developed a “top 10 list” of noncompliant lobbyists whom it may potentially pursue for enforcement actions using five civil enforcement attorneys who have been assigned to review the cases. We provided a draft of this report to the Attorney General for review and comment. We met with the Assistant U.S. Attorney for the District of Columbia, who on behalf of the Attorney General responded that Department of Justice had no comments of the draft of this report. We are sending copies of this report to the Attorney General, Secretary of the Senate, Clerk of the House of Representatives, and interested congressional committees and members. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6806 or [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. Consistent with the audit mandates in the Honest Leadership and Open Government Act (HLOGA), our objectives were to determine the extent to which lobbyists are able to demonstrate compliance with the Lobbying Disclosure Act of 1995 as amended (LDA) by providing documentation to support information contained on registrations and reports filed under the LDA; identify any challenges to compliance and potential improvements; and describe the resources and authorities available to the U.S. Attorney’s Office for the District of Columbia (the Office) and the efforts the Office has made to improve enforcement of the LDA, including identifying trends in past lobbying disclosure compliance. To respond to our mandate, we used information in the lobbying disclosure database maintained by the Clerk of the House of Representatives (Clerk of the House). To assess whether these disclosure data were sufficiently reliable for the purposes of this report, we reviewed relevant documentation and spoke to officials responsible for maintaining the data. Although registrations and reports are filed through a single web portal, each chamber subsequently receives copies of the data and follows different data cleaning, processing, and editing procedures before storing the data in either individual files (in the House) or databases (in the Senate). Currently, there is no means of reconciling discrepancies between the two databases caused by the differences in data processing. For example, Senate staff have told us during previous reviews that they set aside a greater proportion of registration and report submissions than the House for manual review before entering the information into the database, and as a result, the Senate database would be slightly less current than the House database on any given day pending review and clearance. House staff also told us during previous reviews that they rely heavily on automated processing, and that while they manually review reports that do not perfectly match in formation file for a given registrant or client, they will approve and upload such reports as originally filed by each lobbyist even if the reports contain errors or discrepancies (such as a variant on how a name is spelled). Nevertheless, we do not have reasons to believe that the content of the Senate and House systems would vary substantially. For this review, we determined that House disclosure data were sufficiently reliable for identifying a sample of quarterly disclosure (LD-2) reports and for assessing whether newly filed registrants also filed required reports. We used the House database for sampling LD-2 reports from the third and fourth quarters of calendar year 2010 and the first and second quarters of calendar year 2011, as well as for sampling year-end 2010 and midyear 2011 political contributions (LD-203) reports, and finally for matching quarterly registrations with filed reports. We did not evaluate the Offices of the Secretary of the Senate or the Clerk of the House, both of which have key roles in the lobbying disclosure process, although we consulted with officials from each office, and they provided us with general background information at our request and detailed information on data processing procedures. To assess the extent to which lobbyists could provide evidence of their compliance with reporting requirements, we examined a stratified random sample of 100 LD-2 reports from the third and fourth quarters of 2010 and the first and second quarters of 2011. The third quarter 2010 LD-2 reports were from our prior review and were included in the current review to redistribute the LD-2 reports evenly across the calendar year for future lobbying reviews. We excluded reports with no lobbying activity or with income less than $5,000 from our sampling frame. The third quarter 2010 sample was drawn from 13,489 activity reports and we drew our remaining sample from 38,303 activity reports filed for the fourth quarter of 2010 and first and second quarters of 2011 available in the public House database, as of our final download date for each quarter. This allowed us to generalize to a population of 51,792 activity reports. Our sample is based on a stratified random selection, and it is only one of a large number of samples that we may have drawn. Because each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This interval would contain the actual population value for 95 percent of the samples that we could have drawn. All percentage estimates in this report have 95 percent confidence intervals of within plus or minus 10.0 percentage points or less of the estimate itself, unless otherwise noted. When estimating compliance with certain of the elements we examined, we base our estimate on a one-sided 95 percent confidence interval to generate a conservative estimate of either the minimum or the maximum percentage of reports in the population exhibiting the characteristic. the amount of income reported for lobbying activities, the amount of expenses reported on lobbying activities, the names of those lobbyists listed in the report, the Houses of Congress and federal agencies that they lobbied, and the issue codes listed to describe their lobbying activity. Prior to each interview, we conducted an open source search to identify lobbyists on each report who may have held a covered official position. We reviewed the lobbyists’ previous work histories by searching lobbying firms’ websites, LinkedIn, Leadership Directories, Who’s Who in American Politics, Legistorm, and U.S. newspapers through Nexis. Prior to 2008, lobbyists were only required to disclose covered official positions held within 2 years of registering as a lobbyist for the client. HLOGA amended that time frame to require disclosure of positions held 20 years before the date the lobbyists first lobbied on behalf of the client. Lobbyist are required to disclose previously held covered official positions either on the client registration (LD-1) or on the first LD-2 report when the lobbyist is added as “new.” Consequently, those who held covered official positions may have disclosed the information on the LD-1 or a LD-2 report filed prior to the report we examined as part of our random sample. Therefore, where we found evidence that a lobbyist previously held a covered official position, we conducted an additional review of the publicly available Secretary of the Senate or Clerk of the House database to determine whether the lobbyist properly disclosed the covered official position. Finally, if a lobbyist appeared to hold a covered position that was not disclosed, we asked for an explanation at the interview with the lobbying firm to ensure that our research was accurate. Despite our rigorous search, it is possible that we failed to identify all previously held covered official positions for all lobbyists listed. Thus, our estimate of the proportion of reports with lobbyists who failed to properly disclose covered official positions is a lower-bound estimate of the minimum proportion of reports that failed to report such positions. In addition to examining the content of the LD-2 reports, we confirmed whether year-end 2010 or midyear 2011 LD-203 reports had been filed for each firm and lobbyist listed on the LD-2 reports in our random sample. Although this review represents a random selection of lobbyists and firms, it is not a direct probability sample of firms filing LD-2 reports or lobbyists listed on LD-2 reports. As such, we did not estimate the likelihood that LD-203 reports were appropriately filed for the population of firms or lobbyists listed on LD-2 reports. To determine if the LDA’s requirement for registrants to file a report in the quarter of registration was met for the third and fourth quarters of 2010 and the first and second quarters of 2011, we used data filed with the Clerk of the House to match newly filed registrations with corresponding disclosure reports. Using direct matching and text and pattern matching procedures, we were able to identify matching disclosure reports for 3,357, or 88 percent, of the 3,802 newly filed registrations. We began by standardizing client and registrant names in both the report and registration files (including removing punctuation and standardizing words and abbreviations, such as “company” and “CO”). We then matched reports and registrations using the House identification number (which is linked to a unique registrant-client pair), as well as the names of the registrant and client. For reports we could not match by identification number and standardized name, we also attempted to match reports and registrations by client and registrant name, allowing for variations in the names to accommodate minor misspellings or typos. For these cases, we used professional judgment to determine whether cases with typos were sufficiently similar to consider as matches. We could not readily identify matches in the report database for the remaining registrations using electronic means. To assess the accuracy of the LD-203 reports, we analyzed stratified random samples of LD-203 reports from the 32,301 total LD-203 reports. The first sample contains 80 reports of the 10,646 reports with political contributions and the second contains 80 reports of the 21,655 reports listing no contributions. Each sample contains 40 reports from the year- end 2010 filing period and 40 reports from the midyear 2011 filing period. The samples allow us to generalize estimates in this report to either the population of LD-203 reports with contributions or the reports without contributions to within a 95 percent confidence interval of plus or minus 8.2 percentage points or less, and to within 4.2 percentage points of estimate when analyzing both samples together. We analyzed the contents of the LD-203 reports and compared them to contribution data found in the publicly available Federal Elections Commission’s (FEC) political contribution database. For our fiscal year 2009 report, we interviewed staff at the FEC responsible for administering the database and determined that the data reliability is suitable for the purpose of confirming whether a FEC-reportable disclosure listed in the FEC database had been reported on an LD-203 report. We compared the FEC-reportable contributions reporting on the LD-203 reports with information in the FEC database. The verification process required text and pattern matching procedures, and we used professional judgment when assessing whether an individual listed is the same individual filing an LD-203. For contributions reported in the FEC database and not on the LD-203 report, we asked the lobbyists or organizations to provide an explanation of why the contribution was not listed on the LD-203 report or to provide documentation of those contributions. As with covered positions on LD-2 disclosure reports, we cannot be certain that our review identified all cases of FEC-reportable contributions that were inappropriately omitted from a lobbyist’s LD-203 report. We did not estimate the percentage of other non-FEC political contributions that were omitted (such as honoraria or gifts to presidential libraries). To identify challenges to compliance, we used structured interviews and obtained views from lobbyists included in our sample of LD-2 reports on any challenges to compliance. In addition, we asked lobbyists to rate various terms associated with disclosure requirements. To describe the resources and authorities available to the Office, we interviewed officials from the Office and obtained information on the level of staffing and resources dedicated to the enforcement of the LDA. The Office provided us with information on the processes used to enforce compliance with the LDA, and reports from the tracking system on their number and status of referrals. To describe the efforts the Office has made to improve its enforcement of the LDA, we interviewed officials from the Office and obtained information on the processes used by the Office in following up on referrals from the Secretary of the Senate and the Clerk of the House. The Office provided us with reports from the tracking system on the number and status of the referred cases. The mandate does not include identifying lobbyists who failed to register and report in accordance with LDA requirements, or whether for those lobbyists who did register and report all lobbying activity or contributions were disclosed. We conducted this performance audit from June 2011 through March 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The random sample of lobbying disclosure reports we selected was based on unique combinations of registrant lobbyists and client names (see table 5). See table 6 for a list of lobbyists and lobbying firms from our random sample of lobbying contribution reports with contributions. See table 7 for a list of lobbyists and lobbying firms from our random sample of lobbying contribution reports without contributions. In addition to the contact named above, Robert Cramer, Associate General Counsel; Bill Reinsberg, Assistant Director; Shirley Jones, Assistant General Counsel; Crystal Bernard; Amy Bowser; Colleen Candrl; Jill Lacey; Natalie Maddox; Donna Miller; Anna Maria Ortiz; Melanie Papasian; and Katrina Taylor made key contributions to this report. Assisting with lobbyist file reviews were Vida Awumey, Alexandra Edwards, Emily Gruenwald, Lois Hanshaw, Jeff McDermott, Stacey Ann Spence, Megan Taylor and Daniel Webb.
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HLOGA requires lobbyists to file quarterly lobbying disclosure reports and semiannual reports on certain political contributions. HLOGA also requires that GAO annually (1) determine the extent to which lobbyists can demonstrate compliance with disclosure requirements, (2) identify any challenges to compliance that lobbyists report, and (3) describe the resources and authorities available to the Office and the efforts the Office has made to improve its enforcement of the LDA. This is GAOs fifth report under the mandate. GAO reviewed a stratified random sample of 100 quarterly LD-2 reports filed for the third and fourth quarters of calendar year 2010 and the first and second quarters of calendar year 2011. GAO also reviewed two random samples totaling 160 LD-203 reports from year-end 2010 and midyear 2011. This methodology allowed GAO to generalize to the population of 51,792 disclosure reports with $5,000 or more in lobbying activity and 32,301 reports of federal political campaign contributions. GAO also met with officials from the Office regarding efforts to focus resources on lobbyists who fail to comply. GAO provided a draft of this report to the Attorney General for review and comment. The Assistant U.S. Attorney for the District of Columbia responded on behalf of the Attorney General that the Department of Justice had no comments on the draft of this report. Most lobbyists were able to provide documentation to demonstrate compliance with disclosure requirements. This finding is similar to GAOs results from prior reviews. There are no specific requirements for lobbyists to create or maintain documentation related to disclosure reports they file under the Lobbying Disclosure Act of 1995 as amended (LDA). Nonetheless, and similar to last years results, for two key elements of the reports (income and expenses), GAO estimates that lobbyists could provide documentation to support approximately 93 percent of the disclosure reports for the third and fourth quarters of 2010 and the first and second quarters of 2011. According to documentation lobbyists provided for income and expenses, GAO estimates that the amounts disclosed were properly reported and supported for 63 percent of the quarterly lobbying disclosure (LD-2) reports. For lobbyists and lobbying firms listed on the LD-2 report, an estimated 86 percent filed year-end 2010 or midyear 2011 reports of federal political campaign contributions (LD-203) reports as required. For LD-203 political contributions reports, GAO estimates that a minimum of 4 percent of all LD-203 reports omitted one or more reportable political contributions that were documented in the Federal Election Commission database. Fewer lobbyists17 this year versus 21 in the prior yearstated that they planned to amend their LD-2 report following GAOs reviews to make correction on one or more data elements. As of March 2012, 9 of 17 amended their disclosure reports. Lobbyists are required to file LD-2 reports for the quarter in which they first register. The majority of lobbyists who newly registered with the Secretary of the Senate and Clerk of the House of Representatives in the third and fourth quarters of 2010 and first and second quarters of 2011 filed required disclosure reports for that period. GAO could identify corresponding reports on file for lobbying activity for 88 percent of registrants. The majority of lobbyists felt that the terms associated with disclosure reporting were clear and understandable and the requirements were easy to meet. However, a few lobbyists reported challenges in complying with the LDA. The U.S. Attorneys Office for the District of Columbia (the Office) stated that it has resources and authorities to pursue civil or criminal cases for noncompliance with LDA requirements. To enhance enforcement efforts and support the 17 staff who have been working on compliance issues on a part-time basis, the Office hired one contract staff member in September 2010 who works full-time on lobbying compliance issues. The Office has primarily focused on contacting lobbyists who have potentially violated the LDA by not filing disclosure reports. In November 2011, the Office settled its first enforcement case since the enactment of the Honest Leadership and Open Government Act of 2007 (HLOGA), and reached a $45,000 settlement with a lobbying firm that had been referred to the Office repeatedly for failure to file disclosure reports. More than half of the 561 lobbyists who were contacted for noncompliance with LD-2 requirements for calendar years 2009 and 2010 are now compliant. Approximately 1,081 lobbyists were referred by the Secretary of the Senate for noncompliance with LD-203 requirements for calendar year 2009.
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Because of its longstanding inventory management problems, DOD’s inventory management is on GAO’s list of high-risk federal program areas especially vulnerable to waste, fraud, and mismanagement. For the last 3 fiscal years, the Naval Audit Service reported inventory management weaknesses in its audits of DBOF activities’ financial statements. In terms of Navy inventory management weaknesses, we also have reported on excess inventory at Naval aviation depots and shipyards, which are part of DBOF operations. At the consumer level, Navy supply officers store the operating materials and supplies purchased from DBOF on ships and at shore locations, such as air stations, for subsequent issuance or consumption. In addition to items stored that are needed to meet operating requirements, these sites often have excess items stored. Also, over the past 6 years, excess items have been stored at redistribution sites as ships were decommissioned or overhauled. The fleets have been redistributing these excess items free of charge from these redistribution sites. At the wholesale level, the Navy Supply Systems Command, through its inventory control points—the Ships Part Control Center and the Aviation Supply Office—is responsible for providing supply support to the Navy.The Ships Part Control Center is primarily responsible for the ship and submarine spare and repair parts, and Aviation Supply Office is primarily responsible for the aircraft spare and repair parts. The item managers at these inventory control points use DBOF funds to purchase items for resale. These items are stored at the Defense Distribution Depots which are part of DBOF operations and managed by the DLA. DLA also manages most common consumables. Navy and DLA item managers make decisions on (1) budgeting and buying items to support Navy operations and sales to foreign governments, (2) redistributing items among Navy units, and (3) disposing of excess items. Item managers use a process called stratification to forecast requirements and determine if enough inventory will be available to satisfy them as a primary basis for budgeting. Basically, stratification reports display anticipated demand, quantities on hand, and items forecasted to be purchased during the current year and the following 2 fiscal years. These stratification reports are updated quarterly to reflect changes in purchases and requirements. The Navy’s item managers do not have complete information on hundreds of millions of dollars of operating materials and supplies on ships and at redistribution sites that is needed for budget and purchase decisions. This occurs because the inventory systems on ships and at the redistribution sites do not provide the item managers complete and accurate data on operating level excess items. Out of the $5.7 billion of operating materials and supplies covered in our analysis, we identified items valued at approximately $883 million that were excess to current operating allowances or needs. Approximately $428 million worth of these excess items, as of July 1995, were stored on board 261 Navy vessels, aircraft carriers, frigates, destroyers, and some submarines. In addition, the Navy had 17 redistribution sites storing a total of $455 million worth of items, all of which were excess. Operating materials and supplies are consumed during the normal operating cycles, and Navy vessels attempt to maintain sufficient stock on hand to meet their operating allowances and anticipated demand. The allowances are developed by the inventory control points based on technical and supply support information. Excesses will occur due to changes in demand and allowances for items after the fleets have purchased and stored them on ships. The Navy’s downsizing also has resulted in items that had been stored on decommissioned ships becoming excess. Excess items need to be visible for operational and budgetary purposes, otherwise readiness and spending plans can be adversely affected. Thus, to effectively manage items and reduce the risk of buying unneeded items, item managers must have complete information on what items are in excess of requirements at the Navy’s operating unit level. DOD 4140.1-R, “DOD Materiel Management Regulation,” requires item managers to have visibility of inventories to improve utilization and to limit buys and repairs in meeting requirements. The regulation further specifies that activities are to provide the item managers asset-level data and requirements information needed to make economical and readiness-based decisions on lateral redistribution, procurement, and repair. To determine the effectiveness of the Navy’s management of operating units’ excess items, we analyzed the first half of fiscal year 1995 purchase decisions and the forecasts for the second half of fiscal year 1995 and for fiscal years 1996 and 1997 planned purchases. We used (1) the March 1995 stratification reports which supported the development of the fiscal year 1996 and 1997 forecasted requirements for the Ships Part Control Center and the Aviation Supply Office and (2) inventory data that we consolidated from 261 ships and 12 of the 17 redistribution sites. Our analysis determined that the Navy’s item managers in the first half of fiscal year 1995 had ordered or purchased items in excess at the operating level that will result in the Navy incurring unnecessary costs of over $27 million. For example, the cost to the Navy will be (1) $2,477,320 for the purchase of four new stabilized turrets and (2) $532,900 for the purchase of five new displacement gyroscopes. Further, the item managers’ forecasted spending plans for the remainder of fiscal year 1995 and fiscal years 1996 and 1997 showed that the Navy’s item managers could incur unnecessary costs of approximately $38 million for purchases earmarked for items already in excess at the operating level. Two examples of planned purchases were (1) five cryogenic coolers with a total cost of about $1,811,800 and (2) one main coolant pump with a price of $2,741,590. Until item managers have full visibility over these excess items that are available to meet demand, they will not be in a position to adjust their purchase decisions to reflect such items. Thus, the fiscal year 1995 spending pattern will be repeated. Further, the lack of visibility over excess items that are free issued has resulted in the operating unit’s Operations and Maintenance budget requests being overstated. For example, many of these excess items are redistributed among the fleets to meet demand and without any charge to the gaining operating unit. Because these redistributed items are meeting annual operating unit demand, the fleets should fully consider the availability and use of these resources in developing their annual O&M budgets. The Atlantic and Pacific Fleets, which account for about 40 percent of the Navy’s O&M appropriation, prepare annual O&M budget requests based on projected needs for operating materials and supplies and maintenance. However, in developing their O&M budgets, they have not been adequately reducing their budgets for items received free from redistribution sites. We reported in September of 1995 that the Navy’s fiscal year 1996 O&M budget could be potentially reduced by $60 million for the items redistributed as free issue during the current period. The Navy was able to demonstrate that $21.6 million of the $60 million had been taken as a budget reduction, leaving $38.4 million in potential savings. The Navy has various initiatives underway to improve management and reporting of operating materials and supplies. These initiatives can enhance the Navy’s ability to meet its CFO act consolidated financial reporting needs for operating materials and supplies and provide greater asset visibility for item managers’ decision-making. However, some of these efforts are more directed at and concerned with providing visibility for redistribution of excesses among the operating activities sponsoring the initiative than providing item managers with all the data needed to perform their responsibilities from a Navy-wide perspective. Thus, unless a more integrated and coordinated approach is taken, item managers will continue to lack the necessary information needed to make the best redistribution, budget, and purchase decisions possible and the Navy’s consolidated financial reporting needs will not benefit fully from these present efforts. The CFO Act of 1990, as amended by the GMRA of 1994, requires DOD, as one of 24 agencies, to improve its financial management and reporting operations. The CFO act specifically requires that each agency’s Chief Financial Officer develop an integrated agency accounting and financial management system that complies with applicable principles and standards and provides for complete, reliable, consistent, and timely information that is responsive to the agency’s financial information needs. The act also specifies that the CFO should direct, manage, and provide policy guidance and oversight of asset management systems, including inventory management and control. Also, new accounting standards for federal agencies and OMB’s financial reporting guidance requires agencies to report on operating materials and supplies as a major line item on their financial statements. Further, OMB’s guidance requires that agencies disclose specific information on these operating materials and supplies, such as their general composition, the balance for items held for use, and the amount of excess, obsolete and unserviceable items. As previously mentioned, the Navy has an estimated $14 billion of operating materials and supplies at air stations, Defense Distribution Depots, Trident Refit Facilities, redistribution sites, and on board all types of vessels. Of this amount, approximately 49 percent of the items are at the air stations, Defense Distribution Depots, and the Trident Refit Facilities; about 47 percent of the items are on board Navy vessels, including submarines; and about 4 percent are at redistribution sites. Numerous systems are used to account for the operating materials and supplies at these various activities. Nevertheless, most of the data on operating materials and supplies at the shore-based locations is available for financial reporting purposes and, to some limited extent, item managers have data on excess items for decision-making. However, this is not the case for those operating materials and supplies on board ships and submarines. For example, the Atlantic Fleet has developed and implemented the Force Inventory Management Analysis Reporting System to consolidate data from ships for fleetwide visibility and redistribution among the fleet. The Pacific Fleet has tested the system and is implementing it. Yet, according to Atlantic Fleet officials, they are not planning to provide the item managers information on excesses from the system for use in their budget and buy decisions. However, the information is available for supporting consolidated financial reporting requirements, and according to Atlantic Fleet officials, they have provided such information for the Navy’s fiscal year 1995 financial reports. At the same time, the Aviation Supply Office is planning to turn over some operating materials and supplies to DBOF, such as repairables at air stations and on board about 25 ships with aircraft and helicopters—such as aircraft carriers and amphibious assault ships—which then become DBOF inventories held for sale. These DBOF inventories will remain at the operational level and accounted for by the units’ own asset management system. One aim of this change is to improve financial management and reporting, which includes improving item managers’ visibility over these items. However, the Ships Part Control Center is not planning a similar change to turn over repairables to DBOF on the fleets’ remaining ships and submarines. The Aviation Supply Office’s plan considered 41 Naval and Marine Corps air stations as implementation sites for this program. Twenty-four air stations will begin a phased implementation around mid-1996, and a few ships may have their first prototype system around April 1997. However, no specific implementation milestone has been set for the majority of the 25 ships and the remaining 17 air stations. According to the official responsible for the ship portion of this effort, implementation will depend on available resources, installation of upgraded automated data processing capabilities, and the fleets requesting the changes be made. Since 1990, the Navy has developed three separate systems or programs to improve the item managers’ visibility over items specifically at redistribution sites and to provide item managers demand data (on reissues and returns) which are essential for determining requirements. However, progress has been slow and the Navy has not fully achieved these objectives. For example: The first system was the Consolidated Residual Asset Management Screening Information System and has been in use for over 6 years. However, it has not adequately met item managers’ needs because access to the system is manual and labor intensive, limiting their ability to obtain timely information, and the system does not incorporate demand data. The second initiative—the Residual Asset Screening Program (RASP)—enhances automated screening capabilities for identifying excess items at redistribution sites and other Navy activities, and became operational in November 1994. However, RASP only matches item managers’ back orders against excess items at the redistribution sites. It does not provide item managers on-line visibility over excess items or the capability to manage current customer demand. The third effort—the Residual Asset Management Program—is intended to provide item managers on-line visibility over excess items and allow them to manage these assets. However, as of February 1996, it had been implemented at only 2 out of 17 sites. Until the Residual Asset Management Program is fully implemented, the item managers will still lack complete decision-making information on item demand at redistribution sites. Incomplete information will be further affected by any backlog of items not entered into the system’s data base. For example, three of the six sites we visited were not recording receipts of material into their inventory systems within the 30 days required by informal Chief of Naval Operations business rules, which limits the completeness of the data base and, thus, their ability to respond to demand for redistribution. At one of the six redistribution sites we visited, its reports showed 457 pallets of material had not been entered into the system, some of which had been backlogged for over 9 months. For at least 6 years, the Atlantic and Pacific Fleets, with the assistance of the Naval Sea Systems Command, have been operating redistribution sites to store excess items. During fiscal years 1994 and 1995, they had 17 major redistribution sites with approximately $455 million of excess items (repairables and consumables) stored in them that could have been returned to the wholesale supply system. These redistribution sites are consumer-level storage facilities located in the same general geographical areas as the wholesale supply activities, such as DBOF’s Defense Distribution Depots, illustrated in figure 1. The three depots at Navy’s home ports—Norfolk, VA, San Diego, CA, and Puget Sound, WA—are geographically positioned to redistribute items and serve the fleets. The geographically dispersed redistribution sites are generally further away from the home ports. Thus, given the number of redistribution sites and their proximity to the home ports, the Navy could be incurring unnecessary transportation costs. In addition to contributing to the visibility problem and poorly informed budget and buy decisions by item managers as previously discussed, the Navy incurs unnecessary costs of approximately $2 million annually to operate and manage 11 of the 17 redistribution sites. These are contractor costs that include routine operating costs such as utilities and personnel. Operating costs for the other sites and data processing support costs for all sites were not readily available. Most of these costs could be avoided if excess items were promptly returned to the wholesale supply system. Further, if these items were simply returned to the wholesale supply activities and included in their systems or sent directly to disposal if appropriate, the need for the numerous system efforts to track and report on only about 4 percent of operating materials and supplies discussed in the previous section would be eliminated. Prolonging the storage of excess items and not disposing of them can result in the Navy incurring unnecessary storage and other costs. For example, four of the six sites we visited were holding items for more than a year. In fact, one site had been holding some items for at least 5 years. According to DOD Directive 4100.37, “Retention and Transfer of Materiel Assets,” all serviceable or economically repairable assets that are excess to retention limits should be reported to the item manager, who advises on the disposition of the assets and whether credit will be provided for returning them to the wholesale supply system. NAVSUP Publication 500, “Navy Policy and Standards for Supply Management,” specifically requires that (1) repairables in excess of allowances and (2) consumables that are excess to retention limits be returned to the wholesale supply system. Further, as previously mentioned, “DOD Materiel Management Regulation,” requires item managers to have visibility over assets to help maximize their redistribution. It also specifies that items returned to the supply system are to be considered in determining future requirements and that demand data, which are a factor used in determining requirements, be adjusted for these returns. According to Navy officials, they have not promptly returned these items to the supply system because they do not routinely receive credit for them and may need them in the near future. Navy officials further explained that if they returned them promptly but found that they needed them later, they would then have to purchase them again, in essence paying twice for an item. In following up on this point, we held discussions with logistics officials at DLA and the Office of Under Secretary for Defense (Acquisition and Technology). These officials commented that financial incentives probably need to be reevaluated to help ensure that all excess items are returned to the supply system. Under 10 U.S.C. 2208(g) and the DOD and Navy policies which implement it, activities generally will be given credit for returns when the item managers have immediate needs for the items, are purchasing the items, or have included them in the budget. However, since the fleets do not automatically receive credit and they wish to avoid paying twice for the same item, the Navy retains these items either at the operating unit or at the redistribution sites, counter to DOD’s stated policy. We noted that it was the fleets’ surface ship and submarine operations that were primarily storing excess ship parts and consumables at redistribution sites. According to officials who manage the Atlantic Fleet’s air operations, they return excess items as required by policy and do not operate redistribution sites. The Naval Audit Service also has been critical of the fleets’ operating these redistribution sites. In a January 1992 report, the Naval Audit Service stated that retaining “off-line” excess inventories (1) was contrary to supply policy, (2) reduced assurance that Navy-wide priorities are met and maximum redistribution is achieved, and (3) is not efficient. In September 1992, we reported on a similar situation with Army redistribution activities for excesses in Europe. We recommended that the Army transfer ownership of the special redistribution inventories to the wholesale inventory managers to facilitate redistribution Army-wide. The Army concurred with our recommendation and, on October 26, 1992, directed this program to be discontinued. Effectively meeting item manager and consolidated financial reporting needs is dependent on the adequacy of Navy financial systems including the accuracy of the underlying unit records. Thus, accurate unit records on operating materials and supplies are crucial to properly support readiness, ensure proper decision-making for budgets and purchases, and provide reliable financial reporting at all levels. At the 15 shore activities—air stations, redistribution sites, and Trident Refit Facilities—and 12 ships we visited to assess the accuracy of Navy’s records on its operating materials and supplies, we found that 22 out of 27 met the Navy’s minimum inventory record accuracy rate goal of 95 percent. We believe that to ensure reliable financial reporting and maximum operational efficiency, all units should strive to exceed the minimum goal. The accuracy rates we computed were comparable to those being reported by the activities and ships as a result of their own physical counts. Of the 2,619 items valued at $101.3 million in our sample, we found 100 items with quantity and location errors. The dollar value of these errors was approximately $5.1 million. For each location, we computed accuracy rates based on the number of items with an error and the dollar value of the errors. For the locations we visited, our results showed that: Of eight shore activities and seven ships in the Atlantic Fleet, only two ships had item accuracy rates below 95 percent—one was 88 percent, and the other 94 percent. However, for one of these ships, the dollar accuracy rate exceeded 95 percent. For the other ship, the dollar accuracy rate could not be determined because insufficient data were provided. Of six shore activities and five ships in the Pacific Fleet, one air station and one ship had item accuracy rates below 95 percent—86 percent and 88 percent, respectively. However, that ship’s dollar accuracy rate exceeded 95 percent. The air station’s dollar accuracy rate was only 78 percent. The only air station we visited under the command of the Naval Reserve had an item accuracy rate of 91 percent, and its dollar accuracy rate was 77 percent. For the two air stations that did not meet minimum accuracy rates, errors primarily were due to the use of the wrong location identifier or we could not determine the reason. For the three ships with errors—two aircraft carriers and a frigate—our results were similar to those found in the past by the Naval Audit Service. Our testing revealed that approximately half of the discrepancies were due either to unprocessed transactions or the use of the wrong location identifier; the remaining discrepancies could not be readily explained. The Naval Audit Service had found that most adjustments due to discrepancies resulted from unrecorded receipts or issues and erroneously processed transactions. In its 1986 and 1992 reports, the Naval Audit Service recommended that the Navy develop and issue comprehensive reconciliation guidelines, improve receiving procedures on ships, enhance automation and training, and establish a focal point at the Chief of Naval Operations level to ensure that progress is made. In addition, as part of its current audit of Navy’s financial reports, the Naval Audit Service is (1) testing the accuracy of unit records for operating material and supplies and (2) assessing the effectiveness of the Navy’s actions in response to Naval Audit Service recommendations. We believe the Naval Audit Service’s current audit of the Navy’s financial reports should determine whether the Navy’s actions adequately address concerns raised by our findings on unit record accuracy. Item managers need to have visibility over all operating material and supplies in order to effectively support the Navy’s mission and readiness goals as well as to make the most efficient use of limited resources. The present efforts to gain visibility over such items will not fully address item managers’ needs and effectively meet the CFO Act financial reporting requirements. Also, the duplicative supply activities of the 17 redistribution sites are inconsistent with the central supply functions which DBOF’s Defense Distribution Depots offer, and contribute significantly to the problems associated with the lack of visibility over excess operating material and supplies. By eliminating the duplication of supply activities and taking a more integrated and coordinated approach to the various asset visibility program or system efforts, the Navy is in the position to improve its ability to achieve its mission and readiness goals, substantially reduce unnecessary annual spending, and meet consolidated financial reporting requirements. We recommend that the Secretary of the Navy direct the Chief of Naval Operations to take the following actions: Direct the fleets to eliminate redistribution sites. Until the redistribution sites are eliminated, we further recommend that the Assistant Secretary for Financial Management direct the fleets to continue reducing their O&M budget estimates by the value of the items annually issued free from these redistribution sites. Ensure that the various asset visibility efforts are properly coordinated and integrated to fully meet the information needs of item managers for data on operating materials and supplies. In conjunction with the Navy Assistant Secretary for Financial Management, ensure that the asset visibility efforts facilitate complete, reliable, and prompt consolidated financial reporting of operating materials and supplies in accordance with the FASAB Statement no. 3 and OMB’s financial reporting guidance. Report on a quarterly basis to the Secretary of the Navy, the progress made on eliminating the unnecessary redistribution sites and the asset visibility efforts in meeting item managers and consolidated financial reporting needs. DOD generally concurred with the audit findings and most of the recommendations. However, DOD strongly disagreed with our recommendation to disestablish the redistribution sites. DOD asserted that the redistribution centers are a sound business practice because they encourage customers to (1) move excess material to centralized sites without giving up ownership and (2) aggressively redistribute assets internally to offset requirements. Further, DOD claimed that the use of redistribution sites limits the number of sites requiring upgraded automation and training as Total Asset Visibility initiatives progress. DOD also asserted that elimination of the redistribution sites with immediate turn-in requirements would apparently optimize the wholesale level at the expense of the consumer level and potentially drive excesses underground, resulting in reduced, rather than enhanced, inventory management at both levels. DOD suggested that an alternative to this recommendation could be to have the Chief of Naval Operations direct accelerated implementation of the Residual Asset Management program to achieve complete consideration of all assets at these sites to the Navy Inventory Control Point requirement determination programs. While the Residual Asset Management program is intended to address our major concern (that is, item manager visibility), we believe the Navy is not pursuing this objective in the most cost-effective manner. Specifically, the Defense Distribution Depots that are colocated with the three home ports are more centralized locations than the 17 geograhically dispersed redistribution sites. Since DBOF has the capacity and systems in place to give item managers appropriate visibility and oversight of excess items, the initial establishment and the continuing operation of the redistribution sites duplicates existing capabilities and is inefficient. If the Navy made redistribution decisions at the point of decommissioning and overhaul and sent items directly to the appropriate supply and repair activity at the ships’ home ports to satisfy anticipated short-term future needs, then the redistribution of items might be accomplished with less transportation, handling, and storage costs. Further, disposal decisions would not be prolonged, reducing storage and other costs. With total asset visibility down to the operating unit level, redistribution sites should not be needed to encourage redistribution of Navy-owned assets and, in fact, add another operating layer requiring additional systems, people, and controls and the associated costs to properly manage them. Accordingly, we disagree with DOD that the redistribution sites represent centralized locations and limit the number of locations needing automation upgrade and training. Without adequate financial incentives to ensure that excess items are returned to DBOF, we understand the potential for “underground” excesses and recognize this as a legitimate management concern. However, an effective and efficient supply system requires adequate financial incentives and properly designed controls. It is management’s responsibility to establish proper discipline and incentives to ensure that policies and procedures are followed. As we and the Naval Audit Service have pointed out, operating these redistribution sites is contrary to supply policies. DOD’s position is also inconsistent with that taken for Army’s redistribution center in Europe, as discussed in this report. It is our intent that the Navy optimize operating material and supplies management from a total Navy-wide perspective, not at the expense of the consumer level over the wholesale level. Effective Navy-wide management and oversight of operating materials and supplies should help preclude “underground” excesses. We are sending copies of this report to the Chairmen and the Ranking Minority Members of the Senate and House Committees on Appropriations, and their Subcommittees on Defense; the Senate Committee on Armed Services and its Subcommittee on Readiness; the Senate Committee on Governmental Affairs; the House Committee on Government Reform and Oversight as well as its Subcommittee on Government Management, Information, and Technology; and the House Committee on National Security. We are also sending copies to the Secretary of Defense, Director of the Defense Finance and Accounting Service, and Director of the Office of Management and Budget. We will make copies available to others upon request. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on our recommendations. You must send your statement to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days of the date of this report. You must also send a written statement to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made over 60 days after the date of this report. If you have questions regarding this report, please call me at (202) 512-9542, or Linda Garrison, Assistant Director, Defense Financial Audits, at (404) 679-1902. Major contributors to this report are listed in appendix III. To assess the adequacy of the Navy’s accountability and visibility over its operating materials and supplies, we identified the inventory management systems used throughout the fleets, at depots, and at the inventory control points. We interviewed Navy personnel at the Ship Parts Control Center, the Aviation Supply Office, Navy Supply Command Headquarters, and the Atlantic and Pacific Fleets to help determine what operating material and supplies the item managers have visibility over, or needed visibility over, for decision-making. Our discussions with these Navy personnel included the status of the Navy’s principle efforts to improve asset visibility, particularly over operating materials and supplies throughout the Navy. We also reviewed DOD and Navy accounting and supply policies, accounting standards recommended by the Federal Accounting Standards Advisory Board, and OMB guidance on financial reporting. To evaluate the Navy’s management of excess operating materials and supplies, we focused our work on operating material and supplies on ships and at redistribution facilities. The data we used was as of July 1995, the most current data files available at the time of our work, which covered 261 out of 324 active vessels—aircraft carriers, frigates, cruisers, destroyers, other ships, and some submarines. We compared the on-hand quantities to the ships’ allowance for each item to identify potential excesses. Using the March 1995 item managers’ stratification data (from the final stratification reports used in the development of fiscal year 1996 and 1997 forecasted requirements), we determined the extent to which excess items we had identified could have altered the mix of items that DBOF item managers were either purchasing or planning to purchase during fiscal years 1995 through 1997. For determining the potential dollar savings, we used the Navy’s standard pricing catalog. We used a similar methodology for evaluating other excess items using consolidated data from 12 of 17 redistribution sites as of January 1996. In addition, at 6 of the 17 redistribution sites, we examined internal controls over receipt processing, compliance with “business rules” established by the Chief of Naval Operations, costs of operations, and accuracy of unit records. We also discussed the operation of these redistribution warehouses with Navy, DLA, and Office of the Secretary of Defense supply officials. To assess the accuracy of operating material and supplies records at the unit level, we performed physical counts at 15 shore locations and on 12 ships. These locations accounted for about 26 percent, or $3.7 billion out of the estimated $14 billion of operating materials and supplies. These sites visited represented air stations, Trident Refit Facilities, redistribution warehouses, and Navy vessels—aircraft carriers, cruisers, frigates, destroyers, and other ships. From a list of 51 naval air stations provided by the Aviation Supply Office, we selected all Naval air stations with reported operating material and supplies valued at $200 million or greater, a total of 4 air stations. For the remaining air stations we randomly selected from those that had reported operating materials and supplies. The air stations selected had about $1.7 billion, or 57 percent, of the approximate $3 billion in operating material and supplies reported by the 51 Naval air stations. We selected both Trident Refit Facilities which reported $1.5 billion of operating materials and supplies. Also, based on the highest dollar value of items stored, we selected three redistribution sites of the Atlantic Fleet and three of the Pacific Fleet. These sites constituted 61 percent of the total reported value of items held by redistribution sites—about $455 million as of April 1995. We selected aircraft carriers, cruisers, frigates, destroyers, and other ships to visit based on their availability at home ports. To perform our counts, we selected a random sample of 45 items from operating material and supplies records at each location for record-to-floor counts and selected an additional 45 items in the storage areas for floor-to-record counts. For each error identified, we worked with Navy supply personnel to determine the cause for it and attempted to reconcile the variance. From our results, we computed accuracy rates for each location based on quantity and location errors and the dollar value of those errors using the unit prices from the activity’s or ship’s records. We compared our rates with the Navy’s accuracy rate goal of 95 percent and the accuracy rates determined from the units’ own physical inventory programs. In addition, we reviewed Navy supply policies and procedures and results of supply management assessments at the activities we visited. We did not assess the reliability of the automated systems from which we obtained data for our analyses. We performed our work from January 1995 through March 1996 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Defense letter dated July 24, 1996. 1. Discussed in “Agency Comments and Our Evaluation” section. 2. We question DOD’s assertions that (1) the redistribution sites are a controllable collection and distribution point, and (2) mandatory turn-in of items to the wholesale system actually occurs after 12 months. During our review, we assessed some of the controls at six of the redistribution sites that held over 61 percent of the $455 million, as of April 1995, in excess items held at the 17 redistribution sites. We found that some of the sites were not following operating rules established by the Chief of Naval Operations. As pointed out in the report, 3 of the 6 sites were not recording receipts of materiel into their inventory systems within the required 30 days. In addition, officials at 2 sites told us that they offer items for return only if they have not had demand for a year. Further, we found that 4 of the 6 sites we visited were holding items for more than a year—1 site had been holding some items for at least 5 years. A full discussion of our control testing at the redistribution sites was not included because it is our opinion that these sites should not exist. Richard L. Harada Kelly Campbell 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.
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GAO examined the Navy's financial reporting on and management of operating materials and supplies that are not part of Defense Business Operations Fund (DBOF) inventories, focusing on the: (1) Navy's accountability and visibility over approximately $5.7 billion in operating materials and supplies on board vessels and at redistribution sites; (2) Navy's management of excess items; and (3) accuracy of operating unit records for operating materials and supplies. GAO found that: (1) 261 Navy vessels and 17 redistribution sites are storing a total of about $883 million in excess items; (2) the inventory systems on ships and at redistribution sites do not provide Navy item managers with complete and accurate data on excess items at the operating level; (3) because item managers are not aware of excess items that may be available for redistribution free of charge, their operations and maintenance (O&M) budget requests are overstated; (4) initiatives for improving management and reporting of operating materials and supplies do not represent a coordinated, integrated approach for ensuring that item managers are provided with all of the information they need to perform all of their responsibilities; (5) the Navy could achieve cost savings and increase visibility of its excess items by closing its 17 redistribution sites and returning excess items to the wholesale supply system; and (6) while most of the activities tested met the Navy's minimum goal of 95-percent inventory record accuracy, all of the units should attempt to exceed the minimum goal.
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Patients receive infusion therapy for a variety of conditions, and physicians may determine that the home is an appropriate venue for treatment based on a particular patient’s condition and circumstances. Medicare covers and pays for a range of health care services, equipment, and drugs, and uses various payment systems. Over the last three decades, Congress has taken steps to address coverage of home infusion therapy. Patients may receive home infusion therapy for acute conditions, such as infections unresponsive to oral antibiotics or pain management (cancer- related or postsurgical), or for chronic conditions such as multiple sclerosis or rheumatoid arthritis. Prior to initiating infusion therapy in the home, physicians and home infusion providers first assess the appropriateness of home treatment for the needed drug therapy and for the patient’s condition. They then determine whether the patient is able to understand and carry out therapy procedures, and if the patient has family or other caregivers available to provide assistance. For certain therapies, such as antibiotic therapy, the patient or a family member may be taught to administer the drug. In these cases, a nurse would generally visit once or twice at the beginning of treatment, and then once per week throughout the course of treatment. Other therapies may require more frequent nursing care. The home setting is not appropriate for all patients receiving infusion therapy, for all conditions, or for all drugs. Many patients receive home infusion therapy following a hospital stay. The home infusion provider may provide any necessary skilled nursing services directly or may contract with a home health agency to do so. Some patients receive home infusion therapy for chronic conditions that may not require hospitalization; in these cases, a patient’s physician may order the therapy to be delivered by a home infusion provider after diagnosis. Outside of the home, patients may also receive infusion therapy in an independent infusion center, a physician’s office, or a hospital-based infusion clinic. Since it was established in 1965, the structure of Medicare and the benefits covered by the program have evolved. Currently, Medicare consists of four parts, A through D: Medicare Part A: Covers inpatient hospital stays, as well as skilled nursing facility care, hospice care, and home health care. To be eligible for covered home health services—which include skilled nursing care, physical therapy, and occupational therapy—a beneficiary must be homebound and have a home health plan of care approved by his or her physician. In 2008, approximately 3.2 million, or about 7 percent of all Medicare beneficiaries, received home health services. Medicare pays home health agencies that provide these services using a prospective payment system under which they receive a predetermined rate for each 60-day episode of home health care. The payment amounts are generally based on patient condition and service use. Medicare Part B: Provides optional coverage for hospital outpatient, physician, and other services, such as laboratory services. It also covers durable medical equipment (DME) and supplies, including infusion pumps and other equipment needed for infusion therapy. Medicare pays for many Part B services and supplies using fee schedules, and beneficiaries enrolled in Part B are generally responsible for paying monthly premiums as well as coinsurance for services they receive. Certain specified outpatient prescription drugs also are covered under Part B, including drugs needed for the effective use of DME. Part B drugs are generally paid based on a fee schedule; infusion drugs covered under the DME benefit are paid based on a different fee schedule than other Part B drugs. Medicare Part C: Since the 1970s, most Medicare beneficiaries have had the option to receive their Medicare benefits through private health insurance plans—now known as MA plans—under Medicare Part C. In 2008, nearly one out of every four Medicare beneficiaries was enrolled in an MA plan. MA organizations enter into contracts with CMS that require plans to cover Medicare Part A and B services. These organizations have flexibility in designing their plan benefit packages and may offer additional benefits. Medicare pays MA plans a fixed amount per beneficiary per month—based in part on the projected expenditures for providing Medicare-covered services—and adjusts payments to account for beneficiary health status. Medicare Part D: First offered in 2006, Medicare Part D provides optional coverage of outpatient drugs, including infusion drugs, to beneficiaries who enroll in prescription drug plans offered by private entities. Medicare beneficiaries may receive Part D drug coverage through stand- alone prescription drug plans or through MA plans that include drug coverage. Each Part D plan maintains a list of drugs it will cover—a formulary—that must meet certain criteria, and may organize those drugs into pricing groups or tiers. Part D plans contract with pharmacies to create a network of participating providers. Medicare makes subsidy payments to Part D plans, and most beneficiaries pay applicable premiums and cost sharing. Plans negotiate drug prices with drug manufacturers and pharmacies. As such, payment for a drug covered under Part D could be different than payment for the same drug were it covered under Part B. In general, Part D does not cover drugs for which payment is available under Parts A or B. Both home-based services and outpatient infusion therapy have been areas of concern for Medicare program integrity. Recently, the Department of Health and Human Services (HHS) and the Department of Justice have renewed attempts to reduce inappropriate utilization and fraudulent activities in these areas. According to an HHS official, CMS has completed demonstrations that involve strengthening the initial provider and supplier enrollment processes to prevent unscrupulous DME and home health care providers from entering the program. The demonstrations also incorporated criminal background checks of providers, owners, and managing employees into the provider enrollment process. In addition, CMS has found instances of infusion clinics and office-based practitioners billing Medicare for infusion services that were not medically necessary or were not actually provided. Despite the lack of a distinct benefit for home infusion therapy, Medicare policies have played a significant role in the development of the home infusion industry. Specifically, Medicare’s coverage of certain therapies— enteral and total parenteral nutrition (TPN)—in the home beginning in the late 1970s, and the subsequent implementation of prospective payment for Medicare inpatient hospital services in 1983, contributed to the rapid growth of the home infusion industry during the 1980s. Over the last three decades, Congress has taken steps to address expanding Medicare coverage of home infusion therapy. The Medicare Catastrophic Coverage Act of 1988 created a home infusion therapy benefit for all Medicare beneficiaries. The benefit would have provided comprehensive coverage of all the components of home infusion therapy, including intravenous drugs, equipment and supplies, and skilled nursing services when needed. The act called for a per diem fee schedule to pay for the supplies and services used in home infusion therapy and set forth qualifications for infusion providers. Before the provision became effective, however, it was repealed. At the request of the Senate Committee on Finance, the Office of Technology Assessment (OTA) conducted an extensive study of home infusion therapy, released in 1992. The study examined trends in the industry, the safety and efficacy of the technology, and the implications for Medicare coverage, including various coverage and payment options available at the time. OTA found that additional Medicare coverage of home infusion therapy might lead to lower payments to hospitals in some cases because of shorter stays and lower costs. Yet, OTA concluded that Medicare coverage of home infusion therapy could increase overall Medicare spending. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 expanded coverage of home infusion therapy significantly, in that home infusion therapy drugs were covered for beneficiaries enrolled in Part D plans beginning in 2006. Subsequently, CMS released guidance for Part D plan sponsors on their responsibilities in covering home infusion therapy drugs, which may be more complicated to dispense than oral medications. One element of the guidance stated that Part D plan sponsors should ensure that home infusion drugs are dispensed by network pharmacies in a usable form that can be readily administered in beneficiaries’ homes. In January 2009, members of the House and Senate introduced bills that would create a home infusion therapy benefit that provides comprehensive coverage for all Medicare beneficiaries. The proposed legislation called for coverage of infusion-related services, supplies, and equipment under Medicare Part B. The legislation also called for supplies and equipment to be paid through a set fee per day of service, while nursing services would be paid separately based on a fee schedule. Coverage of the drugs used in home infusions would be consolidated under Medicare Part D. Supporters of the legislation have asserted that providing comprehensive coverage of infusion therapy in the home would generate cost savings for the Medicare program, and that beneficiaries who would prefer having treatments at home could not afford it without Medicare coverage. However, concerns have been raised that additional coverage could add to the Medicare program’s growth in spending. Medicare FFS covers components of home infusion therapy in some circumstances. The extent of coverage depends on whether the beneficiary is homebound, as well as factors related to the beneficiary’s condition and treatment needs. For some homebound beneficiaries, Medicare FFS covers all the components of home infusion therapy, while other homebound beneficiaries have limited coverage. Non-homebound beneficiaries who have certain conditions and who require certain drugs and equipment are covered by Medicare FFS for some components of home infusion therapy. Other non-homebound beneficiaries have little or no coverage for home infusion therapy under Medicare FFS. Some Medicare FFS beneficiaries who are homebound—that is, generally confined to their homes and in need of nursing care on an intermittent basis—have coverage for all components of home infusion therapy. (See fig. 1.) Because these beneficiaries qualify for Medicare’s home health benefit, the skilled nursing services—such as training, medication administration, and assessment of the patient’s condition—as well as certain equipment and supplies used at home are covered. These services, equipment, and supplies are provided by or arranged for by a home health agency according to a physician’s plan of care. Any care coordination or clinical monitoring services needed with home infusion therapy would be provided by the home health nurse assisting the beneficiary at home or by the physician who ordered the therapy. The equipment and supplies covered for homebound beneficiaries include certain infusion pumps covered as DME and supplies such as intravenous and catheter supplies. Homebound beneficiaries who require other equipment, such as disposable infusion pumps, would not have coverage for those items, and therefore have limited coverage. Although coverage of drugs is specifically excluded under the home health benefit, coverage for infusion drugs may be obtained through other parts of the Medicare FFS program. For beneficiaries with certain conditions, certain drugs are considered supplies for needed equipment and are therefore covered under the DME benefit. In addition, infusion drugs may be covered for beneficiaries who are enrolled in Part D plans or have other prescription drug coverage. In 2008, approximately 90 percent of all Medicare beneficiaries had prescription drug coverage through Part D plans, retiree plans, or other sources. CMS requires Part D plans to ensure appropriate beneficiary access to commonly infused drugs or drug classes by including them in their formularies and making sure that multiple strengths and dosage forms are available for each covered drug. For non-homebound beneficiaries with certain conditions, Medicare Part B provides limited coverage of home infusion therapy. Specifically, the DME benefit covers certain equipment and associated drugs for beneficiaries with specified conditions, but does not cover other equipment and drugs or any skilled nursing services. (See fig. 2.) In 2008, about 50,000 Medicare FFS beneficiaries received home infusion therapy under this benefit, according to CMS analysis of claims data for covered infusion pumps. In addition, Medicare Part B expressly provides coverage for other home infusion drugs, such as intravenous immune globulin. Under the DME benefit, Medicare covers certain infusion pumps, as well as the infusion drugs that are considered supplies needed for the effective use of the infusion pump, for treatment of particular conditions as specified in national and local coverage policies. Medicare’s national coverage policy related to home infusion details several conditions for which pumps and certain drugs would be covered. The local coverage policies for home infusion outline additional circumstances in which pumps and drugs may be covered, and are required by CMS to be identical. One policy we reviewed listed about 30 specific drugs covered for certain conditions when treated using an external infusion pump. Examples of the limited circumstances in which infusion pumps and related drugs would be covered under the DME benefit include morphine administered by external infusion pump for beneficiaries with intractable pain caused by cancer, deferoxamine administered by external infusion pump for the treatment of acute iron poisoning and iron overload, and TPN administered by infusion pump for patients with a permanent, severe disease or disorder of the gastrointestinal tract. At the same time, national and local coverage policies explicitly exclude certain types of infusion pumps or drugs for certain conditions. For example, Medicare does not cover an implantable infusion pump for the treatment of diabetes because, according to CMS, data do not demonstrate that the pump would provide effective administration of insulin. Medicare coverage also excludes external infusion pumps used to administer vancomycin, a commonly infused antibiotic. According to CMS, this method of treatment is specifically excluded from coverage because of insufficient evidence that an external infusion pump—rather than a disposable pump or the gravity drip method—is needed to safely administer vancomycin. In addition, drugs administered through other methods, such as intravenous gravity drip, are not covered under the DME benefit. Non-homebound beneficiaries needing therapies not covered under Medicare Part B may have coverage of infusion drugs under Part D, but they lack coverage for the other components of home infusion therapy— skilled nursing services, equipment, and supplies. (See fig. 2.) Therefore, these non-homebound beneficiaries would need to seek treatment in another setting—such as a hospital, nursing home, or physician’s office— to have all of the components of infusion therapy covered. Under Part D, drug plans must ensure that certain requirements are met before drugs, including infusion drugs for administration at home, may be dispensed. Specifically, Part D plans must require that their contracted network pharmacies ensure that the other components of therapy are in place before dispensing home infusion drugs. Pharmacies may, in turn, seek assurances that another entity, such as a home health agency, can arrange for other needed services. The health insurers in our study told us that they provide comprehensive coverage of home infusion therapy under all of their commercial health plans and some MA plans. Most of these insurers use a combination of payment mechanisms that include a fee schedule for infusion drugs, a fee schedule for nursing services, and a bundled payment per day for therapy for all other services and supplies provided. The health insurers in our study told us that they provide comprehensive coverage of home infusion therapy under all of their commercial health plans and some MA plans. Most of them reported that they have covered infusion therapy at home for more than 10 years—one for more than 25 years—and that few or no members experienced problems with access to home infusion services. Spokespeople for these insurers generally anticipated more opportunities for home infusion therapy in the future, as more infusion drugs are developed and technology evolves to infuse them safely in the home. All of the health insurers told us that home infusion therapy coverage was comprehensive and available to all members under their commercial health plans. (See fig. 3 for a hypothetical example of how home infusion therapy might be covered under a commercial health plan.) They also told us that their commercial coverage policies have few or no limitations or exclusions on home infusion therapy, although coverage may be denied when the drug’s label specifies another setting as the appropriate venue, such as a hospital or physician’s office. Some insurers mentioned that chemotherapy infusions are rarely administered in the home. One insurer stated that infusion drugs for home use must have a low likelihood of adverse reaction, and that few chemotherapy drugs meet that criterion. Even when the home is a safe setting for such therapy, there may be other reasons to infuse chemotherapy drugs in another setting. For example, another insurer pointed out that cancer treatments might require blood tests prior to the infusion, and fewer supplies would be used if the patient had both the blood testing and the infusion in a physician’s office. Of the five health insurers that had MA plans, two said they provide comprehensive coverage of home infusion therapy for MA beneficiaries in the same manner as for their commercial plan members. The remaining three insurers told us that their MA plans’ policies generally follow Medicare FFS coverage. However, two of these insurers noted that their MA plans may extend coverage to non-homebound beneficiaries on a case- by-case basis. They said that while such MA beneficiaries may be able to leave their homes with little difficulty, it may not be practical for them to go to an outpatient department or infusion clinic three times a day to receive infusion therapy. In those cases, the MA plan might cover infusion therapy administered at beneficiaries’ homes. Nationwide, nearly one out of every five MA beneficiaries has comprehensive coverage of home infusion therapy through a bundle that includes drugs and associated supplies and services. CMS allows MA plans to cover infusion drugs as a Part C mandatory supplemental benefit—a benefit not covered by Medicare FFS, but available to every beneficiary in the plan—to better coordinate benefits for home infusion therapy under Parts C and D. According to CMS, allowing MA plans to cover infusion drugs in this way would also facilitate access to home infusion therapy— including drugs as well as the other needed components—and obviate the need for more costly hospital stays and outpatient services. CMS data show that programwide, roughly 5 percent of MA plans chose to cover infusion drugs as a supplemental benefit: 258 plans representing almost 20 percent of MA beneficiaries in 2009 and 224 plans representing more than 18 percent of MA beneficiaries in 2010. Of the insurers we interviewed, one offers comprehensive coverage in this manner. Health insurer officials we talked to asserted that infusion therapy at home generally costs less than treatment in other settings. Hospital inpatient care was recognized as the most costly setting. One insurer estimated that infusion therapy in a hospital could cost up to three times as much as the same therapy provided in the home. Another insurer reported that its infusion therapy benefit is structured to encourage beneficiaries to receive services at home rather than in a hospital inpatient or outpatient setting whenever possible. For example, members of that insurer’s health plans have no out-of-pocket costs for home infusion therapy. However, the relative costs of infusion therapy in physicians’ offices and infusion clinics compared to the home were less clear. For example, some health insurers stated that the cost of infusion therapy provided in an infusion center may be similar to the cost of treatment at home because nurses at infusion centers can monitor more than one patient at a time. At the same time, other insurers stated that infusion centers incur facility costs, such as rent and building maintenance, which could account for higher costs compared with home infusion. The home may not be the most cost-effective setting for infusion therapy in all cases, given the variability of patient conditions and treatment needs. An insurer noted, for example, that if a patient needs a onetime infusion rather than a longer term treatment, a physician’s office may be the least costly setting. Similarly, another insurer stated that it may not be cost- effective or practical for a patient to be treated at home if that patient requires more than two nursing visits a day—in such a case, treatment in an inpatient setting or nursing home might be more appropriate. Most of the health insurers we spoke with use a combination of methods to pay providers for the different components of home infusion. (See fig. 4 for an example of how a commercial health plan might pay for a typical home infusion case, as introduced in fig. 3.) For infusion drugs, they commonly use a fee schedule, which they update periodically—as frequently as quarterly. Depending on the particular plan and negotiations with individual infusion providers, insurers told us they develop payment amounts for drugs based on one or more of the following: Average wholesale prices (AWP) are list prices developed by manufacturers and reported to organizations that publish them in drug price compendia. There are no requirements or conventions that AWP reflect the price of an actual sale of drugs by a manufacturer. Average sales prices (ASP) are averages, calculated quarterly from price and volume data reported by drug manufacturers, of sales to all U.S. purchasers, net of rebates and other price concessions. Certain prices are excluded, including prices paid to federal purchasers and prices for drugs furnished under Part D. Under Medicare FFS, infusion drugs administered using a covered DME item are generally paid at 95 percent of the October 1, 2003 AWP. Wholesale acquisition costs (WAC) are manufacturer list prices to wholesalers or direct purchasers, not including discounts or rebates. The health insurers in our study reported using these pricing data in different ways. For one insurer, plans in some states base payments on ASP while plans in other states base payments on AWP. Another insurer reported that its MA plans pay for Part D drugs using AWP or WAC, and pay for Part B drugs using either AWP for in-network providers or ASP plus 6 percent for out-of-network providers. Most of the health insurers we spoke with also use a fee schedule to pay for nursing services. The nursing fee schedule generally contains one rate for the first 2 hours of care and another rate for each subsequent hour. According to industry officials, insurers may also provide extra payment for nurses traveling to remote areas or areas considered dangerous enough to require an escort. Nursing services generally are not required for every dose of an infused drug, and the need for such services may depend on the condition of the patient. To explore this, we asked our selected health insurers to estimate nursing costs for different hypothetical cases. For a typical 4-week antibiotic infusion therapy course, insurers estimated the cost of nursing services would range from $270 to $384. For TPN administered over 12 hours, once a day over 4 weeks, insurers’ estimates of the cost of nursing services ranged from $180 to $384. Most of the health insurers in our study pay for the other components associated with home infusion therapy using a bundled payment per day of therapy—known as a “per diem.” This daily rate may cover services, such as pharmacy services, equipment and supplies, and care coordination. The per diem payment amount is based on the type of therapy provided and varies depending on the complexity and frequency of the treatment. For example, the per diem payment for a simple infusion administered once a day might be $75, whereas the per diem for a daily complex infusion with multiple drugs might be $225. Two of the health insurers we spoke with noted that the industry is trending toward greater use of bundled payments, with more services and supplies incorporated into a single rate. For one common home infusion therapy—TPN—the per diem also includes the standard drug costs. Asked about the costs of a typical monthlong course of TPN, insurers estimated total costs ranging from about $3,400 to $5,500, and noted that the per diem payments accounted for more than 90 percent of these costs. Some health insurers we interviewed stated that the infusion drug is generally the most expensive component of home infusion therapy, while others reported most home infusion drugs were among the least expensive, such as generics. Some insurers reported that many of the infusion drugs they cover are specialty drugs that cost more than $600 a month. Other drugs would cost less. For example, for a typical case of a month of antibiotic infusion therapy, a health plan could pay a home infusion provider $300 for the drugs, $350 for nursing services, and $2,000 for the per diem. One insurer told us that the pace of development in specialty infusion drugs is accelerating, which could add to home infusion therapy costs. Most of the health insurers in our study—both commercial and MA plans—use standard industry practices to manage utilization of home infusion and ensure quality of services for their members. None of the insurers reported significant problems with improper payments for home infusion therapy services. While none of the insurers identified significant quality of care problems related to home infusion therapy, they all employ certain practices to help ensure care delivered meets quality standards. Most health insurers we interviewed use two standard industry practices—prior authorization, postpayment claims review, or both—to manage utilization of home infusion therapy for their members. To obtain prior authorization, providers must request and receive approval from the health plan before the therapy is covered. The plan typically requires providers to submit patient information in advance to support a request for coverage and receive payment authorization. With postpayment review, once a claim has been processed, the plan determines if it was billed and paid appropriately, and if not, the plan may seek a refund or adjust future payments. Generally, a health plan auditor would review a sample of claims to see if the patients had medical conditions for which the proposed treatment was required. None of the insurers reported significant problems with improper payments for home infusion therapy. Most of the insurers we interviewed use prior authorization to curb inappropriate use of home infusion therapy. Some insurers stated that prior authorization is particularly effective in managing the use of more costly infusion drugs. Some insurers stated that their plans limit their prior authorization requirement to certain home infusion therapies and drugs. For example, certain hemophilia drugs may require prior authorization because they are expensive and patient needs vary substantially. Additionally, insurers may require prior authorization for immune globulin, checking that patients’ medical conditions indicate use of the drug. In contrast, one home infusion expert told us that prior authorization has little utility for this type of therapy because home infusion providers would incur too much liability risk if they treated patients who were not appropriate for that setting. The denial rates for prior authorization requests are reportedly low. A common reason given for denial of a prior authorization request was that the therapy did not meet medical necessity requirements. Specifically, the requested coverage may be for a treatment of longer than the recommended duration or for a type of narcotic that may not be safe for administration in the home. Another common reason cited for prior authorization denials was insufficient documentation from the prescribing physician. Insurers also cited denials for drugs prescribed for off-label use—that is, for conditions or patient populations for which the drug has not been approved, or for use in a manner that is inconsistent with information in the drug labeling approved by the Food and Drug Administration. An insurance official stated that some conditions that are difficult to treat or diagnose do not have a universally accepted treatment approach. For example, two insurers cited denials for requests to treat Lyme disease with long antibiotic courses that were not supported by medical evidence. Most health insurers we interviewed use postpayment claims review, some in addition to prior authorization, to manage the use of home infusion therapy. One insurer considered postpayment review the practice most effective in deterring inappropriate use of home infusion therapy. Such reviews may have a sentinel effect, meaning that providers who have erroneous claims returned may be less likely to submit such claims in the future. That insurer and an industry expert also noted the importance of developing very specific reimbursement guidelines for providers. An industry expert recommended guidelines at the dosage and package level, noting that a single infusion drug may be used for many different diagnoses, with a different dosage regimen for each diagnosis, and different package sizes from different manufacturers. For example, to reduce wasteful spending, reimbursement guidelines could include the specific package sizes that are covered for products that cannot be reused after they are opened. While none of the health insurers we spoke with identified significant quality problems related to home infusion therapy, they all employ certain practices to help ensure that their members receive quality care. These include developing a limited provider network of infusion pharmacies and home health agencies, requiring provider accreditation, coordinating care among providers, and monitoring patient complaints. Most health insurers we interviewed create a network by contracting with a set of home infusion providers and suppliers that meet certain participation criteria, such as adherence to specified industry standards and licensure. One insurer’s participation criteria contain a set of standards, including staffing requirements, guidelines for patient selection, and the ability to initiate therapy within 3 hours of a referral call. The infusion providers that insurers include in their networks range in size and may include large national chain providers and stand-alone local home infusion providers. Health insurers told us they rely on credentialing, accreditation, or both to help ensure that plan members receive quality home infusion services from their network providers. Home infusion accrediting organizations conduct on-site surveys to evaluate all components of the service, including medical equipment, nursing, and pharmacy. The three accreditation organizations in our study reported that their standards include CMS Conditions of Participation for home health services, other government regulations, and industry best practices. All of their accreditation standards evaluate a range of provider competencies, such as having a complete plan for patient care, response to adverse events, and implementation of a quality improvement plan. According to accreditation organizations we interviewed, an increasing number of providers are seeking home infusion-specific accreditation. One insurer told us that home infusion has minimal quality issues due to strong oversight of pharmacies through state and federal regulation and by accrediting institutions. Accrediting organizations identified unique safety and quality factors that must be considered when providing infusion therapy in the home setting. First, home infusion providers must carefully evaluate the willingness and ability of the patient, caregiver, or both to begin and continue home therapy. Because infusion drugs are administered directly into a vein, the effect of a medication error is greater and faster in infusion therapy than with oral treatments. Providers must therefore also take steps to ensure that patients can recognize the signs and symptoms of an emergency. Second, providers must ensure that patients have the appropriate infrastructure in the home to store equipment, drugs, and supplies, and to provide the therapy. Needed infrastructure often includes a refrigerator to store infusion drugs and sometimes safeguards to protect patients’ drugs and supplies, particularly in the case of controlled substances such as narcotics. Home infusion providers must have emergency support services available 24 hours a day, 7 days a week in case of an adverse drug reaction or to troubleshoot any problems with equipment, such as infusion pumps. Officials from one accrediting organization told us that they also expect infusion providers to have plans in place to deal with other types of emergencies, such as a natural disaster. While officials from accrediting organizations did not report any pervasive quality issues, they described several common problems among home infusion providers that demonstrate the complexity of the treatment. Home infusion providers may not have staff with the appropriate training and competencies, which may be a challenge for small organizations. Also, they may inadequately coordinate care for patients who receive multiple medications and have multiple physicians. Furthermore, home infusion providers may not always meet documentation and planning requirements for accreditation. For example, officials from one accrediting organization stated that the top two deficiencies for infusion companies are incomplete plans of care and a lack of a comprehensive quality improvement program. In addition, home infusion providers may find it challenging to meet some technical standards, including pharmaceutical requirements. An accrediting official observed that some infusion pharmacies are still learning to comply with recent industry standards for combining ingredients or other processes to create a drug in a sterile environment. Poor procedures to track recalled items is another common technical deficiency for home infusion providers. Providers generally have recall processes for medications, but sometimes not for every item used in the provision of care, as required by that accreditation organization. Communication and coordination of care between multiple entities is particularly important for this type of treatment. Several of the insurers we interviewed have processes to coordinate care for home infusion therapy and told us that they take responsibility for that function. Others rely on the patient’s physician, home infusion provider, discharging facility, or a combination of these to coordinate care. Two of the health insurers use the prior authorization process to coordinate care, as case managers initiate contact with the member and home infusion provider and follow up throughout the duration of the therapy. In addition to policies and procedures related to quality, all of the health insurers and accreditation organizations we interviewed have a process for addressing patient complaints. None of the health insurers told us that they have received significant complaints related to home infusion. One insurer cited a case in which a specialty pharmacy had diluted drug doses, and suggested that such problems concerning the quality and integrity of drugs could be overcome with information technology, such as bar coding of drugs. Due to the limited coverage of home infusion therapy under Medicare FFS and some MA plans, non-homebound beneficiaries would need to obtain treatment in alternate and potentially more costly settings—such as a hospital, outpatient department, or physician’s office—to have all of the components of infusion therapy covered. All of the health insurers in our study provide comprehensive coverage of home infusion therapy for all members in their commercial health plans, and some do so in their MA plans as well. Health insurers contend that the benefit has been cost- effective, that is, providing infusion therapy at home generally costs less than treatment in other settings. They also contend that the benefit is largely free from inappropriate utilization and problems in quality of care. Given the long and positive experience health insurers reported having with home infusion therapy coverage, further study of potential costs, savings, and vulnerabilities for the Medicare program is warranted. The Secretary of HHS should conduct a study of home infusion therapy to inform Congress regarding potential program costs and savings, payment options, quality issues, and program integrity associated with a comprehensive benefit under Medicare. We obtained comments on a draft of this report from HHS and from the National Home Infusion Association, a trade group representing organizations that provide infusion and specialized pharmacy services to home-based patients. HHS provided written comments, which are reprinted in appendix I. Officials from the trade association provided us with oral comments. HHS stated that Medicare covers infusion therapy in the home for beneficiaries who are receiving the home health benefit; other beneficiaries have access to infusion therapy in alternate settings, such as hospitals, outpatient departments, and physician offices. HHS noted that adding home infusion therapy as a distinct Medicare benefit would require a statutory change, and suggested we modify our recommendation to recognize statutory authority would be required. To make this more clear, we have rephrased our recommendation for executive action. National Home Infusion Association officials stated that few beneficiaries, even among those who are homebound, receive infusion therapy outside their homes due to the gaps in Medicare FFS coverage. They told us that Medicare FFS does not cover care coordination and clinical monitoring services when performed by infusion pharmacists—the providers most familiar with infusion drugs and treatment regimens. The officials said that homebound beneficiaries, therefore, would not receive infusion therapy in their homes without having supplemental coverage or paying out-of- pocket for services provided by an infusion pharmacist. However, CMS officials reported that infusion therapy in the home is largely provided through home health agencies, which are responsible for meeting a range of beneficiaries’ care needs. These agencies may perform care coordination and clinical monitoring functions themselves or arrange for these services from an independent infusion provider, according to CMS and a home health provider organization. In either case, these services are covered and paid for under the Medicare home health benefit. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the CMS Administrator, and interested congressional committees. The report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 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 major contributions to this report are listed in appendix II. In addition to the contact named above, Rosamond Katz, Assistant Director; Jennie F. Apter; Jessica T. Lee; Drew Long; Kevin Milne; and Julie T. Stewart made key contributions to this report.
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Infusion therapy--drug treatment generally administered intravenously--was once provided strictly in hospitals. However, clinical developments and emphasis on cost containment have prompted a shift to other settings, including the home. Home infusion requires coordination among providers of drugs, equipment, and skilled nursing care, as needed. GAO was asked to review home infusion coverage policies and practices to help inform Medicare policy. In this report, GAO describes (1) coverage of home infusion therapy components under Medicare fee-for-service (FFS), (2) coverage and payment for home infusion therapy by other health insurers--both commercial plans and Medicare Advantage (MA) plans, which provide a private alternative to Medicare FFS, and (3) the utilization and quality management practices that health insurers use with home infusion therapy benefits. To do this work, GAO reviewed Medicare program statutes, regulations, policies, and benefits data. GAO also interviewed officials of five large private health insurers that offered commercial and MA plans. The extent of Medicare FFS coverage of home infusion therapy depends on whether the beneficiary is homebound, as well as other factors related to the beneficiary's condition and treatment needs. Some Medicare FFS beneficiaries who are homebound have comprehensive coverage of home infusion therapy, which includes drugs, equipment and supplies, and skilled nursing services when needed. For non-homebound beneficiaries with particular conditions needing certain drugs and equipment, Medicare FFS coverage of home infusion is limited to the necessary drugs, equipment, and supplies, and excludes nursing services. For other non-homebound beneficiaries, Medicare FFS coverage is further limited; infusion drugs may be covered for those enrolled in a prescription drug plan, but neither equipment and supplies nor nursing services are covered. These non-homebound beneficiaries would need to obtain infusion therapy in a hospital, nursing home, or physician's office to have all therapy components covered. The health insurers in GAO's study provide comprehensive coverage of home infusion therapy under all of their commercial plans. Some insurers also provide comprehensive coverage under their network-based MA plans, which may provide benefits beyond those required under Medicare FFS. Nationwide, nearly one out of every five MA beneficiaries has comprehensive coverage through an MA plan that has chosen to cover home infusion therapy as a supplemental benefit. To pay providers of home infusion therapy, most of the insurers in GAO's study use a combination of payment mechanisms. These include a fee schedule for infusion drugs, a fee schedule for nursing services, and a bundled payment per day of therapy for all other services and supplies. Most of the health insurers in GAO's study use standard industry practices to manage utilization of home infusion therapy and ensure quality of care. Specifically, most health insurers require that infusion providers submit patient information in advance to support a request for coverage and receive payment authorization. Also, health insurers may review samples of claims postpayment to determine if claims were billed and paid appropriately. None of the insurers in GAO's study stated that they have had significant problems with improper payments or quality for home infusion therapy services. In addition, health insurers reported taking various steps to ensure the quality of services delivered in the home. These included developing a limited provider network of infusion pharmacies and home health agencies, requiring provider accreditation, coordinating care among providers, and monitoring patient complaints. In commenting on a draft of this report, the Department of Health and Human Services stated Medicare covers infusion therapy at home for beneficiaries receiving the home health benefit, while other beneficiaries have access to infusion therapy in alternate settings. The Department suggested GAO reword its recommendation to clarify that a change to Medicare benefits would require statutory authority, and GAO has done so.
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Generally, individual countries grant and enforce IP rights. Intellectual property is any innovation, commercial or artistic, or any unique name, symbol, logo, or design used commercially. Intellectual property rights protect the interests of the creators of these works by giving them property rights over their creations. Patent: Exclusive rights granted to inventions for a fixed period of time, whether products or processes, in all fields of technology, provided they are new, not obvious (involve an inventive step), and have utility (are capable of industrial application). Copyright: A set of exclusive rights subsisting in original works of authorship fixed in any tangible medium of expression now known or later developed, for a fixed period of time. For example, works may be literary, musical, or artistic. Trademark: Any sign or any combination of signs capable of distinguishing the source of goods or services is capable of constituting a trademark. Such signs, in particular, words including personal names, letters, numerals, figurative elements and combinations of colors as well as any combination of such signs are eligible for registration as trademarks. Trade secret: Any type of valuable information, including a formula, pattern, compilation, program device, method, technique, or process that gains commercial value from not being generally known or readily obtainable; and for which the owner has made reasonable efforts to keep secret. Geographical indication: Indications that identify a good as originating in a country, region, or locality, where a given quality, reputation, or other characteristic of the good is essentially attributable to its geographic origin. “Pirated copyright goods” means any goods that are copies made without the consent of the right holder or person duly authorized by the right holder. “Counterfeit goods” means any goods, including packaging, bearing, without authorization, a trademark that is identical to a trademark validly registered for those goods, or that cannot be distinguished in its essential aspects from such a trademark, and that thereby infringes the rights of the owner of the trademark in question. While determining the exact magnitude of the problem is difficult, industry groups suggest that counterfeiting and piracy are on the rise and that an increasingly broad range of products, from auto parts to razor blades, and from vital medicines to infant formula, are subject to counterfeit production. High profits and low risk have drawn in organized criminal networks and technology has facilitated the manufacture and distribution of counterfeit and pirated products, resulting in a global illicit market that competes with genuine products. Although the public is often not aware of the issues and consequences surrounding IP theft, many counterfeit products raise serious public health and safety concerns, and the annual losses that companies face from IP violations are substantial. Legal protection of IP varies greatly around the world, and several countries, including China, India, and Thailand are havens for the production and sale of counterfeit and pirated goods. Under its annual Special 301 process, the United States has designated China, India, and Thailand as Priority Watch List countries, meaning that they are not providing an adequate level of IP protection or enforcement, or market access for persons relying on IP protection. Priority Watch List countries are the focus of increased bilateral attention regarding IP issues. China, India, and Thailand are also members of the World Trade Organization (WTO) and must comply with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which provides minimum standards for IP protection and enforcement. Seven federal agencies, and entities within them, undertake the primary U.S. government activities in support of IP rights overseas. These agencies are: Commerce, State, DOJ, DHS, HHS, USTR, and the U.S. Agency for International Development (USAID). Key entities include Customs and Border Protection (CBP), the Food and Drug Administration (FDA), Immigration and Customs Enforcement (ICE), the Federal Bureau of Investigation (FBI), the International Trade Administration (ITA) and USPTO. USPTO and DOJ recently established positions overseas that have IP protection and enforcement as their primary mission, in order to enhance U.S. efforts. USPTO created its IP attaché program to address country- specific and regional IP problems in key parts of the world. USPTO’s first IP attaché was posted in Beijing, China, in 2004. USPTO added an attaché in Beijing, China, in 2006; and an attaché in Guangzhou, China, in 2007. During 2006 and 2007, USPTO also expanded the program to five other countries: Egypt, Thailand, Russia, Brazil, and India. Since then, the Egypt position has been eliminated and a new position in Doha, Qatar, is in the planning stages. Table 1 shows the current IP attaché positions, their country and post locations, and their geographic areas of coverage. The IP attachés work on a range of IP activities in coordination with other federal agencies, U.S. industry, and foreign counterparts. At the time of our audit work overseas in March 2009, both IP attaché positions in Beijing were vacant, with the two IP attachés departing in August and November of 2008, respectively. According to USPTO, the IP attaché in Guangzhou helped manage the office in Beijing in the absence of an IP attaché there; and from December 2008 through August 2009, on a regular basis, USPTO headquarters sent attorneys with expertise and experience on China IP matters from the Office of IP Policy and Enforcement to Beijing on short-term assignments to manage the office. In March 2009, USPTO officials told us that a candidate had been selected to fill one of the vacant attaché positions. The new attaché arrived in early September 2009. USPTO stated that it intends to fill the other vacancy in Beijing and will be putting out a vacancy announcement in the near future. DOJ placed two federal prosecutors with IP expertise to serve as IPLECs, in Bangkok, Thailand, and Sofia, Bulgaria, in January 2006 and November 2007, respectively. The IPLECs are tasked with advancing the criminal enforcement of laws in their respective regions through a combination of training, technical assistance, and outreach. The IPLEC in Thailand also serves as a DOJ attaché and thus, according to DOJ officials, performs case work, including investigations on IP. Although IP is a central part of the mission of the IPLEC in Thailand, as DOJ attaché, this person is also responsible for a range of DOJ functions beyond IP. In addition to the IP attachés and the IPLECs, there are a variety of other types of U.S. government personnel posted overseas who perform IP functions. For instance, State economic, political, and public affairs officers may be involved in IP activities at posts. ICE and CBP attachés may also be involved. Other personnel such as FBI legal attachés, Commerce’s Foreign Commercial Service (FCS) officers, FDA investigators and technical experts, and USDA Foreign Agricultural Service officers are among the other U.S. government personnel that may be involved in IP activities at posts. As described in our February 2009 report, the various U.S. personnel posted overseas conduct a range of activities related to IP enforcement and protection within their agencies’ respective roles and responsibilities. These responsibilities generally include advancing U.S. IP policy, dialoguing with foreign counterparts on IP, providing training and technical assistance, supporting U.S. companies, facilitating enforcement of IP laws and regulations, and conducting public awareness campaigns. Table 2 elaborates on these responsibilities and the types of activities they entail, and provides examples of how such activities are undertaken by U.S. personnel in China, India, and Thailand. The U.S. government has identified weak enforcement as a key IP issue in the three case study countries; however, weaknesses also persist in their IP laws and regulations. According to the U.S. government, enforcement of existing IP laws and regulations and adjudication of suspected infringements are limited and inconsistent and penalties are not typically sufficient to serve as an effective deterrent. U.S. government documents and U.S. officials we interviewed cited several factors that contribute to this limited and inconsistent enforcement including flawed enforcement procedures; a lack of technical skills and knowledge of IP among police, prosecutors, and judges; a lack of resources dedicated to IP enforcement efforts; and the absence of broad-based domestic support for strong IP enforcement. While acknowledging progress in recent years, the U.S. government also continues to cite various weaknesses in the three countries’ IP laws and regulations that need to be addressed. The U.S. government has identified weak enforcement as a key IP issue in China, India, and Thailand. According to the U.S. government, the extent to which existing IP laws and regulations are enforced and pursued through the courts in the three case study countries is limited and inconsistent. According to various U.S. officials we interviewed overseas, enforcement tends to be particularly weak and inconsistent outside of major commercial centers. For instance, some U.S. officials in China noted that cases of IP enforcement are much more common in large cities such as Beijing and Shanghai than in other parts of the country. In India, U.S. officials noted that IP enforcement is weak in much of the country with significant variations in the level of enforcement among India’s 28 states. While the three countries have taken some steps to demonstrate an increased emphasis on IP enforcement, various U.S. officials in the three countries stated that there continues to be an uneven commitment to such efforts. A range of U.S. officials and private-sector representatives we met with made the point that all three countries are increasingly looking to be centers of innovation and that there is a growing awareness that domestic production of IP is important for their economic development. As this process occurs, various U.S. officials and private-sector representatives we interviewed believe that the three countries will have a greater incentive for strong IP enforcement. At this point though, various U.S. officials and private-sector representatives noted that the three countries’ continue to not be fully committed to strong and sustained enforcement efforts. For instance, in the 2009 Special 301 Report, the U.S. government reported that during the 2008 Beijing Olympics, China took unprecedented steps to crackdown on the unauthorized retransmission of broadcasts and other infringing activities over the Internet; however, the report also noted the need for China to demonstrate this type of resolve more generally in combating piracy and counterfeiting on the Internet. Additionally, the U.S. government reported in the 2009 Special 301 Report that an innovative agreement brokered by the Beijing municipal courts between IP rights holders and the landlord of a commercial center that was a well-known source for an array of violating goods has not been enforced despite initial optimism. In India, 23 states have created specialized IP units within their police forces, but U.S. officials we interviewed stated that only a few of these units are currently operational. Furthermore, the officials noted that even these specialized units have other priorities, with IP not always being at the top of the list. Thailand has set up a specialized IP court, but the U.S. embassy in Thailand has reported that the court is not living up to its full potential with most convictions resulting in minimal sentences, such as small fines or required community service. The U.S. embassy in Thailand has also reported that Thai authorities have labeled parts of Bangkok and other Thai cities that are well-known retail centers for infringing products as “red zones;” however, the embassy noted that since the designations, there have not been any sustained efforts to reduce the availability of pirated and counterfeit goods in these zones. The U.S. government has identified a variety of problems with the countries’ IP enforcement procedures and subsequent judicial proceedings that limit the effectiveness of actions against infringers. For instance, several U.S. officials in China stated that high thresholds for criminal violations mean that most cases are handled using administrative enforcement actions, rather than criminal prosecutions that have the potential to result in more serious punishments for violators. With an administrative enforcement action, the violator is ordered to stop performing the infringing activity and is levied a fine. The 2009 Special 301 report states that administrative fines are not consistently levied in China and are too low to be an effective deterrent for infringers with most seeing the fines simply as part of the cost of doing business. In the 2009 National Trade Estimate Report on Foreign Trade Barriers, the U.S. government reported that documentary and procedural requirements in India have created impediments to the prosecution of IP violators. The 2009 National Trade Estimate Report on Foreign Trade Barriers also stated that in Thailand, police are at times reluctant to involve themselves in raids due to limited legal protections, even when acting in an official capacity. Enforcement is also hampered by a lack of technical skills and knowledge of IP among police, prosecutors, and judges in the three countries. For example, a U.S. law enforcement official we interviewed in India stated that a lack of basic technical skills and awareness of investigative techniques limits the Indian police’s ability to successfully conduct IP enforcement actions. Additionally, the U.S. embassy in India has noted that many government prosecutors lack even a basic awareness of IP rights. In Thailand, a representative from the private sector said that Thai police are uncertain as to what to do after they have conducted a raid and are reluctant to do the necessary paperwork that is required to turn a strong case over to a prosecutor. In China, U.S. officials stated that historically, Chinese judges were not required to have law degrees, with many judicial appointees being former army officers. While some U.S. officials we interviewed noted that China has increased the requirements for judges in recent years, the officials said that there continues to be a great deal of inconsistency in judges’ knowledge level and competency. One representative from the private sector noted as an example that there is a need for more IP case law to be published in China since many judges have little awareness of previous IP cases and cannot capitalize on precedent to guide them in their decisions. The three countries are also faced with limited resources that challenge their ability to dedicate sufficient time and energy to IP enforcement, particularly given other competing priorities. For example, the U.S. embassy in Thailand has reported that the Thai police generally lack the resources to undertake enforcement actions apart from those cases initiated by rights holders, with the Thai police typically relying on rights holders to perform the majority of investigative work and evidence collection. Additionally, the embassy has noted that rights holders are generally required to pay the costs of such raids. As a consequence, rights holders often find it cost-prohibitive to seek out police action in areas much beyond Bangkok. In India, the U.S. embassy has reported that the courts are extremely backlogged with it taking years before cases are resolved; however, U.S. officials noted that India has taken some steps to reduce the backlog of IP cases in the criminal courts in Delhi and Bangalore. In China, the U.S. government has noted that the National Copyright Administration, which is responsible for administrative enforcement actions against copyright violators, does not have sufficient personnel to carry out such actions on a wide scale. Support for strong IP enforcement among politicians and government officials, domestic industry, and the general public is also lacking in the three countries. For instance, a U.S. official we interviewed noted that in India there has been a long history of anti-IP rights sentiment among many in the government. According to U.S. embassy officials, this attitude has started to change among some senior Indian officials in the last few years; however, the U.S. embassy in India has reported that it has not yet translated into concrete action at the national level. In Thailand, a U.S. official noted that political instability over the last few years has made it challenging to get the Thai government to focus on IP enforcement at the national level. Increased enforcement is also at times viewed as contributing to economic harm and as being counter to local interests. For instance, in the 2009 Special 301 Report, the U.S. government reported that some Chinese officials are encouraging more lenient enforcement of IP laws due to concerns about the financial crisis and the potential loss of jobs. U.S. government officials also stated that while companies in all three countries are increasingly looking to be innovators and create their own intellectual property, domestic industry has not always been a strong voice for IP enforcement and has at times seen it as being counter to their interests. For instance, a U.S. official and a private-sector representative in India noted that India’s generic pharmaceutical industry has often been at odds with international innovating companies over strong enforcement of IP patent rights. Finally, various U.S. officials we interviewed stated that members of the general public in the three countries are not always supportive of strong IP enforcement. For instance, a U.S. official we met with in China noted that a view expressed by some Chinese citizens is that IP is simply a tool to help the rich get richer at the expense of ordinary citizens. The U.S. government generally believes that all three countries have made progress in strengthening their IP laws and regulations in recent years. For instance, U.S. officials have noted that at this point, all three countries have made progress bringing their laws into compliance with the WTO’s TRIPS agreement. The U.S. government has also cited other positive developments. For instance, China has established rules that now require computers sold in the country to be pre-installed with licensed operating system software in an effort to reduce purchases of pirated software. In 2008, India passed a law strengthening penalties for spurious and adulterated pharmaceuticals. Additionally, India has approved initiating action for accession to the Madrid Protocol and has passed a bill to amend provisions of its trademark law to reflect this accession. Thailand has implemented provisions of its 2007 Film and Video Act that target the unauthorized sale of DVDs. The U.S. government has cited various weaknesses in the three countries’ legal protections for copyrighted works. For instance, India and Thailand have not yet joined the World Intellectual Property Organization’s Copyright Treaty or its Performances and Phonograms Treaty. These two treaties, which are commonly referred to as the World Intellectual Property Organization Internet Treaties, are designed to protect digital works and works distributed over the Internet. The U.S. government cites Thailand and India’s accession to these treaties and the revision of their copyright laws to implement the treaties as key steps that the two countries must take to ensure adequate protections for copyrighted works given advances in technology. Another key area of concern the U.S. government has in all three countries relates to the production of optical disks, such as CDs and DVDs. For instance, one U.S. official at the embassy in Thailand noted the need for Thailand to amend its Optical Disk Manufacturing Act to increase the government’s power to shut down operations where illegal infringements are occurring. In its WTO case against China, the U.S. government alleged that China’s Copyright Law did not protect copyrighted works, such as movies, that did not meet China’s content review standards. The U.S. government contended that this blanket denial of protection limited certain rights holders’ ability to pursue enforcement actions to prevent infringing copies from being produced in China and distributed there or exported to other markets. The WTO subsequently ruled in favor of the United States on this issue, finding that this denial of protection was impermissible under TRIPS. The U.S. government has also raised several issues with the laws governing patent protections in the three countries. For instance, while the U.S. government has credited India for several positive changes made as part of the revisions to its patent law in 2005, it has also raised concerns that many pharmaceutical companies’ applications for incremental patents are not patentable under the revised law. According to a U.S. official in India, this is problematic because much of the pharmaceutical innovation that occurs today is incremental in nature and builds upon existing patents. U.S. officials also cited problems with the structure of India’s system for challenging patent applications. According to these officials, under India’s current system, patents cannot be granted until all challenges made by parties are resolved and India’s patent law and implementing regulations do not set a specific time frame in which such challenges can be brought against a patent application. Thus, parties can file sequential challenges to significantly delay patent approvals. The U.S. embassies in India and Thailand also noted concerns with patent linkage issues in the two countries. For instance, a U.S. official in India stated that India’s Ministry of Health has been at odds with India’s Patent Office and has granted approvals for generic drugs to be brought onto the market while the innovating drugs were still eligible for exclusive marketing rights under the terms of the patent granted by the Patent Office. Similar issues exist in Thailand where the U.S. embassy has reported that there is not a formal system in place to prevent generic producers from being given approval to bring their products to market while the originals are still under patent. In addition, the U.S. government has raised concerns or sought clarification regarding China, India, and Thailand’s protections against the unfair commercial use of undisclosed test and other data generated to obtain marketing approval for pharmaceutical and agricultural chemical products. For instance, the 2009 National Trade Estimate Report on Foreign Trade Barriers reports that Indian law does not provide for effective protection against the unfair commercial use of test or other data that companies have submitted in order to get government approval for their pharmaceutical and agricultural chemical products. The U.S. government has also raised concerns or sought clarification regarding compulsory licensing in China, India, and Thailand. For example, Thailand has issued several compulsory licenses in recent years on pharmaceutical products, although no new licenses have been issued in 2009. The Thai government maintains that its actions did not violate its WTO commitments and the U.S. government has acknowledged Thailand’s right to issue compulsory licenses; however, the U.S. government has raised concerns regarding the transparency of the process and has noted industry complaints regarding the Thai government’s unwillingness to negotiate in good faith with rights holders before issuing the licenses. In the 2009 Special 301 Report, the U.S. government noted concerns with the scope and role of compulsory licensing under China’s revised patent law, which will go into effect on October 1, 2009. Recently, the U.S. government has raised fewer concerns with the three countries’ existing trademark laws and regulations than with those protecting other types of intellectual property; however, the U.S. continues to identify certain issues. For instance, the U.S. embassy in Thailand has reported that Thailand has not implemented the Madrid Protocol on Trademarks, which allows trademark owners the ability to apply for trademark protection in all of the Protocol’s signatory countries through the filing of a single application in their own national trademark offices. In China, the U.S. government has reported that there are no requirements to provide evidence of prior use or ownership when filing a trademark application, resulting in “trademark squatting” whereby third parties are able to register popular foreign trademarks for their own use. The U.S. government has also cited certain market barriers, in China in particular, as being key areas of concern, since it believes that some of these barriers create incentives for piracy and counterfeiting. For instance, the 2009 Special 301 Report and U.S. officials we interviewed stated that China’s restrictions on the number of foreign films allowed to enter its market every year minimize access to legitimate versions of films, which in turn drives up the demand for pirated versions. The U.S. government has also noted in the 2009 Special 301 Report that China needs to add, on a regular basis, new drugs to its national formulary, which determines which medicines consumers will be able to legally access. The USPTO IP attachés were generally effective in collaborating with other agencies at the four posts primarily by acting as IP focal points, establishing IP working groups, and leveraging resources through joint activities. The DOJ IPLEC collaborated on IP with post and agency headquarters personnel via country and regional forums such as training U.S. and foreign, police, prosecutors, and customs officials on enforcement practices. While the IPLEC collaborated with FBI and ICE officials at the posts and with DOJ headquarters on criminal casework, the cases mostly involved non-IP criminal activities under the IPLEC’s dual role as DOJ attaché. GAO has found that while collaboration among federal agencies can take different forms, practices that generally enhance collaboration include agreeing upon agency roles and responsibilities; establishing compatible policies, procedures, and other means to operate across agency boundaries; and identifying and addressing needs by leveraging resources. We found several instances where the IP attachés demonstrated these practices in collaborating with other agencies at the posts: agreeing on roles; establishing policies and procedures; and leveraging resources. (The practice of “establishing mutually reinforcing or joint strategies” is discussed later in this report under our third objective regarding interagency planning.) Several agency officials in each of the four posts noted common factors that were important to enabling the IP attachés to serve as effective focal points. First, agreement on roles and responsibilities of the IP attachés particularly vis-à-vis the State economic section and post leadership, while challenging, was achieved in most posts. Prior to the creation of the attaché position at the four posts, State economic officers had primary responsibility for IP; now, they are the most involved in IP issues after the IP attachés. Thus, it was important that State officials and the IP attaché at each post agree on their respective roles. State economic officers in Guangzhou and Beijing raised some challenges regarding such agreement, but they and the IP attachés have successfully worked out their appropriate roles on IP, including dealing with the Chinese government. For example, in Guangzhou, the economic officer said that he gathered information and applied diplomacy to convince the Chinese to improve their IP protection and that IP attaché played a similar role, but also offered the host government practical means, such as technical assistance. The economic officer in Beijing said it took some work, but he was able to balance his role with the subject matter expertise of the attaché, for example, deciding when the IP attaché should use his expertise to support the economic officer’s diplomatic efforts and when the IP attaché should work directly with the Chinese government. However, at the post in Thailand, the lack of consensus between the IP attaché and the economic section and post leadership on the attaché’s role negatively affected collaboration. For instance, a State economic officer expressed the view that the IP attaché should primarily provide training and technical assistance on IP and should have little involvement in policy and diplomacy matters as the economic section was the primary U.S. face to the Thai government on IP. According to USPTO officials, the regional role of the IP attaché may have contributed to the perception that the attaché was not intended to be the IP focal point at the post. Although the IP attaché was able to promote IP protection and enforcement through technical assistance programs, the attaché wanted to be more fully included in the embassy’s IP policy considerations, such as more opportunities to provide her expertise during all phases of the Special 301 process. As a result, one private-sector representative and another U.S. agency official at the post with whom we spoke expressed confusion about who to contact on IP at the embassy. Another element that contributed to the IP attachés’ ability to serve as effective focal points was that they imparted their subject matter expertise. For example, IP attachés pro-actively shared their IP expertise among the other agencies such as providing updates on IP laws and regulations, which had increased awareness of the issue at the posts. A Foreign Agricultural Service official in Bangkok said that with the IP attaché’s expertise, he was able to identify and address IP violations of agricultural products. He gave an example where an agricultural cooperator contacted him about the packaging and labeling of one of its products being copied and sold on host country grocery shelves. The Foreign Agricultural Service official said that without the IP attaché’s help, he would have sent a sample to Washington where it likely would have been considered a labeling issue rather than the more accurate designation of counterfeiting. In addition, the IP attachés had the advantage of working full time on IP. Several agency officials from all four posts said that they had multiple responsibilities required by their broad portfolios, and some officials in some posts said they spent relatively little time on IP. In particular, the officials from the law enforcement agencies, such as ICE and FBI, at the posts where they had a presence, stated that IP was not a top priority given all the other issues they address such as counterterrorism and internet fraud. A State economic officer in Beijing said that the IP attaché compelled agency officials at the post to make time for IP despite other competing demands, while a State economic officer in New Delhi said that having the IP attaché take the lead on IP had been very helpful and an ICE official said that the arrival of the IP attaché had energized the same post on IP issues. Finally, agency officials cited working with other agencies as a team and fostering trust and support among U.S. agency and host country government counterparts as key elements contributing to the attachés’ successful role as focal points. For instance, two agency officials at one post said that the IP attaché was a team player who really encouraged communication on IP with the agencies at the posts. At another post, an agency official said that the IP attaché was very effective in building relationships with the host government, which, in turn, gave other U.S. agencies entrée to state their case on IP with the host government officials. At the embassies in New Delhi and Beijing, the IP attachés played a key role in creating interagency IP working groups soon after their arrival. Several agency officials at these two posts said that the multiple duties, heavy demands in terms of official visitors, and the large number of personnel at the post made it difficult to rely solely on informal communications to address IP. Accordingly, the IP attachés facilitated the formation of IP working groups for agencies to meet and share information on IP and update each other on their respective IP activities. The meetings were usually led by the IP attaché and might include attendees from USTR, the State economic section, the Foreign Agricultural Service, and the FCS as well as enforcement agencies such as ICE, CBP, FBI, and DOJ, depending on the agencies located at the two posts. Several agency officials in New Delhi and Beijing said that the working groups provided several advantages. For instance, the working group meetings allowed agencies to learn, on a regular basis, of each other’s upcoming activities on IP, hear about news and trends in IP, and complement each other’s efforts such as arranging to attend each other’s training programs to lend their particular expertise. One agency official said that when she first arrived at the post in Beijing, the working group helped her get up to speed on the IP issues and priorities and take advantage of opportunities to raise them in her meetings with the host government. The importance of the IP working group and the role of the attaché in Beijing was demonstrated when the working group became inactive after the attaché left the post in August 2008 and the position became vacant. Two agency officials at the post said that presently without these meetings, there was less focus on IP at the post. One of these two officials said that although agency officials had actively exchanged emails since the attaché’s departure, a more formal collaborative process would be useful to ensure that the embassy spoke with one voice on IP. In addition, the same official said that the meetings were particularly important to maintain connection with the enforcement side, which he said tends to be more reluctant to share information with other agencies at the post. At the consulate in Guangzhou, one agency official said that he had participated in the embassy’s working group meetings in Beijing by phone until they were discontinued with the departure of the IP attaché; he hoped that the embassy working group meetings would be resumed when the IP attaché vacancy was filled, saying that the meetings kept him informed of IP events at the capital. In Thailand, IP issues are covered in two regular, large interagency meetings at the post: the Economic Cluster and the Law Enforcement Working Group. In addition, according to the IP attaché, for the past couple of years, the attaché held periodic informal meetings on IP with officials from State, DOJ, and DHS to discuss IP issues. The IP attaché said that although participants’ regional responsibilities and travel schedules prevented regularly scheduled meetings, this group met at least 10 times from October 2006 to the end of 2008. In late 2008, the IP attaché worked with the Deputy Chief of Mission to establish a more formal IP working group. The first meeting of the IP working group was in January 2009, chaired by the Deputy Chief of Mission, and coordinated by the IP attaché. As of June 2009, USPTO had instituted a new requirement that the IP attachés and State Department embassy staff in all the posts where IP attachés are posted form an “IPR task force” that meets on a regular basis. The IP attachés complemented the efforts of other agencies to enhance IP protection and enforcement at all four posts by leveraging resources through joint IP activities with other agency officials. For example, the IP attachés helped FCS’ efforts to assist and encourage individuals to do business in the country by providing advice on how to avoid IP problems, and answering IP-related questions. For example, the attaché explained host country IP regulations to U.S. companies in order to avoid customs related delays, and produced educational materials on IP for industry trade shows. In China, an FCS official and the IP attaché from Guangzhou said these efforts helped avoid situations that would lead to more WTO dispute settlement cases down the road. An FCS official in New Delhi said that the IP attaché has worked to remove the silos between FCS and USPTO at post, such as providing FCS clients with information on the IP situation in India. Economic officers in two posts provided examples of where the IP attachés expertise enhanced the officers’ access to and relationship with host country officials on IP. For instance, the economic officer in New Delhi said that the IP attaché had used his expertise to build trust and rapport with the host government on IP issues and complement the economic officer’s diplomacy with details on potential solutions. Another economic officer in Guangzhou said that he worked closely with the IP attaché on a daily basis to sell the idea that IP rights and their enforcement was important and that the attaché facilitated this joint effort by cutting through the bureaucratic layers in the host government. A public affairs officer in Guangzhou said that he had worked with the IP attaché on a series of public affairs events and that the attaché has also met with other stakeholders such as academics, students, and industry groups on IP that provided the public affairs officer with new contacts for his work. He said that the IP attaché had been very successful in amplifying the issue by making sure that IP was being discussed in the media. The public affairs officer in Bangkok said that the IP attaché provided talking points on IP for the U.S. ambassador at media events. Also in Bangkok, the IP attaché worked with CBP counterparts on customs enforcement training. The IPLEC collaborated on IP primarily through IP forums with other U.S. agency officials posted in several countries in the region, including Thailand and to a lesser extent China and India, as well as with agency headquarters personnel. With regard to case work, his primary focus was on his responsibilities as the DOJ attaché in which he works with U.S. and foreign law enforcement officials, prosecutors, and judges on an array of mostly non-IP criminal cases and investigations in the region that involve, among other things, money laundering, fraud, human trafficking, and child exploitation. The IPLEC collaborated with other post and headquarters officials via regional and country IP forums. According to the IPLEC, an important part of his collaborative efforts was creating an IP Crimes Enforcement Network (IPCEN), establishing a network of law enforcement officials in the region. To facilitate the IPCEN, the IPLEC hosted a 4-day and a 3-day, regional IPCEN conference, held in 2007 and 2009, respectively, in Bangkok, Thailand. The 2007 conference was co-organized by USPTO, DOJ, and ASEAN; and the 2009 conference by USPTO and DOJ. Both conferences were funded by the State’s Bureau for International Narcotics and Law Enforcement Affairs. The goals of the two IPCEN conferences were to work directly with police, prosecutors, and customs officials attending from the United States and numerous countries in the region to share best practices on fighting IP crimes. The IPCEN conferences were also meant to create a vehicle through which participants could develop relationships and opportunities for sharing information on transnational IP criminal investigations. In addition, the IPCEN conferences were meant to strengthen communication channels in the law enforcement community and promote coordinated, multinational prosecutions of the most serious IP offenders. In hosting the IPCEN conferences, the IPLEC collaborated with enforcement agencies at posts in the region, including CBP, ICE, and FBI. In addition, the Deputy Chief of Mission in Bangkok spoke at both conferences, and the IP attaché from Thailand assisted in arranging both IPCEN conferences and spoke at the conference in 2007. The IP attachés from China and India were not involved in either conference. In addition, an official from USPTO headquarters was a moderator in 2009. Non-U.S. government speakers at the conferences included law enforcement officials and investigators from several countries including China, South Korea, Australia, and Japan, and some ASEAN countries as well as U.S. rights holders from a range of industries. Examples of topics at the IPCENs included effective strategies for prosecuting internet- based piracy, illegal production of optical discs, and retail piracy; developing positive relations between investigators and prosecutors; effective border enforcement strategies; and presentations on the perspectives of several countries regarding effective IP rights criminal enforcement strategies. headquarters officials from DOJ and USPTO on more than 50 IP programs (2006-2009), providing legal and technical assistance to foreign law enforcement agencies and judges on IP law enforcement issues in multiple countries in the ASEAN region. Examples included IP workshops and seminars for U.S. and foreign judges, prosecutors, and investigators, and for U.S. business groups. With regard to collaboration with State officials and IP attachés at the posts, the IPLEC said that he sometimes attended host government meetings with the State economic officers in Bangkok and also attended several Bangkok IP working group meetings. However, he said that while he had attended some IP programs sponsored by the IP attachés earlier in his tenure in Bangkok, more recently he had not collaborated regularly with the IP attachés in Bangkok, Guangzhou, Beijing, or New Delhi. The IPLEC collaborated frequently with USPTO headquarters, specifically with an official from the Office of Intellectual Property Policy and Enforcement, which organized most IP events in the region from 2006 to 2009. This USPTO official, who worked closely with the IPLEC, commented that the IPLEC’s expertise as a prosecutor added depth and perspective to the programs. The IPLEC said that he had collaborated less with the IP attachés due to his many responsibilities working on regional forums and his role as a DOJ attaché, commenting that he was one person in a large region and that they had a broader set of concerns on IP than his more narrow focus on law enforcement. The IP attachés in Bangkok, New Delhi, and Guangzhou said that they viewed the IPLEC as a valuable resource and that, ideally, they would like to take advantage of his expertise more often, but found him busy with other priorities. One IP attaché commented that the IPLEC was “stretched thin” and another observed that he had a “full plate” due to the wide region and many issues he covered in addition to IP. With regard to case work, the IPLEC said he collaborated with other law enforcement agencies at the posts on a daily basis, including the FBI and ICE attachés in Thailand and other ASEAN countries, but primarily on non-IP cases in his role as DOJ attaché. The IPLEC also said he collaborated with the CBP attachés, though somewhat less. The FBI attaché in Thailand told us that he works with the IPLEC on a regular basis on various non-IP extradition cases, but knew of no recent IP cases. According to the IPLEC, since his arrival in Bangkok, there has been one IP case involving the extradition of a criminal from Thailand, in March 2008, for counterfeit pharmaceuticals, the first ever related to pharmaceuticals in the region. According to DOJ officials, extraditions based on IP offenses are very rare. The IPLEC assists U.S. prosecutors and investigative agencies develop cases by facilitating evidence and extradition requests as well as communication between U.S. authorities and foreign law enforcement. The IPLEC said that one focus of the IPCENs was to promote collaboration among U.S. and regional law enforcement authorities on IP cases. The IPLEC said that feedback from IPCEN attendees has been positive in terms of case-related communication. However, according to DOJ officials, the IPCEN network does not have a means to track any resulting sharing of evidence and other information, or resulting joint investigative efforts on IP cases. Ultimately, the IPLEC said that he would like to continue working on IP cases with his foreign counterparts, but finding areas where their interests coincide with those of the United States is challenging. The IPLEC further explained that although targeted prosecution of the most egregious IP offenders could result in higher sentences and have the greatest deterrent effect, countries such as Thailand have sought to improve the perception of their enforcement efforts by bringing a large number of low-value cases to trial. The IPLEC maintained that his two roles, IPLEC and DOJ attaché, were complementary in that wearing the DOJ attaché hat gave him more credibility as the IPLEC to push countries to investigate and prosecute IP criminals. First, host country officials could see that as a prosecutor he understood that IP was one among many large-scale crimes in the region and that addressing them, given scarce resources, was a challenge. Second, other types of criminal cases have been known to generate IP cases, as IP is often intertwined with money laundering, fraud and other criminal activities. He said that his main goal as both IPLEC and DOJ attaché is to convince countries to target their criminal investigations on the most egregious transnational cases, ideally for IP crimes, but realistically not restricted to them, which in the long run would result in reducing piracy and counterfeiting along with other crimes. While the four posts have adopted several practices to collaborate effectively on IP, only one has adopted an interagency plan to address key IP issues. Existing post guidance on IP is high level and does not generally guide agencies’ day-to-day efforts to reach IP goals. Agencies can plan by using joint strategies that translate high level goals into specific objectives and activities. At one post, agencies collaborated to develop a joint strategy in the form of an interagency IP work plan that has established specific IP objectives and helped agencies at the working level identify and implement IP activities that address the key IP issues identified by the United States. Joint strategies can help agencies prioritize among existing IP efforts, avoid duplication of IP efforts, convey a common message on IP to foreign governments, and maintain focus on IP given numerous competing issues and periodic changes in key IP personnel at the posts. Agencies at the posts are provided high-level guidance on IP issues, including guidance from U.S. headquarters’ interagency mechanisms and post-wide plans in which IP is included among other relevant issues. Individual agencies may also have their own IP guidance for a country. However, overall, existing guidance is generally either too high level to be applied to agencies’ day-to-day IP efforts to achieve IP goals or not shared widely among the agencies at the posts. The annual Special 301 report provides the posts guidance on key IP issues, although there are significant differences in the level of detail provided for each country. For instance the section on China in the Special 301 report has in recent years been longer than the sections for India and Thailand. USTR headquarters officials reported that in addition to the report, USTR sends cables to posts identifying IP priorities for their host countries. However, U.S. officials we interviewed at the four posts did not generally report that they utilized either the final Special 301 report or subsequent cables to guide them in conducting their IP activities on a day- to-day basis. As part of the Special 301 process, posts are also responsible for submitting a cable that outlines their perspectives on the key IP issues in their host countries. At the posts we visited, this effort was led by the State economic section with assistance from the IP attachés and input from other agencies. While these submissions identify a wide range of issues in each country, posts did not report that they utilized this interagency effort at the post level as a foundation from which to establish specific IP objectives to guide their IP efforts. The outcomes of bilateral forums such as the U.S./China Joint Commission on Commerce and Trade and the U.S./India Trade Policy Forum also provide high-level guidance to posts on IP issues that the U.S. government is seeking to collaboratively address with its foreign counterparts. For instance, in the context of the Trade Policy Forum, the United States and India agreed to work together to build enforcement agencies’ awareness of IP laws and systems in each country by, among other things, exchanging information on best practices and undertaking capacity building programs. While some U.S. officials we met with at the posts noted that these forums help establish U.S. policy goals for IP, as with the Special 301 process, post officials did not generally report relying on the outcomes of these forums to drive their IP activities on a day-to-day basis. Each U.S. embassy in the three countries also has a fiscal year 2010 Mission Strategic Plan (MSP) that discusses IP. While the mention of IP in the MSPs indicates that the embassy leadership in that country views IP as a priority, MSPs are designed to set general goals for posts rather than provide extensive guidance on particular issues. Thus, the MSPs are not meant to guide agencies’ day-to-day IP efforts. For example, India’s MSP has a general statement about supporting improved protection of intellectual property to attract more foreign direct investment and one IP- related performance target that relates to a reduction in the software piracy rate. To the extent that IP is discussed in the three countries’ MSPs, it is primarily within the sections on economic issues rather than in the sections on law enforcement. Only the MSP for Thailand mentions IP as a law enforcement issue. Even there, the discussion is limited to a broad statement about IP violations being one of a list of crimes that the mission will combat in partnership with the Thai government and does not include any specific categories of violations or potential strategies related to criminal IP enforcement in the law enforcement section of the plan. While other agencies may have broader plans that discuss IP, USPTO is the only agency we identified that has developed its own IP-specific plans for each of the three countries. USPTO’s headquarters-based country teams have developed IP plans for China, India, and an ASEAN regional plan that covers several countries, including Thailand. Additionally, the India, Thailand, and Guangzhou IP attachés have developed individual IP work plans for their areas of responsibility. However, USPTO officials stated that these plans tend to serve primarily as internal guidance and are not widely shared with officials from other U.S. agencies. Some USPTO headquarters officials we interviewed acknowledged that there would be benefits to having the IP attachés work with other relevant agencies on a post-wide IP plan at each location where there is an IP attaché. The officials stated that this would help ensure that agencies’ IP activities at the posts are in alignment with agreed upon long-term objectives and that there is a clear assignment of responsibilities. Additionally, the officials noted that such buy-in is essential since USPTO does not have the authority to direct the U.S. agenda at a post, with the ambassador having final say on the priorities. At the time of our review, however, USPTO had decided to give the attachés the discretion to determine whether or not to work with agencies at the post to develop such a plan, rather than making it a requirement. A USPTO headquarters official stated that this allowed the attachés greater flexibility in deciding how best to work with other agencies at post. GAO has found that agencies can enhance collaboration by establishing mutually reinforcing or joint strategies that articulate clear objectives and align activities, core processes, and resources to achieve a common outcome. While the four posts have adopted several practices to collaborate on IP, only one has adopted such a joint strategy. The U.S. embassy in New Delhi has developed a joint strategy in the form of an interagency IP work plan that translates key IP issues into a clear set of objectives and provides details on the post’s planned IP activities. The IP attaché in New Delhi led the effort to draft the plan under the auspices of the IP working group. Completed in December 2008, the plan incorporated input from several agencies at the embassy, including USPTO, CBP, ICE, FCS, and the State economic section. The interagency work plan lists specific IP objectives that the working group intends to work towards in India, such as the implementation of an optical disk law and the implementation of a meaningful system for protecting undisclosed data against unfair commercial use. The plan also identifies specific day- to-day activities in support of each objective that the IP working group hopes to undertake. For instance, it discusses meetings that the post intends to hold with various Indian ministries, outreach it plans to perform with the private sector, IP training it plans to provide, and data it plans to collect to bolster the U.S. position on certain IP issues. As the plan had been in place for a relatively short period of time when we conducted our fieldwork in New Delhi, in March 2009, the IP working group had not yet assessed progress that had been made. Agency officials told us that they intended to revisit the plan at the 6-month point, assess progress, and determine what revisions, if any, were needed. As of the end of July 2009, the IP attaché reported that he had met with the State economic section to discuss updates to the plan and that the full IP working group would discuss the plan at an upcoming meeting in August with intentions to finalize the revisions shortly after that. In revising the plan, he said that he expected that the working group would maintain the original objectives in the plan, which are long term in nature, but that there would likely be some minor modifications to the approach outlined for meeting them. While agencies at the four posts have undertaken IP activities that are relevant and support U.S. interests, joint strategies such as interagency work plans can potentially assist posts in prioritizing among their various demands and help ensure that their activities are part of a strategic approach to address key IP issues identified by the U.S. government. Various U.S. officials and private-sector representatives stated that the level of IP activity has increased at the posts in recent years in large part due to the arrival of the IP attachés and the attention they bring to IP issues. However, agency officials generally noted that on a day-to-day basis their activities were not undertaken as part of the implementation of particular plans to address key IP issues. For example, one agency official in China stated that his strategy for IP was to simply “juggle” issues as they arose. The development of interagency work plans can also help to encourage sustained attention to key IP activities. Some agency officials noted that the long-term nature of many IP efforts—such as implementing optical disk laws, developing public outreach to convince consumers of the importance of IP rights, or building the relationships with foreign law enforcement officials necessary to conduct joint IP investigations—require sustained and focused attention over time. In the absence of such sustained attention, the impacts of U.S. efforts can be diminished. For instance, an official at one post noted that he had observed a cycle where the post would exert pressure on the host country’s police to more aggressively enforce IP laws, and enforcement would increase; however, after a time, pressure would ease and previous enforcement levels would return. An official in Beijing noted the challenges to staying focused on particular issues at such a large post. Whereas, a written plan has helped the embassy stay on target and not loose focus on IP issues, according to an official in New Delhi. A different official in New Delhi stated that the plan would allow the post to keep up momentum on IP and helped ensure that all the relevant agencies were engaged. Post-level plans can also minimize the reduction in focus on IP as agency officials transfer in and out of posts. For instance, one U.S. official in Beijing noted that the IP attaché had driven the post’s day-to-day IP activities, and that when he left the post, there was no plan to consult to help ensure that agencies continued to focus on key IP issues. In addition, new personnel can consult joint strategies to help them more quickly contribute to IP issues. Given the cross-cutting nature of IP, interagency post work plans may also assist agencies in identifying opportunities to avoid redundant activities or divergent messages, particularly given the multiple agencies at each of the posts we visited that play some role in IP activities. For example, we identified over 10 agencies or agency sections that perform IP-related work at the embassy in Beijing. An agency official in Beijing stated that there was not a cohesive embassy strategy on IP, with agencies tending to pursue their individual projects. In addition, we found evidence of disagreement among agencies in Thailand regarding the appropriate strategy for working with the host government and upon what issues to focus. An agency official in Thailand stated that an IP work plan for the post would help ensure that agencies at the post were knowledgeable about what was happening on IP and would reduce the risk of duplicative efforts or inconsistent messages to the host government. An agency official in India stated that, through the work plan, the post hoped to maintain a common message on IP. Improving IP protection and enforcement overseas is challenging because IP issues are complex and multifaceted. Many IP issues are symptoms of broader problems the countries face such as weak government institutions or the lack of a strong historical respect for the rule of law. Addressing the many challenges associated with improving countries’ IP laws and regulations and strengthening their enforcement efforts requires extensive knowledge of a country’s IP regime and the ability to influence a complex web of policies and procedures under an array of legislative, administrative, and judicial authorities. The best ways for the United States to motivate change are not always obvious, particularly while seeking to preserve good relations and pursue other foreign policy goals. Adding to the complexity, multiple U.S. agencies are involved in IP and most of their overseas personnel do not consider IP their primary mission because they have numerous and more pressing responsibilities. U.S. agencies at the four posts are generally collaborating effectively and have adopted certain key practices to enhance and sustain collaboration, with the exception of developing joint strategies such as interagency IP work plans. Such plans can further improve collaboration and maximize the effectiveness of U.S. government IP efforts at posts by bringing agencies together to develop and commit to specific objectives and activities that address the key IP issues. Interagency IP work plans increase the likelihood that interagency efforts will be sustained throughout the inevitable shifts in key IP personnel at overseas posts, and despite the competing demands placed on many agencies for which IP is not their main mission. By acting as focal points, IP attachés have already spearheaded collaboration among the agencies by facilitating joint U.S. agency IP efforts and, in some cases, generating mechanisms like IP working groups for sharing ideas and planning IP events. Recognizing the importance of such mechanisms, USPTO has recently required that all posts with IP attachés form such working groups. However, currently, neither the IP attachés nor any other post agency official has the responsibility for facilitating post-wide planning on IP. Instead, planning to address the key IP issues is dependent on the individual initiative of post personnel and, thus, to date has been limited to only one of the four posts. To more effectively ensure that activities at U.S. posts with USPTO IP attachés consistently address the key IP protection and enforcement issues identified by the U.S. government, we recommend that the Secretary of State direct post leadership in countries with USPTO IP attachés to work with the USPTO IP attachés to take the following action: Develop annual IP interagency work plans to be used by the post IP working groups with input from relevant agencies, which set objectives and identify activities for addressing key IP protection and enforcement issues defined by the U.S. government, taking into account the range of expertise of responsible agencies, available resources, and agency specific IP goals. We provided a draft of this report to the Secretaries of Commerce, Health and Human Services, Homeland Security, and State; the Attorney General; the U.S. Trade Representative; and the Director of the U.S. Patent and Trademark Office. We received written comments from the Department of State Assistant Secretary and Chief Financial Officer, the Department of Commerce Acting Under Secretary for International Trade, and the Acting Chief Financial Officer of the U.S. Patent and Trademark Office, which are reprinted in appendices II through IV. The Department of State and the U.S. Patent and Trademark Office officials concurred with our recommendation. The Departments of State, Commerce, Justice, and Health and Human Services; the U.S. Patent and Trademark Office; and the Office of the U.S. Trade Representative chose to provide technical comments. We modified the report where appropriate. The Secretary of Homeland Security chose not to provide comments. We are sending copies of this report to appropriate congressional committees and the Secretaries of Commerce, Health and Human Services, Homeland Security, and State; the Attorney General; the U.S. Trade Representative; and the Director of the U.S. Patent and Trademark Office. 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 about this report, please contact me at (202) 512-4347 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To address Congress’ concern about U.S. government efforts to protect and enforce intellectual property (IP) rights overseas and assist the new advisory committee headed by the Intellectual Property Enforcement Coordinator, recently created by the Congress, this report evaluates U.S. government efforts to enhance protection and enforcement of IP overseas in three countries at four posts, including posts in Beijing and Guangzhou, China; New Delhi, India; and Bangkok, Thailand. Specifically, this report (1) describes the key IP protection and enforcement issues that the U.S. government has identified in China, India, and Thailand; (2) assesses the extent to which the U.S. Patent and Trademark Office (USPTO) IP attachés and the Department of Justice (DOJ) Intellectual Property Law Enforcement Coordinator (IPLEC) effectively collaborated with other agencies at posts in China, India, and Thailand to improve IP protection and enforcement; and (3) evaluates the extent to which each of the four posts has undertaken interagency planning in collaborating on their IP- related activities. Overall, to determine the scope of our work, we obtained documentation and interviewed cognizant officials from the Departments of Commerce (Commerce), Health and Human Services (HHS), Homeland Security (DHS), Justice (DOJ), and State (State); and from the Office of the U.S. Trade Representative (USTR). We reviewed documentation on overseas U.S. government personnel and their IP activities, including which countries had personnel dedicated to IP issues. We collected and analyzed documentation that discussed key IP protection and enforcement issues around the world and that identified those countries where the U.S. government believes IP problems are most acute, such as documents related to the Special 301 process, and other agency assessments of countries’ IP laws and regulations. We determined that our scope would focus on IP efforts at the embassy/post level and that we would utilize a case study approach, focusing on selected countries. To select the case study countries, we used a set of criteria that included: the extent to which the U.S. government has identified the country and its region as having significant IP problems, the types and range of IP problems that exist in the country, and the presence of U.S. government personnel posted in the country involved in IP activities, including USPTO IP attachés and coverage by a DOJ IPLEC. Based upon our criteria, we chose China, India, and Thailand. We then conducted fieldwork in Beijing and Guangzhou, China; Bangkok, Thailand; and New Delhi, India; in March 2009. Because we utilized a case study approach, our findings cannot be generalized and do not necessarily apply to countries or posts other than those we visited. To address all three objectives, we met with U.S. government personnel in all four locations who perform IP-related functions to learn about the types of activities they undertake, the factors that drive their work, and how they collaborate with their counterparts at the post and in headquarters, with the private sector, and with their host government. Table 3 lists the agencies and agency sections we met with at each post. We also met with representatives from various industry associations and individual companies in each location to obtain their perspectives on the key IP issues in the country and to learn about how they seek to protect their IP, including through collaboration with the U.S. government and the host government. Finally, in each location, we met with foreign government officials to learn about the challenges they face in improving IP protection and enforcement and to obtain their perspectives on the effectiveness of their collaboration with the U.S. government on IP issues. To address the first objective, we reviewed U.S. government documents identifying key IP protection and enforcement issues in each of the case study countries, including each embassy’s Special 301 submission for 2009 and also the final Special 301 reports for 2008 and 2009. Additionally, we reviewed the 2009 National Trade Estimate Report on Foreign Trade Barriers. We also reviewed other post documentation discussing key IP issues, including talking points from presentations, internal U.S. government IP newsletters, agency reports to their headquarters offices, and materials produced to assist U.S. businesses. Additionally, we interviewed U.S. government personnel and private-sector representatives in each of the countries to obtain their perspectives on the key IP protection and enforcement issues. Our discussion on foreign laws and regulations in the objective is based primarily on interviews with U.S. officials and U.S. government documentation, rather than GAO analysis of those laws. To address the second objective, we used information from our interviews and documentation we collected at each post to evaluate the extent to which the USPTO attachés and DOJ’s IPLEC have adopted good practices to collaborate with other agencies at the posts on promoting IP protection. Documents included attaché activity summaries, IP seminar agendas, the IPCEN agendas, IP working group minutes, and technical assistance work plans. In evaluating the collaboration practices at the four posts, we relied upon past work that GAO has done that identified key practices that agencies can adopt in order to sustain and enhance collaboration. For this objective, we examined select key practices and assessed the extent to which agencies followed them in carrying out their IP activities at the posts. Specifically, we evaluated the extent to which agencies at the four posts had identified and addressed needs by leveraging resources, agreed on role and responsibilities, and established compatible policies, procedures, and other means to operate across agency boundaries. To address the third objective, we reviewed the 2008 and 2009 Special 301 Reports to determine the extent to which they provide guidance to posts on IP activities to undertake. We also reviewed each embassy’s fiscal year 2010 Mission Strategic Plan and assessed the extent to which the plans discuss IP. We assessed the submissions of the embassies in Thailand and India for the 2009 Special 301 report to determine the extent to which the embassies had prioritized among various IP issues and set actionable objectives as well. Additionally, we reviewed the USPTO headquarters country plans covering the three countries and the USPTO IP attachés’ individual work plans and analyzed the types of objectives established in these plans and the actions that plans call for to address these objectives. We also reviewed the IPR Working Group Action Plan for the embassy in New Delhi and assessed the extent to which it serves as a reasonable guide for the posts’ IP activities. We interviewed U.S. government officials at all four posts to determine how they select IP activities to undertake and the extent to which they use interagency planning to guide their efforts. Based on the information collected through document review and interviews, we evaluated the extent to which the four posts have utilized interagency planning on IP to establish mutual reinforcing or joint strategies. This is a key practice that GAO has identified as contributing to enhanced and sustained collaboration. Finally, we utilized evidence collected in our interviews, as well as findings from past GAO work, to identify potential benefits the posts might achieve by performing interagency planning to establish joint strategies. We conducted this performance audit from August 2008 through September 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, Christine Broderick, Assistant Director; Nina Pfeiffer; and Ryan Vaughan made significant contributions to this report. Shirley Brothwell, Elizabeth Curda, Martin De Alteriis, Karen Deans, and Ernie Jackson also provided assistance.
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Intellectual property (IP) protection and enforcement is inadequate in parts of the world, resulting in significant losses to U.S. industry and increased public health and safety risks. GAO was asked to evaluate U.S. government efforts to enhance protection and enforcement of IP overseas. Using a case study approach, this report (1) describes the key IP protection and enforcement issues at four posts in China, India, and Thailand; (2) assesses the extent to which the U.S. Patent and Trademark Office (USPTO) IP attach?s and the Department of Justice (DOJ) IP Law Enforcement Coordinator (IPLEC) effectively collaborate with other agencies at the posts; and (3) evaluates the extent to which each of the posts has undertaken interagency planning in collaborating on its IP-related activities. GAO examined U.S. government documents and interviewed headquarters and post agency officials as well as U.S. private-sector and host-country representatives. The U.S. government has identified weak enforcement as a key IP issue in the three case study countries; however, weaknesses also persist in their IP laws and regulations. According to the U.S. government, enforcement of existing IP laws and regulations and adjudication of suspected infringements are limited and inconsistent, and penalties are not typically sufficient to serve as an effective deterrent. U.S. government documents and U.S. officials we interviewed cited several factors that contribute to this limited and inconsistent enforcement, including flawed enforcement procedures; a lack of technical skills and knowledge of IP among police, prosecutors, and judges; a lack of resources dedicated to IP enforcement efforts; and the absence of broad-based domestic support for strong IP enforcement. The USPTO IP attach?s were generally effective in collaborating with other agencies at the four posts, primarily by acting as IP focal points, while the DOJ IPLEC collaborated with both post agencies and agency headquarters via IP forums. The IP attach?s shared common characteristics that made them effective, such as IP expertise, the ability to work full time on IP, and having roles and responsibilities for which there was general agreement among post agencies and leadership. At two posts, several agency officials stated that the IP attach?s were instrumental in establishing and maintaining interagency IP working groups to share ideas and coordinate on activities, enabling the agencies to speak with one voice on IP. The IPLEC collaborated through country and regional IP forums that provided technical assistance to foreign law enforcement agencies and judges on IP law enforcement issues and facilitated a network among U.S. and foreign government officials for sharing information on IP criminal investigations. The IPLEC also collaborated on case work for an array of mostly non-IP criminal activities, including money laundering, fraud, human trafficking, and child exploitation, in fulfilling his other duties as DOJ attach?. While the four posts have adopted several practices to collaborate effectively on IP, three out of the four have not adopted interagency plans to address key IP issues. Current policy guidance on IP at the posts, such as the annual Special 301 report and embassy mission strategic plans, is high level and not generally used for planning agencies' day-to-day IP efforts. Posts could potentially enhance collaboration by developing joint strategies to translate the key IP issues identified by the U.S. government into specific objectives and activities. One post, the U.S. embassy in New Delhi, has developed a joint strategy in the form of an interagency IP work plan with specific objectives and prescribed activities for addressing key IP issues. Joint strategies can help agencies prioritize existing efforts, avoid duplication of efforts, formulate a common IP message to foreign governments, and maintain focus on IP given competing issues and personnel changes at posts.
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GSA established the Federal Supply Schedule (FSS) program in 1949 to facilitate federal agencies’ purchase of common products and services from commercial vendors through schedule contracts. The multiple award schedules program, the largest FSS program, was designed to provide agencies with a simplified method for purchasing varying quantities of a wide range of commercially available products, such as office furniture and supplies, personal computers, scientific equipment, network support, and various professional services. The schedules program provides advantages to both federal agencies and vendors. By using this simplified method of procurement, agencies can avoid using other more time- consuming and administratively costly procurement methods. Vendors receive wider exposure of their commercial products and services and expend less effort to sell them. In administering the multiple award schedules program, GSA is responsible for ensuring that negotiated prices reflect the government’s aggregate buying power. GSA contracting officials seek discounts from a vendor’s price list that are equal to or greater than the vendor’s most favored customer’s discounts. GSA awards contracts to multiple vendors supplying comparable commercial products and services. Federal agencies order products and services directly from the vendors that best meet their needs. Prices paid by federal agencies include a fee for GSA to recover program costs, including contract administration and program support. In the mid-1990s, GSA had about 5,200 schedules contracts. By fiscal year 2004, this number had increased to over 16,000 contracts. As the number of contracts offering products and services to federal agencies increased, the sales volume skyrocketed. Between fiscal years 1995 and 2004, program sales increased more than sixfold, from $4.9 billion to about $32.5 billion (see fig. 1). Because prices that agencies pay for schedule products and services are the result of negotiations between GSA and individual vendors, the pricing of products and services being offered is key to the contract negotiation process. GSA contracting officials use various tools to analyze vendor offers and establish negotiation objectives. Tools commonly used include market research, sales histories, invoices and references, and competitor price lists. Of all the pricing tools available for contract negotiation, two tools—pre-award audits and postaward audits of pre-award information— are specifically designed to protect the government from overpricing. Pre- award audits enable contract negotiators to verify that vendor-supplied pricing information is accurate, complete, and current before the contract is awarded. Postaward audits serve as a deterrent to overpricing and a primary tool for recovering vendor overcharges. GSA’s use of pre-award audits and postaward audits of pre-award information has been sporadic—a finding we have reported for more than 25 years. For example, in March 1977, we reported that although sales from multiple award schedules contracts amounted to $840 million, vendor proposals were rarely independently audited and the veracity of the information submitted was suspect. We found that sales and discount information submitted on 6 of 15 contract proposals was not accurate, complete, and current. Further, we found that 25 pre-award audits done in fiscal years 1973 and 1974 had resulted in recommendations of $962,000 in savings. Eighteen postaward audits done in the same years resulted in GSA claims of more than $1.4 million. In 1979, we again reported that price information submitted by some vendors was unreliable. Also, our comparison of 29 products available through four states’ annual contracts, as well as GSA schedules, found that prices were on average 20 percent to 57 percent lower under the state contracts. We estimated that had GSA obtained the same discounts as did the states, $5.8 million would have been saved in fiscal year 1978 on purchases of calculators, dictating equipment, typewriters, and lamps from the same manufacturers. Moreover, of the 11 audits (1 pre-award and 10 postaward) that had been done during fiscal years 1977 and 1978, all but 2 found inaccurate sales information had been reported by vendors or the availability of better discounts had not been disclosed. Pricing problems continued throughout the 1980s, and GSA’s use of pre- award audits and postaward audits of pre-award information was limited. For example, in 1986, we again reviewed GSA’s price negotiations for the multiple award schedules program, which at that time consisted of about 3,300 contracts with sales of about $2.3 billion. Our review of 20 contracts found that while the prices GSA obtained appeared to be fair and reasonable, action was needed to obtain better prices. On one multiple award schedules contract, where the vendor did not offer the government discounts comparable to the most favored customer, a reopening of contract negotiations resulted in an estimated savings of $1.6 million. We also found that the number of pre-award audits decreased between fiscal years 1984 and 1985. The decrease was attributed to reductions in the Inspector General’s staff, a shift in resources to audits of higher dollar value contracts, and the change from single-year to multiple year contracts. In response to our concern about the continuing decline in the number of pre-award audits, GSA agreed to take actions to provide adequate audit coverage, including shifting resources from other GSA offices to the Inspector General’s office, as well as within the office, and an increase in the Inspector General’s fiscal year 1987 budget. In the early 1990s, schedules sales remained relatively stable, ranging between $4 billion and $5 billion, annually. During this period, GSA successfully performed a significant number of pre-award and postaward audits. For example, from fiscal years 1992 through 1996, the GSA Inspector General conducted 624 pre-award audits—an average of 125 each year. These pre-award audits resulted in nearly $480 million in negotiated cost savings for GSA’s customers. Additionally, from fiscal years 1990 through fiscal year 1994, the GSA Inspector General reported that it recovered an average of $18 million each year in vendor overcharges. Most of these postaward audit recoveries were the result of vendor failure to provide accurate, complete, and current information in the negotiation of their contracts and their failure to report and offer price reductions. In August 1997, GSA revised its acquisition regulations to expand access to commercial products and services and implement greater use of commercial buying practices. As part of this revision, GSA specifically removed language from the examination of records clause that automatically granted postaward audit rights for pre-award pricing information in every schedules contract. To offset the reduction in these postaward audits, GSA proposed to increase emphasis on the use of pre- award audits. According to GSA, this approach would provide the contracting officer a mechanism for verifying information submitted by vendors and avoid pricing problems instead of uncovering problems after contract award. However, recent GSA Inspector General and GAO reviews have shown that GSA’s long-standing pricing problems have continued and the plan to increase the use of pre-award audits never materialized. In August 2001, the GSA Inspector General reported that while schedules program sales had grown dramatically, certain program fundamentals— including pricing objectives and other pricing tools—had been marginalized. Specifically, the Inspector General found that contracting officers were not consistently negotiating most favored customer pricing or adequately performing price analyses. For example, the Inspector General reported that a major distributor of information technology products sold its top 10 GSA-selling models to commercial customers at an average price that was 6 percent lower than the price offered to federal agencies. The Inspector General projected that over the contract’s term, GSA customers would pay nearly $40 million more for these products than they should. In February 2005, we completed our most recent review of the multiple awards schedules program and found that contract pricing continues to be a problem. Table 1 summarizes the extent of the problems found with 62 contracts in June 2004. We found that a GSA review of 62 contract files identified 37 contracts— nearly 60 percent—that lacked sufficient documentation to clearly establish that the contracts were effectively negotiated. Twenty-six of the 62 contracts—roughly 40 percent—lacked adequate price analyses or price negotiation documentation. Between fiscal years 1997 and 2004, GSA completed only 155 pre-award audits—an average of about 19 each year, compared to the average of 125 pre-award audits annually for the prior 5 years (see fig. 2). During this same 8-year period, schedules sales increased nearly five-fold from about $6.6 billion in fiscal year 1997 to $32.5 billion in fiscal year 2004. As the number of pre-award audits performed continued to decline, so too did the amount of negotiated cost savings. Between fiscal years 1992 and 1997, the GSA Inspector General reported a total of nearly $496 million in savings—an average of nearly $83 million per year. Between fiscal years 1998 and 2004, the total savings reported had dropped to about $126 million—an average of only $18 million per year (see fig. 3). According to GSA Inspector General and contracting officials, the decline in pre-award audits was largely due an organizational culture that stresses making award decisions quickly and because pre-award audits were not emphasized institutionally in GSA. Also, GSA management officials told us that they believe increasing the contract length from 1 year in the mid- 1990s to the 5 years of today has also limited pre-award audits because the number of opportunities for pre-award audits has been reduced. We believe, however, that the potential for pre-award audits is substantial. Since the mid-1990s, the number of schedules contracts awarded increased from about 5,200 in fiscal year 1995 to over 16,000 in fiscal year 2004, significantly increasing the potential for pre-award audits. While conducting our review, we tested GSA’s assertion that longer-term contracts reduced the opportunity for pre-award audits, applying GSA’s guidance to contract negotiators on when to request audit assistance. As we reported in February 2005, we found that 71 contracts awarded or extended in fiscal year 2003 met the pre-award audit threshold, but GSA only completed 14 pre-award audits—57 fewer than we identified as potential audits. In fiscal year 2004, GSA selected 55 contract offers for pre-award audits. The GSA Inspector General completed 40 of these audits. In our most recent review, we also found that GSA has not conducted postaward audits of pre-award information since 1997—when GSA revised its policy on the use of such audits. The revised policy had the effect of eliminating the use of postaward audits. With the dramatic increase in sales and the continuing decline in pre-award audits, the potential for significant recoveries of vendor overcharges could be substantial. In our February 2005 report, we made three recommendations aimed at helping GSA ensure that prices are effectively negotiated for schedules contracts. We recommended that the GSA Administrator (1) ensure that pre-award audits are conducted when the threshold is met for both new contract offers and contract extensions, (2) develop guidance to help contracting officers determine when postaward audits are needed, and (3) direct GSA program management to revise its quality control program to (a) determine the underlying causes for contract pricing deficiencies and (b) develop appropriate plans to implement corrective actions. GSA management officials agreed with our recommendations, and stated that GSA would continue to work with the Inspector General to increase and improve the number of pre-award audits, publish an advance notice of proposed rulemaking in the Federal Register to request comments on the role of postaward audit reviews in the acquisition process, and evaluate the results of the fiscal year 2004 contract file review and that this evaluation would involve a discussion and identification of the underlying reasons for any weaknesses. We believe that GSA’s actions are a good first step toward addressing its long-standing pricing problems with multiple award schedules contracts. However, unless these actions are effectively implemented the risk of pricing problems will continue. In conclusion, while GSA’s schedules program has provided the government with a more flexible and cost-effective approach to buying commercial items, our work has shown that the program has long been fraught with problems of contract overpricing—resulting in millions of taxpayer dollars being wasted. Historically, pre-award and postaward audits have proven their value in deterring overpricing and recovering vendor overcharges. Until GSA takes steps to ensure the appropriate use of available pricing and negotiation tools, it will continue to miss opportunities to save the government hundreds of millions of dollars in the procurement of goods and services. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to address any questions you may have at this time. For further information, please contact David E. Cooper at (202) 512-4841 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 testimony. Individuals making key contributions to this testimony include James Fuquay, Sanford Reigle, Victoria Klepacz, Karen Sloan, and Sylvia Schatz. 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.
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Each year, federal agencies spend billions of dollars to buy commercial products and services through the General Service Administration's (GSA) Multiple Award Schedules program. The program has grown significantly over the past several years. Currently, federal agencies can directly purchase, through more than 16,000 schedule contracts, over 8 million products from more than 10,000 commercial vendors. In fiscal year 2004, purchases from these contracts totaled more than $32 billion. The multiple award schedules program is designed to take advantage of the government's significant buying power. To maximize savings, GSA negotiates discounts that are equal to or greater than those given to the vendor's most favored customers. This testimony focuses on GSA's historic use of two proven negotiation tools to improve the pricing of schedules contracts--pre-award audits and postaward audits of pre-award information. Pre-award audits allow GSA to avoid potential overpricing by verifying vendor pricing information before contracts are awarded. Postaward audits allow GSA to identify overpricing of awarded contracts and recover overcharges. Historically, GSA has used pre-award and postaward audits sporadically, thereby minimizing its ability to avoid excessive pricing and recover overcharges and potentially save millions of federal dollars. For more than 25 years, GAO has reported on GSA's multiple award schedules program pricing problems. In March 1977, we reported that pre-award information on 6 of 15 contract proposals was not accurate, complete, or current. In 1979, we again reported that pricing information submitted by some vendors was unreliable. Moreover, only 1 pre-award audit and 10 postaward audits had been conducted during fiscal years 1977 and 1978 of which 9 found inaccurate sales information had been reported by vendors or the availability of better discounts had not been disclosed. These problems continued throughout the 1980s. In the early 1990s, GSA made good use of pre-award and postaward audits, negotiating nearly $480 million in cost savings and recovering about $90 million in vendor overcharges over 5 years. However, in August 1997, GSA revised its acquisition regulations and effectively eliminated the use of postaward audits. While GSA expected pre-award audits to increase, this increase never materialized. In August 2001, the GSA Inspector General reported that GSA was not consistently negotiating most favored customer pricing. For just one contract, the Inspector General projected that over the contract's term, GSA customers would pay nearly $40 million more than they should have. In February 2005, we completed our most recent review of the multiple award schedules program and found that pricing problems persist and that the number of pre-award audits continued to decline. We concluded that GSA was continuing to miss opportunities to save hundreds of millions of dollars.
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Secret Service headquarters is organized into a series of offices with different responsibilities. The Secret Service’s Office of Investigations (INV) oversees the agency’s criminal investigation mission and the field office structure. Although agents in the field support protective operations as needed, a separate cadre of agents is responsible for permanent protective details. Specifically, the Presidential Protective and Uniformed Divisions, within the Office of Protective Operations, carry out permanent protective details and assignments. The Presidential Protective Division is dedicated to the protection of the President. The Uniformed Division, subject to the supervision of the Secretary of Homeland Security, is to perform duties, as prescribed by the Director of the Secret Service, in connection with the protection of certain facilities, including the White House and the Treasury Building, among others. Figure 1 shows the Secret Service’s organizational chart. The Secret Service’s Office of Investigations operates four tiers of offices that make up districts. Specifically, there are 42 domestic districts, each led by a field office. The 42 districts are also composed of a total of 60 resident offices, 13 resident agencies, and 26 domiciles (see fig. 2). The four categories of offices are defined as follows: Field office—The largest of all the offices, field offices are located in metropolitan areas, travel hubs, and populous areas where there is generally a high demand for protective and investigative services, according to Secret Service officials. These offices are to be led by a special agent-in-charge who is also responsible for the management and staffing of contingent offices within the field office’s district. Resident office—The next largest office after a field office in size. A resident agent-in-charge is to supervise the office, which is to be staffed by at least 3 special agents, in addition to an office manager, and typically an investigative assistant. Resident agency—Generally located in more remote areas where a field or resident office is not economically feasible. A resident agency is to be led by a senior special agent (resident agent), and staffed by additional special agents as dictated by the workload, and one or more administrative employees. Domicile—Typically a single special agent who works out of his or her residence. According to Secret Service officials, in some instances, the special agent works out of another agency’s office space, such as that of a U.S. Attorney’s Office or local police department. The Secret Service collects data on the cost and performance of its individual field offices, resident offices, and resident agencies. Cost. In general, each domestic office has its own organizational code, which allows the agency to identify costs for individual offices. Office costs include salaries and benefits—regular salaries and wages (including those paid for annual, sick, and compensatory leave), geographic differentials, overtime pay, holiday pay, cash incentive awards, and relocation expenses, among others; infrastructure—rent for office and antenna space, parking, tenant improvements (office expansions or remodeling), Federal Protective Service fees, utilities, and repairs; travel—travel for protective details, investigative cases, training, and support (including conferences, office inspections, and recruitment); and other—equipment (e.g., furniture and telephones), supplies, training and services, and rental and postage. Secret Service headquarters centrally manages domestic office costs, except for those included in the “other” category, which are managed directly by the domestic offices. Specifically, Secret Service headquarters performs the budgeting for salary and benefits across the agency as well as infrastructure and travel costs. Domestic offices have their own small budgets from which to purchase items and services, such as postage and repairs to government vehicles. Performance. The Secret Service requires field offices, resident offices, and resident agencies to report on their operational activities. The Offices of Investigations and Strategic Planning and Policy use the reported data to award points to each office in accordance with 20 performance metrics. These metrics are related to the agency’s criminal investigation and protection missions (see app. II for the list of metrics and points). According to the Secret Service, the points assigned to each metric are based, in part, on the agency’s strategic plan, mission priorities, and the Quadrennial Homeland Security Review. From fiscal years 2009 through 2014, annual domestic office costs ranged from a low of $500 million in fiscal year 2010 to a high of $549 million in fiscal year 2012 (see fig. 3). The cost of the domestic field office structure accounted for approximately 29 percent of the Secret Service’s total budget, on average, across all 6 fiscal years. In fiscal year 2012, when domestic office costs peaked at $549 million, costs increased by $37.6 million when compared with costs for the prior year. Specifically, salaries and benefits increased by $20.1 million and travel costs by $18.7 million, primarily, according to Secret Service officials, because of protective duties associated with political campaigns and the general election in 2012. Over the 2 fiscal years following the election year, 2013 and 2014, salaries and benefits costs decreased by about $30.9 million and travel costs decreased by about $12.0 million. During those 2 fiscal years, the Secret Service’s domestic office workforce was reduced by 351 FTEs. According to Secret Service officials, the agency had grown to a historically high number of personnel in fiscal year 2011, with more than 7,000 total FTEs and could not sustain the size of its workforce because of increases in pay and rising health care costs. As a result, the agency had to limit hiring and allow attrition to gradually reduce the workforce. From fiscal years 2009 through 2014, salaries and benefits were the main cost driver, accounting for $416.3 million (81 percent) of the average annual total cost of domestic offices (see fig. 4). Infrastructure, travel, and other costs accounted for the remaining $100.1 million (19 percent) of the average annual total cost. Infrastructure costs accounted for $55.3 million (11 percent) of the average annual total cost of domestic offices. The key driver of infrastructure costs was leased office space, accounting for $43 million (78 percent). Travel costs accounted for $38.4 million (7 percent) of the average annual total cost of domestic offices. Other costs made up $6.4 million (1 percent) of the average annual total cost of domestic offices. From fiscal years 2009 through 2014, the average annual cost of each of the Secret Service’s 42 domestic field office districts ranged from $3 million (Little Rock) to $67 million (New York) (see fig. 5). The average annual cost per FTE in the 42 domestic field office districts ranged from $167,550 to $261,448. The variation among districts’ FTE costs can be explained by costs associated with infrastructure and travel. For example, on average, from fiscal years 2009 through 2014, the least expensive district per FTE spent almost $8,000 per FTE on infrastructure compared with the most expensive district per FTE, which spent about $28,000 per FTE given the greater cost of rent and parking. Similarly, the least expensive district per FTE spent about $9,000 per FTE on travel compared with the most expensive district per FTE, which spent about $56,000 per FTE, given the greater frequency of travel and cost of travel. Of note, from fiscal years 2009 through 2014, 51 percent of the average annual total costs of all districts are attributable to 7 of the 42 districts— New York; Washington, D.C.; Los Angeles; Chicago; Miami; Dallas; and Houston. These 7 districts also represent 49 percent of the total FTEs in domestic districts. Table 1 shows the 7 most expensive field office districts by average annual total cost. From fiscal years 2009 through 2014, the Secret Service did not accurately record salary and benefit data at the individual office level, but the data are reasonably reliable at the district level and in the aggregate. According to Standards for Internal Control in the Federal Government, control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Although control activities can vary by agency, categories of control activities that are common to all agencies include accurate and timely recording of transactions and events, which helps to ensure that all transactions are completely and accurately recorded. On the basis of our analysis, salaries and benefits costs may not have been accurately recorded for 21 of 73 resident offices and agencies from fiscal years 2009 through 2014. Specifically, 13 resident offices and resident agencies likely had their salaries and benefits costs attributed to their “parent” field offices. For example, in fiscal year 2014, the Saginaw Resident Office’s reported salaries and benefits per FTE were $15,588, far below the domestic office average of $152,918. Conversely, Saginaw’s parent field office, Detroit, had higher than expected salaries and benefits at $225,767 per FTE in the same year, and 8 resident offices and resident agencies had higher than expected salaries and benefits costs that may include the salaries and benefits of personnel in their parent field office. For example, the Tulsa Resident Office had salaries and benefits costs of about $483,000 per FTE in fiscal year 2011. In the same year, the Oklahoma City Field Office, Tulsa’s parent office, had salaries and benefits costs of about $45,000 per FTE. According to Secret Service officials, salaries and benefits costs were incorrectly attributed to certain offices because the codes that determine the office where the costs were recorded were not always set up correctly in the agency’s time and attendance system. For example, the codes in the time cards may have been established using the organizational code for the parent field office, not realizing a subcode specific to the subordinate resident agency or resident office was needed. Officials added that they believe the organizational codes were not changed in the time and attendance system when some agents transferred offices. According to a senior Secret Service official, the budget division performs a biweekly review of part of the code structure for compliance, but not for the organizational code. On the basis of our analysis, ineffective controls resulted in costs being inconsistently recorded at the office level from fiscal years 2009 through 2014, which yielded inaccurate cost data for certain offices. Specifically, the Secret Service lacks effective controls for recording time and attendance transactions for each office and has not employed an effective review process for ensuring time and attendance codes for cost data are correctly established and appropriately linked to resources. Without accurate data, the Secret Service is unable to reliably determine the cost of each of its domestic offices. Secret Service officials agreed that its cost data should be reliable at the individual office level. By implementing a review process to ensure time and attendance codes for cost data are correctly established and appropriately attributed to the correct office, the Secret Service could reliably determine the cost of each of its domestic offices to assist in assessing their cost-effectiveness. The Secret Service’s domestic offices predominately carry out the agency’s investigative mission by investigating financial crimes, which include access device fraud; financial institution fraud; identity theft; mortgage fraud; bank fraud; and electronic crimes, including cyber fraud and computer-based attacks on financial, banking, telecommunications, and other critical infrastructure. On the basis of our analysis of Secret Service data, from fiscal years 2009 through 2014, domestic office investigations resulted in an estimated $67.3 million to $346.2 million per year in assets seized (see fig. 6) and $18.3 million to $28.3 million per year in counterfeit funds removed from circulation (see fig. 7). During the same time period, domestic offices made an average of about 7,300 state, local, military, and federal arrests annually (see fig. 8). According to Secret Service officials, total arrests declined in fiscal year 2012 as a result of the need for increased protection related to the general election. Arrests further declined in fiscal years 2013 and 2014 because of decreases in the number of special agents in domestic offices. Secret Service officials reported that investigative accomplishments decrease commensurate with reductions in staff because it is necessary to scale back investigations while maintaining the same level of commitment to the protective mission. To further facilitate financial and electronic crimes investigations, domestic field office districts host 81 financial or electronic crime task forces. By leveraging locally fostered relationships, field offices create task forces composed of detailees from multiple federal, state, and local law enforcement agencies, among others. These detailees contribute to Secret Service investigations by providing local knowledge as well as resources and manpower. Local knowledge. Officials at 8 of the 12 domestic offices we spoke with said that state and local law enforcement partners provide expertise and contacts because they are more familiar with local persons of interest and the culture. One Secret Service official added that when pursuing leads on financial crime, local police departments add value to the investigative process as they are often more aware of and connected to street-level contacts and confidential informants than Secret Service agents. In addition, officials from 1 domestic office we spoke with noted that making connections with task force members provides Secret Service agents with greater awareness of investigations being pursued by local law enforcement agencies, which can inform the Secret Service’s investigative operations. Resources and manpower. In the field executive summaries submitted by each domestic field office, we found that approximately one-third of domestic offices noted that state and local law enforcement partners provided assistance with investigations, including forensics. Secret Service agents in 2 domestic offices we spoke with use local police department forensics labs, while a third domestic office noted that state and local law enforcement partners provide manpower support to the Secret Service on a weekly basis. Officials in 5 of the 12 Secret Service offices and 3 of the 15 partner agencies we spoke with also stated that the existence of task forces and close investigative relationships allows partners to maintain momentum on investigations when Secret Service agents have to postpone them in order to perform protective duties. For instance, 1 office reported that task force members maintain investigations, including forensics investigations, and liaise with other partners when agents are occupied with protection duties. To strengthen their partnerships with state and local law enforcement agencies, Secret Service officials reported that the agency also assists state and local law enforcement partners with investigations and provides training and resources. For example, 1 domestic office pointed out that it can assist state and local partners with electronic crime cases that reach outside their cities, counties, and states by calling on other domestic offices throughout the country. The Secret Service also provides training for state and local law enforcement partners. On the basis of our review of field executive summaries for fiscal year 2014, over half of Secret Service domestic offices noted that they had provided training on financial crime investigations and forensics for state and local partners through local trainings or the National Computer Forensics Institute in Hoover, Alabama. Providing training opportunities for state and local law enforcement partners not only strengthens these relationships, but allows the partners to be more effective in assisting the Secret Service with its investigations, according to Secret Service officials. For instance, 1 domestic office reported that when its special agents trained through the Electronic Crimes Special Agent Program were transferred to other offices, it relied heavily on its local law enforcement partners, which had been trained by the Secret Service to conduct computer forensic examinations. Secret Service domestic offices contribute to protecting the President, Vice President, their families, foreign dignitaries, and other individuals in need of protection, and conduct protective intelligence investigations into threats against the President and other protectees. According to Secret Service officials, a key benefit of the agency’s domestic field office structure is the placement of its offices across the country, positioning the Secret Service to support its protective mission. Domestic offices allow the Secret Service to maintain real-time knowledge of local activities that may affect security during a presidential or dignitary visit. Further, they provide a venue for developing and maintaining relationships with state and local law enforcement agencies that are vital for ensuring each protectee’s safety. Domestic office officials told us that when special agents are required for a protective mission, the protective mission takes priority over ongoing investigations, with the exception of threat investigations. Domestic offices are responsible for coordinating the logistics and operations of protectee visits to their jurisdictions. Secret Service officials stated that for a visit from the President or Vice President, an advance team dedicated to that individual travels to the location prior to the visit to work with the local domestic office in planning the protective mission. In such cases, special agents assigned to the domestic office facilitate coordination between the advance team, special agents from other offices and state and local law enforcement partners. When an individual with no dedicated advance team visits a domestic office district, the office is responsible for all aspects of planning for protection. On the basis of our analysis, during fiscal years 2009 through 2014, individuals receiving protection from the Secret Service made between 5,597 and 6,386 visits per year, consisting of over 10,000 days (on average) in domestic office jurisdictions annually (see fig. 9). Special agents assigned to domestic offices also travel to assist with protective missions in other locations. Each office is generally required to provide headquarters a list of 35 percent of its special agents available for travel to other locations for protective and investigative missions, but the majority of this travel is spent on protective missions. Relationships built by domestic offices with state and local law enforcement partners through assistance on investigations and coordination on electronic crime cases facilitate not only the agency’s investigative mission but also its protective mission, according to Secret Service officials. Domestic offices draw on these local relationships with state and local law enforcement agencies to ensure that protective visits are adequately supported with manpower and other necessary resources. Because of the scope of its protective mission, agents in each of the 12 domestic offices we interviewed emphasized that it would not be possible to protect visiting dignitaries without extensive assistance from state and local law enforcement partners. Secret Service officials stated that the domestic offices are critical to ensuring the success of protective assignments because of these relationships. Similarly, in interviews and field executive summaries for fiscal year 2014, Secret Service officials cited relationship development and maintenance as a significant benefit of their locations in the field. For example, officials pointed out that the Secret Service makes substantial use of manpower, equipment, and other resources provided by state and local partners for protective visits at no cost to the agency. One domestic office said it has used 150 to 200 local law enforcement officers (or 2,400 man-hours) for a single visit. Other offices reported that state and local law enforcement partners provide equipment, such as helicopters, vehicles, and communication equipment during dignitary visits. State and local law enforcement officials provide resources to protective missions based, in part, on the relationships and training provided to their agencies by the Secret Service domestic offices. Of the 13 state and local partners we spoke with that provide assistance with protective missions, 12 said that they are willing to provide any resources needed by the Secret Service. Five of those partners noted that they provide assistance to the Secret Service because the agency contributes substantially to their investigations. They also said that they provide manpower and resources to protective missions on account of the assistance and training Secret Service provides them. For instance, 3 local law enforcement agencies noted that their officers receive on-the-job training when working with the Secret Service on protection. In addition, the Secret Service reported that over 1,000 state and local partners attended dignitary protection training at the Secret Service’s James J. Rowley Training Center in Maryland from fiscal years 2009 through 2014. This investment in training by the Secret Service is mutually beneficial, according to Secret Service domestic office officials and their partners, as it allows the Secret Service to utilize state and local law enforcement as a force multiplier while providing state and local law enforcement officials with training they can use in their day-to-day responsibilities. While contributing to the investigative and protective missions of the Secret Service, domestic offices also play a substantial role in the recruitment and hiring of new agents. In field executive summaries for fiscal year 2014, over half of the domestic offices reported attending job fairs, working closely with local colleges, or conducting interviews and examinations of applicants. They also noted that they recruit talented investigators from their state and local partners, allowing the Secret Service to gain experienced agents who are already familiar with law enforcement. Secret Service officials at 5 of the 12 domestic offices we spoke with cited recruitment as a significant activity for their agents. Officials at 1 domestic office noted that it administers the special agent entrance exam and other agent testing, as well as certification for panel interviews, security interviews, and background investigations necessary to complete the hiring process. Officials at another domestic office emphasized that the Secret Service’s cadre of domestic offices across the United States helps its recruiting efforts, as it helps introduce qualified candidates from diverse locations and backgrounds to the Secret Service who might not have otherwise considered it an option. Since fiscal year 2009, the Secret Service has used performance metrics to assess its domestic offices. Over the years, the Secret Service has made changes to these metrics in order to better assess the contributions of individual offices to the agency’s missions, according to Secret Service officials. For instance, in fiscal year 2013, the agency added a metric for the time special agents spend liaising with law enforcement agencies and other stakeholders. GAO analysis indicates that of the 20 metrics used in fiscal years 2013 and 2014, 6 relate solely to the agency’s protective mission, 11 to the investigative mission, and the remaining 3 serve both the investigative and protective missions (see app. II). For example, in regard to protection, domestic offices report on the number of protective intelligence cases in which they completed investigations of threats against protected persons or facilities. In regard to both missions, domestic offices report the number of polygraph examinations conducted on persons of interest, among others. Our analysis comparing Secret Service performance metrics to agency and department strategic plans, statutes governing the Secret Service’s areas of responsibility, and measures developed under the Government Performance and Results Act indicate that the Secret Service’s performance metrics align with the agency’s investigative and protective missions. For example, metrics related to the protective mission, such as man-hours for protection, number of protective visits, and providing protection for National Special Security Events correspond to the Secret Service’s mandate to protect individuals as laid out in statute, the DHS Quadrennial Review, and the agency’s own strategic plan. Since fiscal year 2013, the Secret Service has ranked each of its offices and field office districts utilizing a point system, in which points are assigned to each unit of each metric (see app. II). In addition to ranking each office and district as a whole, the Secret Service also calculates a per agent rank, by dividing each office’s and district’s points by the number of nonsupervisory agents, to compensate for the variation in office and district size. An INV official told us that as of July 2015, the Secret Service had not determined how, if at all, it planned to use performance data to inform its field office structure. Officials also noted that offices’ overall rankings also have to be reviewed in conjunction with their per agent rankings since larger offices tend to be ranked higher overall simply because they have more special agents to accomplish more work. For example, one office was ranked in the top 5 among all offices in both fiscal years 2013 and 2014. However, on a per agent basis, which is an indication of the efficiency of the office, this office was ranked 108 in fiscal year 2013 and 123 in fiscal year 2014 out of a total of 137 offices. Conversely, an office that was ranked as relatively low- performing, 120 out of 137 in fiscal year 2014, had a per agent rank of 16 out of 137, indicating that its low office-level ranking may be a function of being a smaller office, rather than poor performance. The contribution of individual domestic field office districts to the Secret Service’s investigative mission versus its protective mission varies widely. For example, in fiscal year 2014, investigative points ranged from 35 percent of a district’s total points to nearly 98 percent. Points for protective activities contributed between 2 and 55 percent of districts’ points. In fiscal year 2013, investigative points contributed between 34 and 97 percent, and protective points contributed between 1 and 65 percent. INV officials we spoke with noted that although districts can take action to increase their investigative contributions, they have little control over protection needs within their jurisdictions. As a result, in line with the primary role of domestic offices, INV has weighted metrics related to investigations more heavily than those related to the agency’s protective mission. Therefore, offices with low levels of protective activity can still rank highly in the performance system. For instance, in fiscal years 2013 and 2014, one district drew over 97 percent of its points from metrics related to the investigative mission or both missions and had a district rank of 8 and 4 in those years (and agent rank of 3 and 2), respectively. Conversely, another district, which has a disproportionately large share of the agency’s protective mission, drew 65 percent of its points in fiscal year 2013 and 55 percent in fiscal year 2014 from metrics related to protection. According to senior Office of Investigations officials, the Secret Service has an ongoing process for evaluating and adjusting staffing levels among its domestic offices. However, the Secret Service has not conducted an analysis of its domestic field office structure, including an assessment of office location and size. According to Standards for Internal Control in the Federal Government, an agency’s organizational structure provides management’s framework for planning, directing, and controlling operations to achieve agency objectives. In addition, an agency’s internal controls should provide reasonable assurances that operations are effective and efficient, and that agencies should use information and data to ensure effective and efficient use of resources. Internal control guidance also suggests that management periodically evaluate the organizational structure and make changes as necessary in response to changing conditions. The standards further note that all documentation and records should be properly managed and maintained. INV officials reported that they do not know when the Secret Service last formally analyzed its domestic field office structure or if it has reviewed the structure because they were unable to find documentation indicating such a review had been conducted. In October 2014, the agency began to develop a plan to review the domestic field office structure in 2015, according to INV officials. However, according to INV officials, this planned review is now to be conducted as part of the Director’s comprehensive bottom-to-top review of the entire agency. As of August 2015, INV officials reported that they have not received any guidance on how the review is to be conducted or what it will include with respect to the domestic field office structure. Cost and performance data. INV officials reported that the Secret Service uses performance metric data to evaluate the quarterly performance of the domestic offices and as one of the factors in determining the office staffing levels. Staffing decisions, according to INV officials, often involve reviewing several variables related to the geopolitical climate as it pertains to the protective and investigative missions. Also taken into account are the experience level of agents in a particular office, protective stops within a particular district, whether a protectee has a private residence within a district, and an agent’s specialty training certifications (i.e., polygraph and cyber forensics). Additionally, field office staffing level variables take into account individual agents’ protective, investigative, and training requirements. However, officials from INV and the Management and Organization Division (MNO) stated that they do not use cost and performance metric data together to formally analyze—via a comparison of costs with performance metric outcomes—the location and size of its domestic offices. According to these same officials, the Secret Service does not compare domestic office costs with performance metric data because it is difficult to (1) assign benefits to protective activities in which the elimination of a threat—no outcome—is the desired outcome, and (2) capture costs and results of more complex investigations spanning different domestic offices over multiple years. However, the Secret Service can take steps to mitigate these challenges, as we did in our analysis comparing cost relative to performance of the field office districts. Specifically, to address the challenge of assigning benefits to protective activities, we used the Secret Service’s protection related performance metrics of protective intelligence cases closed, protective travel stops, and protective man- hours to assign benefits to protective activities. To mitigate the issue of accurately capturing costs and results of more complex investigations, we analyzed 4 years of data to account for investigations that span multiple years and do not produce results within a single fiscal year. To address the challenge of investigations that involve multiple domestic offices, we used the Secret Service’s performance review reports for each office, which, according to MNO officials, provide each involved office points for its contributions, unlike the agency’s official statistics which provide credit to a single office. Our comparative analysis of the Secret Service’s cost-to-performance data indicates that certain field office districts may be less cost-effective than others. Also, six performance metrics—(1) federal arrests, (2) protective travel stops, (3) protective intelligence investigations (cases closed), (4) amount of seized counterfeit currency, (5) value of actual financial crimes loss, and (6) critical systems protection advances—had a statistically significant relationship with field office district costs. We analyzed the cost and performance of the Secret Service’s domestic field office districts to demonstrate the utility of such an analysis for evaluating the field office structure. Our analysis was conducted at the field office district level rather than individual office level because of limitations in the Secret Service’s cost data, as previously discussed. This analysis compares the cost per special agent with the performance metric outcomes from fiscal years 2011 through 2014 to identify trends in cost and performance over these 4 years. On the basis of our analysis of Secret Service–provided cost and performance data for fiscal years 2011 through 2014, we determined that the San Diego, Boston, Pittsburgh, Honolulu, and Houston Field Office Districts had the highest average cost per special agent relative to their performance. Comparatively, the Richmond, St. Louis, Baltimore, Little Rock, Birmingham, and Indianapolis Field Office Districts had the lowest average cost per special agent. In terms of cost relative to performance, the highest average cost district on a per agent basis (San Diego) cost 1.7 times more than the lowest average cost district (Richmond). Overall, this indicates that compared with their peers, districts with higher average costs per agent could become more efficient at meeting the agency’s needs given expended resources, and there may be opportunities to leverage practices from districts with lower average costs per agent. According to INV and MNO officials, the Pittsburgh and San Diego Field Office Districts may not be as cost-effective as the other districts because of the limited number of cases prosecuted at the federal level. For instance, the U.S. Attorney’s Office in the San Diego District, according to these same officials, prioritizes narcotics and immigration cases over financial and electronic crime cases. INV and MNO officials reported that the Richmond and Baltimore Field Office Districts likely had lower costs per special agent because in addition to the high number of background investigations they conduct, they also receive several performance points for the high volume of protection events and visits they handle in support of the Washington, D.C., District. By identifying the districts with higher and lower costs per special agent, the Secret Service could examine how to further maximize its domestic field office structure and ensure that its mission needs are not only effectively, but efficiently, met as well. For example, the Secret Service could use these insights on the efficiency of special agents in these districts gained from this type of an analysis to inform decisions it makes regarding the placement and size of its domestic offices. INV officials agreed that this type of an analysis may be useful in assessing its domestic field office structure. We also compared the cost per special agent with the points accumulated per special agent for fiscal years 2013 and 2014 to determine the cost per agent point earned. This comparison measures how efficiently special agents are meeting the agency’s mission needs. Since we were limited to 2 fiscal years, we could not identify any trends over multiple years. However, this type of an analysis could be of greater use to the Secret Service, as it collects additional performance metric data in the future to identify any trends warranting an adjustment of the field office structure. For instance, the Secret Service could use this type of an analysis, upon collecting additional data, to identify the higher- and lower-cost districts by special agent point to inform decisions it makes regarding the placement and size of its domestic offices. See appendix III for a description of this analysis and findings. Travel data. According to INV officials, the Secret Service considers the number of protective travel stops in a district and agent hours traveling out of district when evaluating domestic office staffing levels. However, according to INV and MNO officials, the Secret Service does not use travel data on the geographic locations domestic personnel are traveling to or from to analyze the domestic field office structure. These officials noted that such an analysis is not conducted because the majority of domestic office travel is dependent on external factors, such as election campaigns; visiting foreign dignitaries; and natural disasters, among other factors, that are difficult to predict and beyond the agency’s control. While these factors may be difficult to predict and outside of the Secret Service’s direct control, further analysis of past and planned travel needs may assist the Secret Service in determining office placement and use of staff. For example, our analysis of frequent investigative travel patterns may indicate the need for the agency to establish a permanent Secret Service presence at certain non-Secret Service office locations. Given the dynamic nature of domestic office travel because of the protection demands cited by INV and MNO officials, it is important to analyze travel patterns to determine if the domestic field office structure is responsive to these changing conditions, as needed. Our analysis of the Secret Service’s travel data from fiscal years 2009 through 2014 shows that, overall, personnel in certain domestic offices traveled more often than personnel in others. However, on a per FTE basis, certain smaller offices may be contributing a greater share of their resources to travel. Our analysis further shows that domestic office personnel traveled to certain locations more frequently than to others to achieve the agency’s protective and investigative missions. The travel is geographically dispersed, with concentrations in key geographic areas, and certain nonoffice locations have required frequent repeat travel from selected domestic offices to carry out the investigative mission. From fiscal years 2009 through 2014, the number of trips taken by Secret Service personnel in domestic offices ranged from a low of 12,404 in fiscal year 2014 to a high of 28,678 in fiscal year 2012 (see fig.10). On average, from fiscal years 2009 through 2014, the Secret Service spent at least $38 million on travel per year, with travel for protection accounting for the majority of travel taken by domestic field office personnel. Overall, the domestic offices that had personnel who traveled the most often for any purpose from fiscal years 2009 through 2014, on the basis of our analysis, were the Los Angeles Field Office with 7,470 trips, followed by the New York, Miami, Chicago, and Washington, D.C., Field Offices. INV and MNO officials explained that these offices have the most special agents and as a result they are often used to provide agents for protection duties. However, further analysis of the trips taken per domestic office FTE shows that certain smaller offices may actually be contributing a greater share of their resources to travel. For example, we found that in fiscal year 2014, personnel in three smaller resident offices took 13 to 15 trips per FTE. This was well above the average of 7 trips per FTE in fiscal year 2014 for all domestic offices. By analyzing the number of trips taken per FTE at each domestic office, the Secret Service could have greater insight into identifying how the agency is utilizing its domestic office FTEs and whether an adjustment in the field office structure is warranted to gain travel efficiencies. This type of analysis could be used by the Secret Service to inform decisions regarding domestic office staffing as well as the structure of the domestic offices. On the basis of our analysis of travel taken in support of the Secret Service’s protective mission, we found that domestic office personnel visited 787 different U.S. cities during fiscal years 2009 through 2014. These personnel most often visited Washington, D.C. (11,087); New York (8,523); Wilmington, Delaware (3,051); Chicago (2,516); and Boston (1,653). According to INV and MNO officials, frequent travel to these destinations is largely because of the high number of protectee- and foreign dignitary-attended events, such as the United Nations General Assembly and other international summits, and current and past presidential residences. Figure 11 shows all of the U.S. locations visited by domestic office personnel for the purpose of carrying out protective duties and the frequency of those visits during fiscal years 2009 through 2014. As shown in figure 12, the domestic offices that had agents who traveled the most often for protection, on the basis of our analysis, were the Los Angeles Field Office, with the highest number of trips—6,328—from fiscal years 2009 through 2014, followed by the New York; Chicago; Miami; and Washington, D.C., Field Offices. Protective travel between these offices accounted for 8 percent of all total protective travel from fiscal years 2009 through 2014. Additionally, in the case of the Dallas, Houston, and Atlanta Field Offices, the frequent protection travel patterns reflect travel between protectee residences—former presidents Bush and Carter—and Washington, D.C. The Tyler Resident Agency in Texas had agents who traveled the least often for protection, with 50 trips taken from fiscal years 2009 through 2014, followed by the Anchorage, Alaska; Akron, Ohio; Harrisburg, Pennsylvania; Roanoke, Virginia; and Wilmington, Delaware offices. On the basis of our analysis of investigative travel, we found that personnel from four domestic offices each made 73 or more trips to the same geographic locations where there is no Secret Service office, from fiscal years 2009 through 2014. For example, one field office had personnel who traveled a total of 241 times to the same geographic location, with a minimum of 29 trips in fiscal year 2013 and a maximum of 54 in fiscal year 2010. INV officials explained that frequent travel for these four domestic offices was the result of joint investigations, favorable prosecution rates for Secret Service cases, and providing assistance with major fraud investigations. Given the staffing levels at these offices—an average of 20 or fewer FTEs from fiscal years 2009 through 2014—and frequent travel, this could indicate a need to adjust staffing levels at these offices or establish a permanent agency presence at non-Secret Service office locations. Conducting an analysis of its domestic field office structure, inclusive of cost and performance, and other meaningful indicators of resource need, such as travel data, could provide the Secret Service with greater assurance that its domestic field office structure is responsive to changing conditions, as needed, and that the agency is able to identify specific actions that need to be taken to meet mission needs. Specifically, a comparative analysis using cost and performance and travel data could, among other things, help the Secret Service identify inefficiencies in its domestic field office structure, including the cost relative to the performance of particular offices and the location and size of offices, and serve as a basis for allocating personnel. Additionally, this type of analysis could also assist the agency with determining and justifying its budgetary needs based on projected domestic field office activities. By analyzing the travel patterns of its domestic field office personnel— purpose and locations traveled to—the agency could determine if there are geographic areas that are under-or over-represented in terms of field office coverage, thus warranting a potential adjustment of the domestic field office structure. Further, maintaining a record of such analysis and results could help ensure that key decisions and management directives resulting from this analysis are carried out, and serve as a baseline for future analyses. Inconsistencies in how Secret Service personnel in domestic offices recorded the purpose of investigative- and training-related travel from fiscal years 2009 through 2014 adversely affected the reliability of the agency’s travel data. According to Standards for Internal Control in the Federal Government, control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Although control activities can vary by agency, categories of control activities that are common to all agencies include the accurate and timely recording of transactions and events. According to INV officials, the purpose of travel to some of the geographic locations most often visited—identified as 100 or more visits—for the purpose of investigations from fiscal years 2009 through 2014 was likely for training rather than investigations, as recorded. For example, according to INV officials, locations such as Las Vegas, Nevada; San Antonio, Texas; and Orlando, Florida, are popular destinations for law enforcement conferences on investigations. Secret Service agents often attend the conferences as presenters or students. Similarly, the Secret Service named Birmingham, Alabama; Tulsa, Oklahoma; Brunswick, Georgia; and Pittsburgh, Pennsylvania, as examples of locations likely traveled to for training rather than investigations. These are, according to Secret Service officials, locations that host training and academic facilities. Accordingly, domestic office personnel travel to these locations to instruct or attend training courses. According to Secret Service officials, however, since investigations may have been the topic of the conferences or training courses, domestic office personnel likely recorded these trips as investigative instead of training on their travel request forms. INV and Financial Management Division officials reported that they require all personnel to identify the purpose of travel on their travel request forms using the purpose of travel provided to them through e- mail. Further, each travel request must be reviewed and authorized by the traveler’s first-line supervisor. However, individuals may make mistakes when identifying the purpose of travel in their travel request forms, and supervisors may not be aware of the purpose the traveling employee was directed to use. Accordingly, the appropriate travel purpose may not be recorded. As a result of ineffective controls to ensure that the purpose of investigative- and training-related travel is accurately recorded, the Secret Service is unable to reliably determine the cost and number of trips taken for the purpose of investigations—one of its two core missions. This further limits the Secret Service’s ability to fully analyze investigative travel data to determine if its domestic offices are optimally located to meet its mission needs. By ensuring that supervisors are aware of the travel purpose that is to be used and reviewing the travel request forms to confirm that that the correct travel purpose is recorded, the Secret Service will be able to enhance its travel request and approval process. As a result, the Secret Service will be able to reliably report on travel cost information and be better positioned to inform the budgetary needs of its domestic offices and assess related travel data that may inform its efforts to determine if its domestic offices are optimally located to meet its mission needs. The Secret Service plays a vital role by protecting our nation’s leaders, including the President; ensuring the safety of foreign dignitaries visiting the United States; and investigating crimes against our financial, banking, and telecommunications infrastructure, among other important activities. The Secret Service’s domestic field offices are essential to the agency accomplishing its investigative mission and successfully executing its protective mission. Given the significant contributions the domestic field offices make in carrying out the agency’s missions, it is critical that the offices be strategically positioned, in terms of both geography and resources. The Secret Service’s institutional knowledge and subject- matter expertise are important for informing the domestic field office structure. Having the right data and using them to inform the structure is also important, as having the right data can provide agency leadership an important basis for ensuring the Secret Service is best positioned to carry out its mission given available resources. However, making effective data-driven decisions is dependent on using reliable data. The Secret Service does not currently have reliable salary and benefits cost data for each of its offices. Correcting this will provide the Secret Service with an accurate representation of how much each office costs, and serve as a reliable basis for understanding resources allocated to each domestic field office. Further, conducting and documenting an analysis of its field office structure could provide the Secret Service with greater assurance that its domestic offices are best positioned to achieve its mission needs. The Secret Service has made a significant investment in developing metrics for understanding contributions made by its domestic field offices, and has collected related performance data since at least 2009. Conducting a comparative cost and performance analysis of its domestic field offices can enhance the information agency leadership has available for decision making. Importantly, the analysis can provide the Secret Service with greater insight on the cost relative to performance of each office, help identify inefficiencies and best practices, and provide valuable data for informing future budget requests. In addition, by analyzing other meaningful indicators of resource need, such as travel data, the Secret Service could leverage additional information to ensure that its domestic offices are optimally located to meet its mission needs, and better understand the extent to which agents in each office travel and for what purpose. Finally, taking steps to ensure that the purpose of travel by domestic office personnel is accurately recorded will allow the agency to reliably determine the costs associated with the investigative mission, which is critical to assessing how resources are used in the domestic field offices to meet the agency’s mission needs. To help ensure that the Secret Service accurately records salaries and benefits cost data for its domestic offices, we recommend that the Director of the Secret Service implement a review process to ensure time and attendance codes used for recording cost data at each domestic office are correctly established and appropriately attributed to the correct office. To better ensure that the Secret Service’s domestic field office structure is enabling the Secret Service to best meet its mission needs, we recommend that the Director of the Secret Service conduct an analysis using cost and performance data and consider using other data, such as travel data, to assess and inform its domestic field office structure, and maintain a record of the analyses performed and the results. To help ensure that the Secret Service has reliable information on the number and cost of trips for its domestic field office personnel for investigative and training purposes, we recommend that the Director of the Secret Service enhance its travel request and approval process to ensure that the trip purpose is accurately documented, effectively reviewed and approved, and accurately recorded. We provided a draft of the sensitive version of this report to DHS for its review and comment. DHS provided technical comments, which have been incorporated into this report, as appropriate. DHS also provided written comments, which are reprinted in appendix IV. In its comments, DHS concurred with the report’s four recommendations and described actions it has under way or planned to address the recommendations by September 30, 2016. DHS concurred with the first recommendation, to implement a review process for domestic office time and attendance codes and stated that the Secret Service’s Office of Human Resources will generate monthly reports to ensure employee office codes in the time and attendance system align with the office codes in the payroll system of record. If implemented as planned, this action should help address the intent of the recommendation and ensure cost data are attributed to the correct office. DHS concurred with the second recommendation, that it conduct an analysis using cost and performance data and consider using other data, such as travel data, to assess and inform its domestic field office structure. DHS stated that the Secret Service will develop a methodology for incorporating cost data into its analysis of the field office structure. However, DHS cited challenges to comparing cost to performance data, including investigations that span multiple jurisdictions and fiscal years. We acknowledged those challenges in this report and identified ways in which we were able to mitigate them when conducting our own cost-to- performance analyses of the Secret Service’s domestic field office structure. We believe that an analysis that combines both the Secret Service’s cost and performance data will help ensure that the domestic field office structure is enabling the Secret Service to best meet its mission needs. As illustrated in our report, such an analysis can help the Secret Service identify the offices yielding the greatest performance given cost over a period of time. Such information can serve as a basis for encouraging effective mission-driven practices at lower performing locations. The data can also serve to uncover locations where fewer resources should be allocated given the lack of mission-driven activities and high cost for achieving them. In other words, performing a cost-to- performance analysis, as we recommend, yields the Secret Service a “bang for the buck” assessment to inform the agency’s allocation of scarce resources. It is further important to note that our second recommendation focuses on the Secret Service comparing cost-to-performance data, among other data, as part of an analysis. We agree that other factors, such as travel patterns and associated resource use, as well as location-specific crime data, among other things, should be assessed as part of the analysis. However, undertaking a cost-to-performance analysis to inform the assessment of the field office structure would help efforts to ensure resources are best positioned to meet the Secret Service’s mission needs. DHS concurred with the third recommendation to record the results of the analyses performed and stated that the Secret Service’s Office of Strategic Planning and Policy will maintain any analyses completed. Finally, DHS concurred with the fourth recommendation, to enhance its travel request and approval process and stated that the Secret Service’s Risk Management and Assurance Branch will conduct validity tests to ensure trip purposes are accurately documented, effectively reviewed and approved, and accurately recorded. Additionally, any deficiencies found during testing of the travel request and approval process will be corrected. If implemented as planned, these actions should help address the intent of the recommendation and ensure each trip purpose is accurately documented. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, Director of the Secret Service, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9627 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 addresses the U.S. Secret Service’s domestic field office structure. Specifically, our objectives were to examine the following questions: 1. What are the costs of the Secret Service’s domestic field office structure and to what extent are the data reliable? 2. How do the domestic offices contribute to accomplishing the Secret Service’s missions? 3. To what extent does the Secret Service use available data to ensure that its domestic field office structure meets its mission needs, and what data reliability challenges, if any, exist? To determine the costs of the Secret Service’s domestic field office structure, we obtained data from the Secret Service on the costs for each domestic field office, resident office, and resident agency by cost category. We collected data for fiscal years 2009 through 2014—the 6 most recent fiscal years for which full-year data were available at the time of our review. We analyzed the total cost of the field office structure in addition to costs associated with four categories we identified—salaries and benefits, infrastructure, travel, and other (e.g., supplies)—among all the categories provided by the Secret Service. The Secret Service was unable to provide some cost data—lodging for protective travel, vehicle purchases, working capital funds, information technology, telecommunications, and insurance claims—for the field office structure because these costs are not tracked in a manner in which they can be attributed to domestic offices. To assess the reliability of the Secret Service’s cost data, we discussed with Financial Management Division and Management and Organization Division officials, among others, how the data are entered and maintained in the Secret Service’s official financial system of record—Travel Manager, Oracle, PRISM, Sunflower system (referred to as TOPS)— which is used to disburse salaries, operating expenses, and travel costs. We also reviewed the data for any obvious errors and anomalies and identified inaccurate salary and benefit data because these costs were attributed to the wrong office within the same district of the office where the costs were incurred (e.g., the salary and benefit costs of a resident office were assigned to its parent field office). As a result, we determined that the cost data were sufficiently reliable in the aggregate, but not at the individual office level. We compared the Secret Service’s practices for reviewing the reliability of its cost data against standards in Standards for Internal Control in the Federal Government, which state that control activities should be effective and efficient in accomplishing the agency’s objectives and help ensure that all transactions are completely and accurately recorded. To address the cost data limitation at the individual office level, we compared the costs of the Secret Service’s 42 domestic field office districts rather than individual offices. In addition, to account for the disparity in the size of domestic offices, we also compared the costs of field office districts per full-time equivalent (FTE), which is inclusive of all personnel. We assessed the reliability of the Secret Service’s fiscal year 2009 through 2014 FTE data by interviewing Secret Service officials in the Office of Investigations and Workplace Planning Division about how the data are captured from the agency’s time and attendance system. According to a Secret Service official, the data do not reflect a small number of FTEs from two divisions that place personnel in domestic offices, such as polygraph examiners. Although the Secret Service does not know how many of these staff are in each of the domestic offices, we determined the FTE data were sufficiently reliable for our purposes because the costs associated with these personnel were not included in the Secret Service’s cost data. To address our second question and describe the ways in which domestic offices contribute to the Secret Service’s missions, we obtained and analyzed data provided by the agency on domestic office contributions from fiscal years 2009 through 2014. Specifically, the Secret Service provided two sets of data on domestic office contributions: (1) performance review reports used to assess performance during fiscal years 2009 through 2014, and (2) official statistics for the same years. We compared the Secret Service’s performance metrics with agency and department strategic plans, statutes governing the Secret Service’s areas of responsibility, and measures developed under the Government Performance and Results Act. We found that the Secret Service’s performance metrics align with the agency’s investigative and protective missions. The performance review reports were formulated to give all contributing domestic offices credit for accomplishments (e.g., if several offices contributed to an arrest, each would get credit), whereas the official statistics published in the Secret Service’s annual report count each accomplishment for only the main contributing office, to correctly reflect the agency’s accomplishments. We utilized the performance review reports in cases where we were assessing accomplishments on a domestic office or field office district basis, and used the official statistics in instances where we assessed the domestic offices’ contributions as a whole. We assessed the reliability of both sets of data by interviewing agency officials knowledgeable about the data and by obtaining written responses from the agency regarding (1) the agency’s methods of data collection and quality control reviews, (2) practices and controls over data entry, and (3) any limitations of the data. We determined that the data were sufficiently reliable for our purposes. We also systematically reviewed the Secret Service’s Field Executive Summaries for fiscal year 2014—narratives that accompany each domestic office’s performance review reports to identify types of reported performance and provide examples of the office’s accomplishments. Finally, we gathered information on Secret Service domestic offices’ contributions to the missions through semistructured interviews with a nongeneralizable sample of 12 domestic offices in 6 districts led by field offices in Atlanta, Georgia; Charlotte, North Carolina; Los Angeles, California; Memphis, Tennessee; Miami, Florida; and Oklahoma City, Oklahoma. We selected the offices based on fiscal year 2014 data—the most recent data available—to represent a range of sizes, performance ranks, and mission focus. To gain an understanding of how domestic offices work with local and state law enforcement partners, we also conducted semistructured interviews with at least one local and one state partner for each selected district. The 15 law enforcement agencies were selected from lists provided by the domestic offices to represent partners that had long-term relationships with the Secret Service. To address the third question, regarding the extent to which the Secret Service uses available data to ensure its domestic field office structure enables the agency to meet its mission needs, we interviewed officials from the Office of Investigations, Management and Organization Division, and Administration Operations Division about how the agency has historically made decisions to open and close offices, and the methodology behind those decisions. We used Standards for Internal Control in the Federal Government to assess the agency’s efforts to ensure that its domestic field office structure meets its mission needs. Since we determined the Secret Service had not used its available data to analyze its field office structure, we analyzed Secret Service–provided cost, performance, and travel data to demonstrate how such analyses could position the Secret Service to better ensure that its domestic field office structure is responsive to changing conditions and that the agency is able to identify specific actions that need to be taken to meet mission needs. To identify those districts with high costs and lower performance and conversely low costs and higher performance, we conducted a regression analysis of the 42 field office districts comparing cost with performance. Specifically, we used variable district costs—total costs, except for rent— and all of the performance metrics that the Secret Service used during fiscal years 2011 through 2014, with the exception of the protective intelligence cases closed metric. This metric was excluded because of how closely correlated it is with the protective intelligence cases opened metric. Since the cost data at the individual field office level were not reliable as previously discussed, we used variable costs at the district level and then determined the average district cost per (1) special agent from fiscal year 2011 through 2014, and (2) special agent point for fiscal years 2013 and 2014. All performance metrics and cost variables were normalized by the number of special agents per district to account for the varying size of domestic offices within a district. We were not able to make cost-of-living adjustments across localities, since the analyses had to be performed at the district level and a Secret Service district can cover more than one locality depending on the number and location of offices. For example, the Atlanta District includes the Atlanta Field Office, and Albany and Savannah Resident Offices. We evaluated cost and performance data for the fiscal year 2011 through 2014 time frame because the data on the number of special agents assigned to each field office district were available for this time frame. We also analyzed the average district cost per special agent point for fiscal years 2013 and 2014 because 2013 was the first year the Secret Service used the point system. Model. The following equation presents the model to be estimated where: = The total variable cost per agent, excluding rent, incurred by district i in year t. = an intercept. = a group of 12 performance metrics per agent identified and used by Secret Service. The metrics consist of travel days, physical protection hours, federal arrests, state arrests, cases closed, counterfeit seized value, asset forfeiture, potential loss, actual loss, in-custody responses closed, critical systems protections, and protective intelligence cases closed by district i in year t. = indicator variables for fiscal years 2011, 2012 and 2013. = district indicator variables for each of the 41 districts where Richmond is used as the reference district. = error term assumed to be possibly heteroskedastic and auto-correlated. Results. Table 2 shows the regression results, which we used to determine the average cost per special agent and special agent point. The district ranking is estimated from this table by adding the average cost differential from each district to Richmond’s average cost per agent. We analyzed the Secret Service’s travel data to identify travel patterns that may warrant an adjustment of the domestic field office structure. Specifically, we analyzed travel voucher data from the Secret Service’s Travel Manager System for all domestic office personnel—special agents and administrative personnel—who traveled from fiscal years 2009 through 2014. Using a Geographic Information System to synthesize and analyze all trips taken by originating domestic office and destination by fiscal year, we determined the following: the purpose of all domestic office travel—protective, investigative and training, and support travel; all locations that domestic office personnel traveled to for the purpose of protection, both those with a Secret Service office and those without a Secret Service office; and domestic offices that took the greatest number of total trips and trips per FTE. We used the travel data to assess whether the domestic offices are optimally located given the Secret Service’s travel patterns to geographic locations with or without a Secret Service office. To determine the reliability of these data, we discussed with Financial Management Division and Management and Organization Division officials, among others, how the data are entered and maintained in the Secret Service’s Travel Manager System, which is used to disburse travel costs. We also reviewed the data for any obvious errors and anomalies. We determined that the travel data were unreliable for determining the number of trips taken for the purposes of investigations and training because some investigative travel was, according to Office of Investigations officials, inaccurately recorded as training travel. As a result, we combined investigative and training travel in our analyses by purpose. Travel data for the purposes of protection and support were sufficiently reliable for our purposes. To understand how manpower resources are diverted from domestic offices, we treated multileg trips as separate visits in our analyses. For instance, a multileg trip from Chicago to Los Angeles with a stop in Spokane was treated as two separate visits to capture the actual location of the traveling employee: Chicago to Los Angeles and Chicago to Spokane. We did not evaluate travel costs since the voucher data do not contain lodging costs, according to Management and Organization Division officials, for protection-related travel, which is the majority of domestic office personnel travel. Additionally, we did not analyze the length of trips and distance traveled because the primary purpose of this analysis was to identify the locations domestic office personnel were traveling to and for what purpose. We conducted this performance audit from September 2014 through February 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 3 lists the metrics, by mission, used by the Secret Service in fiscal years 2009 through 2014 to assess the performance of its domestic offices. Over the years, the Secret Service has made changes to these metrics in order to best assess the contributions of individual offices to the agency’s missions, according to Secret Service officials. We developed the descriptions below using Secret Service guidance and interviews with Secret Service officials. Table 4 shows the number of points that can be earned by an office for each performance metric in fiscal years 2013 and 2014—the years in which points were awarded. In alignment with agency mission priorities, the Secret Service established a point system and weighted metrics for use in fiscal years 2013 and 2014 when assessing the performance of both its domestic offices and special agents. Using the resulting data, we conducted a comparative analysis of the associated performance data against cost. Specifically, we analyzed the variable cost per special agent point earned for all 20 performance metrics defined by the Secret Service. Since we were limited to 2 fiscal years of performance data, we could not yet identify any trends that may warrant an adjustment to the field office structure. However, the Secret Service could build on this type of analysis as it collects additional performance metric data in the coming years. On the basis of our analysis, as shown in figure 13, we determined that the New Orleans Field Office District was among the 5 districts with the highest variable cost per special agent point in both fiscal years 2014 and 2013. We also found when comparing this analysis with the average cost per special agent analysis that the Pittsburgh and San Diego Field Office Districts had some of the highest costs per special agent and special agent point. Specifically, we determined that the Pittsburgh, Tampa, New Orleans, Denver, and Boston Field Office Districts had the highest cost per special agent point in fiscal year 2014. The Orlando, Honolulu, New Orleans, Memphis, and San Diego Field Office Districts had the highest cost per special agent point in fiscal year 2013. The Washington, D.C.; Atlanta; Dallas; Richmond; and Little Rock Field Office Districts had the lowest cost per special agent point in fiscal year 2014. The Washington, D.C., Baltimore, Kansas City, Miami, and Dallas Field Office Districts had the lowest cost per special agent point in fiscal year 2013. Office of Investigations (INV) and Management and Organization Division (MNO) officials explained that the variance in cost per special agent points from fiscal years 2013 to 2014 could be the result of lengthier, multiyear investigations that do not show results (e.g., cases closed or value of asset forfeiture) until the following year or years. Further, we found, on the basis of our analysis of changes in the cost per special agent point from fiscal years 2013 to 2014, that 35 of the 42 field office districts experienced an increase in the cost per special agent point from fiscal years 2013 to 2014, with the increases ranging from $1,507 to $100,546. Specifically, we found the following: The Denver, Kansas City, Phoenix, Pittsburgh, and Baltimore Field Office Districts had the highest increases in cost per special agent point from fiscal years 2013 to 2014, ranging from $60,664 to $100,546. The Minneapolis, Oklahoma City, Charlotte, Seattle, and Cincinnati Field Office Districts had the lowest increases in cost per special agent point from fiscal years 2013 to 2014, ranging from $1,507 to $7,798. Since special agent points are a direct reflection of how the special agents are meeting the agency’s mission needs, determining those districts with higher and lower costs per special agent point is a key indicator of whether the agency is maximizing its domestic office resources. Further, as the Secret Service collects additional special agent point data over the coming years, this type of analysis could allow the agency to capture best practices for those districts with lower costs per special agent point that could be shared with costlier districts. In addition to the contact named above, Joseph P. Cruz (Assistant Director), Lisa Canini, Miriam Hill, Robin Nye, and Zachary Sivo made key contributions to this report. Also contributing to this report were Pedro Almoguera, Billy Commons, Dominick Dale, Patricia Donahue, Emily Gunn, Michele Fejfar, Eric Hauswirth, John Mingus, Ben Nelson, and Jerry Sandau.
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Commonly known for protecting the President, the Secret Service also plays a role in investigating and preventing a variety of financial and electronic crimes (e.g., counterfeiting). To execute its dual investigative and protective missions, the Secret Service operates a domestic field office structure of 115 offices in 42 districts. GAO was asked to review the Secret Service's domestic field office structure. This report evaluates (1) the costs of the Secret Service's domestic field office structure and to what extent the data are reliable, (2) how domestic offices enable the Secret Service to accomplish its missions, and (3) the extent to which the Secret Service uses available data to ensure that its domestic field office structure meets its mission needs and what data reliability challenges, if any, exist. GAO analyzed the Secret Service's cost, performance, and travel data for fiscal years 2009 through 2014, including a regression analysis of cost to performance. GAO also interviewed Secret Service headquarters officials; officials from 12 domestic offices selected based on size, performance and mission focus; and 15 of the agency's law enforcement partners. From fiscal years 2009 through 2014, the annual cost of the U.S. Secret Service's domestic field office structure—including 115 field offices, resident offices, and resident agencies—ranged from $500 million to $549 million, but the Secret Service did not accurately record cost data for some offices. GAO determined that although the Secret Service's cost data were reasonably reliable in the aggregate, salary and benefit costs may not have been accurately recorded in the agency's time and attendance system for 21 of 73 of the agency's smaller offices. Specifically, thirteen resident offices and resident agencies likely had their salaries and benefits costs attributed to the field offices in their districts, and eight had higher than expected salaries and benefits costs that may include the salaries and benefits of personnel in field offices. By implementing a review process to ensure time and attendance charge codes for cost data are correctly established, the Secret Service could reliably determine the cost of each of its domestic offices. The Secret Service's domestic offices predominately carry out the agency's investigative mission of various financial and electronic crimes and play an integral role in providing protection. GAO's analysis of Secret Service data from fiscal years 2009 through 2014 found that domestic offices removed at least $18 million in counterfeit funds from circulation annually, and coordinated with state and local partners to support between 5,597 and 6,386 protective visits each year. The Secret Service has developed a performance system, which aligns with its missions, to assess domestic office contributions to the agency's missions, which vary by office. GAO also found that the Secret Service uses data to adjust staffing for the domestic offices, but the agency does not fully use all available data to analyze its domestic field office structure. For example, the Secret Service has not compared domestic field office districts' costs relative to performance or used personnel travel data to analyze whether the domestic offices are optimally located and sized to best meet the agency's mission needs. GAO's analyses of cost, performance, and travel data indicated that some field office districts were more efficient than others and personnel from four domestic offices frequently traveled to non-Secret Service office locations for investigations, potentially indicating the need for a Secret Service presence in these locations. This type of analysis could help the Secret Service determine if its field office structure is responsive to changing conditions and if an adjustment to the structure is warranted. By conducting an analysis of its domestic offices using cost and performance data, among other data as appropriate, the Secret Service could be better positioned to ensure that its domestic field office structure is meeting its mission needs. This is a public version of a sensitive report that GAO issued in November 2015. Information that the Secret Service deemed sensitive has been removed. GAO recommends, among other things, that the Secret Service implement a review process to ensure it accurately records cost data, and conduct an analysis of its domestic field office structure using cost and performance data. The Department of Homeland Security concurred.
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Iraq’s national government was established after a constitutional referendum in October 2005, followed by election of the first Council of Representatives (Parliament) in December 2005, and the selection of the first Prime Minister, Nuri Kamal al-Maliki, in May 2006. By mid-2006, the cabinet was approved; the government now has 34 ministries responsible for providing security and essential services—including electricity, water, and education—for the Iraqi people. The Ministry of Finance is responsible for tracking and reporting government expenditures. The Iraqi government uses single-year budgeting, which generally requires that funds be used by December 31, the end of Iraq’s fiscal year. In March 2003, the United States—along with the United Kingdom, Australia, and other members of the coalition—began combat operations in Iraq. The original “coalition of the willing” consisted of 49 countries (including the United States) that publicly committed to the war effort and also provided a variety of support, such as direct military participation, logistical and intelligence support, over-flight rights, or humanitarian and reconstruction aid. Many nations and various international organizations are supporting the efforts to rebuild Iraq through multilateral or bilateral assistance. U.N. Security Council Resolution 1511 of October 16, 2003, urged member states and international and regional organizations to support the Iraq reconstruction effort. On October 23-24, 2003, an international donors conference was held in Madrid, with 76 countries, 20 international organizations, and 13 nongovernmental organizations participating. Since GAO last reported on the status of the 18 Iraqi benchmarks in September 2007, the number of enemy attacks in Iraq has declined. While political reconciliation will take time, Iraq has not yet advanced key legislation on equitably sharing oil revenues and holding provincial elections. In addition, sectarian influences within the Iraqi ministries continue while militia influences divide the loyalties of Iraqi security forces. The January 2007 U.S. strategy, New Way Forward in Iraq, is designed to support Iraqi efforts to quell sectarian violence and foster conditions for national reconciliation by providing the Iraqi government with the time and space needed to help address differences among the various segments of Iraqi society. The number of enemy-initiated attacks on civilians, Iraqi Security Forces, and coalition forces increased dramatically after the February 2006 bombing of the Golden Mosque in Samarra. The increase in the number of monthly attacks generally continued through June 2007. To help quell the violence, the United States deployed about 30,000 additional troops to Iraq during the spring of 2007, bringing the total number of U.S. military personnel to about 164,700 as of September 2007. As depicted in figure 1, enemy-initiated attacks declined from a total of about 5,300 in June 2007 to about 3,000 in September 2007. However, the recent decrease in monthly attacks was primarily due to a decrease in the number of attacks against coalition forces. Attacks against Iraqi Security Forces and civilians have declined less than attacks against coalition forces. According to the Defense Intelligence Agency (DIA), the incidents captured in military reporting do not account for all violence throughout Iraq. For example, they may underreport incidents of Shi’a militias fighting each other and attacks against Iraqi security forces in southern Iraq and other areas with few or no coalition forces. In addition, according to a UN report released October 15, 2007, the Iraqi people and government continue to confront major challenges resulting from the devastating effects of violence. The UN reported that widespread insecurity continues to make national dialogue challenging, and increasing levels of displacement are adding to an alarming humanitarian crisis. The Iraqi government continues to make limited progress in meeting eight legislative benchmarks intended to promote national reconciliation. As of October 25, 2007, the Iraqi government had met one legislative benchmark and partially met another. Specifically, the rights of minority political parties in the Iraqi legislature were protected through existing provisions in the Iraqi Constitution and Council of Representatives’ by-laws. In addition, the Iraqi government partially met the benchmark to enact and implement legislation on the formation of regions; this law was enacted in October 2006 but will not be implemented until April 2008. The benchmark requiring a review of the Iraqi Constitution has not yet been met. Fundamental issues remain unresolved as part of the constitutional review process, such as expanded powers for the presidency, the resolution of disputed areas (such as Kirkuk), and power sharing between federal and regional governments over issues such as the distribution of oil revenue. In addition, five other legislative benchmarks requiring parliamentary action have not yet been met. Figure 2 highlights the status of the benchmarks requiring legislative enactment and implementation. Although State and Multinational Force-Iraq report progress in promoting reconciliation at local levels such as Anbar province, at the national level, sectarian factions within the Iraqi government ministries continue to undermine reconciliation efforts. For example, ministries within the Iraqi government continued to be controlled by sectarian factions and are used to maintain power and provide patronage to individuals and groups. According to an August 2007 U.S. interagency report, the withdrawal of members of the Iraqi cabinet ended the Shi’a-dominated coalition’s claim to be a government of national unity and further undermined Iraq’s already faltering program of national reconciliation. In late August 2007, Iraq’s senior Shi’a and Sunni Arab and Kurdish political leaders signed a unity accord signaling efforts to foster greater national reconciliation. The accord covered draft legislation on de-Ba’athification reform and provincial powers laws, and established a mechanism to release some Sunni detainees being held without charges. However, these laws have not been passed as of October 25, 2007. The Iraqi government has made limited progress in developing effective and non-sectarian forces. Since 2003, the United States has provided about $19.2 billion to train and equip about 360,000 Iraqi soldiers and police officers, in an effort to develop Iraqi security forces, transfer security responsibilities to them and to the Iraqi government, and ultimately withdraw U.S. troops from Iraq. Iraqi security forces have grown in size and are increasingly leading counterinsurgency operations. However, only about 10 of 140 Iraqi army, national police, and special operations forces are operating independently as of September 2007. Several factors have complicated the development of effective and loyal Iraqi security forces. First, the Iraqi security forces are not a single unified force with a primary mission of countering the insurgency in Iraq. Second, high rates of absenteeism and poor ministry reporting result in an overstatement of the number of Iraqi security forces present for duty. Third, sectarian and militia influences have divided the loyalties of Iraqi security forces. According to the Independent Commission on the Security Forces of Iraq, the Iraqi National Police is not viable and should be disbanded. Fourth, Iraqi units remain dependent upon the coalition for their logistical, command and control, and intelligence capabilities. Three GAO reports illustrate a recurring problem with U.S. efforts in Iraq—the lack of strategies with clear purpose, scope, roles and responsibilities, and performance measures. Our reports assessing (1) the National Strategy for Victory in Iraq (NSVI), (2) U.S. efforts to develop planning and budget capacity in Iraq’s ministries, and (3) U.S. and Iraqi efforts to rebuild Iraq’s energy sector show that clear strategies are needed to guide U.S. efforts, manage risk, and identify needed resources. The National Strategy for Victory in Iraq was intended to clarify the President’s strategy for achieving overall U.S. political, security, and economic goals in Iraq. In our 2006 report, we found that the strategy was incomplete. First, it only partially identified the agencies responsible for implementing key aspects of the strategy. Second, it did not fully address how the United States would integrate its goals with those of the Iraqis and the international community, and it did not detail Iraq’s anticipated contribution to its future needs. Third, it only partially identified the current and future costs of U.S. involvement in Iraq, including maintaining U.S. military operations, building Iraqi government capacity, and rebuilding critical infrastructure. Without a complete strategy, U.S. efforts are less likely to be effective. We recommended that the National Security Council (NSC), along with DOD and State, complete the strategy by addressing all six characteristics of an effective national strategy, including detailed information on costs and roles and responsibilities. NSC, State, and DOD did not comment on GAO’s recommendations. In commenting on the report, State asserted that GAO misrepresented the NSVI’s purpose—to provide the public a broad overview of the U.S. strategy in Iraq, not to set forth details readily available elsewhere. However, without detailed information on costs and roles and responsibilities, the strategy does not provide Congress with a clear road map for achieving victory in Iraq. In addition, we have provided the Congress classified reports and briefings on the Joint U.S. Embassy – Multinational Force-Iraq’s classified campaign plan for Iraq. The development of competent and loyal Iraqi ministries is critical to stabilizing and rebuilding Iraq. To help Iraq develop the capability of its ministries, the United States has provided about $300 million between fiscal years 2005 to 2007. The Administration has requested an additional $255 million for fiscal year 2008 to continue these efforts. However, U.S. efforts lack an overall strategy, no lead agency provides overall direction, and U.S. priorities have been subject to numerous changes. U.S. efforts also face four challenges that pose risks to their success and long-term sustainability. First, Iraqi government institutions have significant shortages of personnel with the skills to perform the vital tasks necessary to provide security and deliver essential services to the Iraqi people. Second, Iraq’s government confronts significant challenges in staffing a nonpartisan civil service and addressing militia infiltration of key ministries. Third, widespread corruption undermines efforts to develop the government’s capacity by robbing it of needed resources. Fourth, violence in Iraq hinders U.S. advisors’ access to Iraqi ministries, increases absenteeism among ministry employees, and contributes to the growing number of professional Iraqis leaving the country. Without a unified U.S. strategy that clearly articulates agency roles and responsibilities and addresses the risks cited above, U.S. efforts are less likely to succeed. We recommended that the State Department complete an overall integrated strategy for U.S. capacity development efforts. Congress should also consider conditioning future appropriations on the completion of the strategy. State recognized the value of such a strategy but expressed concern about conditioning further capacity development investment on completion of such a strategy. The weaknesses in U.S. strategic planning are compounded by the Iraqis’ lack of strategic planning in its critical energy sector. As we reported in May 2007, it is difficult to identify the most pressing future funding needs, key rebuilding priorities, and existing vulnerabilities and risks given the absence of an overarching strategic plan that comprehensively assesses the requirements of the energy sector as a whole. While the Iraqi government has crafted a multiyear strategic plan for Iraq’s electricity sector, no such plan exists for the oil sector. Given the highly interdependent nature of the oil and electricity sectors, such a plan would help identify the most pressing needs for the entire energy sector and help overcome the daunting challenges affecting future development prospects. For fiscal years 2003 to 2006, the United States made available about $7.4 billion and spent about $5.1 billion to rebuild Iraq’s oil and electricity sectors. However, production in both sectors has consistently fallen below U.S. program goals of 3 million barrels per day and 6,000 megawatts of electrical peak generation capacity. Billions of dollars are still needed to rebuild, maintain, and secure Iraq’s oil and electricity infrastructure, underscoring the need for sound strategic planning. The Ministry of Electricity’s 2006-2015 Electricity Master Plan estimates that $27 billion will be needed to reach its goal of providing reliable electricity across Iraq by 2015. According to DOD, investment in Iraq’s oil sector is “woefully short” of the absolute minimum required to sustain current production, and additional foreign and private investment is needed. Moreover, U.S. officials and industry experts estimate that Iraq would need $20 billion to $30 billion over the next several years to reach and sustain a crude oil production capacity of 5 million barrels per day. We recommended that the Secretary of State, in conjunction with relevant U.S. agencies and international donors, work with Iraqi ministries to develop an integrated energy strategy. State commented that the Iraqi government, not the U.S. government, is responsible for taking action on GAO’s recommendations. We believe that the recommendations are still valid given the billions made available for Iraq’s energy sector and the U.S. government’s influence in overseeing Iraq’s rebuilding efforts. From the onset of the reconstruction and stabilization effort, the U.S. strategy assumed that the Iraqis and the international community would help finance Iraq’s development needs. However, the Iraqi government has a limited capacity to spend reconstruction funds, which hinders its ability to assume a more prominent role in rebuilding Iraq’s crumbling infrastructure. The international community has provided funds for Iraq’s reconstruction, but most of the funding offered has been in the form of loans that the Iraqis have not accessed. The government of Iraq allocated $10 billion of its 2007 revenues for capital projects and reconstruction, including capital funds for the provinces based on their populations. However, available data from the government of Iraq and analysis from U.S. and coalition officials show that, while 2007 spending has increased compared with 2006, a large portion of Iraq’s $10 billion in capital projects and reconstruction budget will likely go unspent through the end of this year. Iraq’s ministries, for example, spent only 24 percent of their 2007 capital budgets through mid- July 2007. U.S. government, coalition, and international agencies have identified a number of factors that affect the Iraqi government’s ability to spend capital budgets. In addition to the poor security environment and “brain drain” issues, U.S. and foreign officials also noted that weaknesses in Iraqi procurement and budgeting procedures impede completion of capital projects. For example, according to the State Department, Iraq’s Contracting Committee requires about a dozen signatures to approve projects exceeding $10 million, which slows the process. As a possible reflection of Iraq’s difficulty in spending its capital budgets, Iraq’s proposed 2008 capital budget declines substantially (57 percent) from 2007 (see table 1). As a percentage of its overall budget, Iraq’s capital expenditures will decline from 24 percent in 2007 to 12 percent in 2008. We are conducting a review of U.S. efforts to help Iraq spend its budget and will issue a separate report at a later date. As of April 2007, international donors have pledged about $14.9 billion in support of Iraq reconstruction. In addition, some countries exceeded their pledges by providing an additional $744 million for a total of about $15.6 billion, according to the State Department. Of this amount, about $11 billion is in the form of loans. As of April 2007, Iraq had accessed about $436 million in loans from the International Monetary Fund. The remaining $4.6 billion is in the form of grants, to be provided multilaterally or bilaterally; $3 billion of that amount has been disbursed to Iraq. See appendix I for pledges made at Madrid and thereafter for Iraq reconstruction. In addition, 16 of the 41 countries that pledged funding for Iraq reconstruction also provided troops to the multinational force in Iraq. In addition to funds, some countries also contribute troops to the U.S.-led coalition. As of September 2007, 26 countries were contributing 12,300 troops to multinational forces in Iraq. Compared with the 164,700 forces from the United States, other coalition countries represent about 7 percent of Multinational Forces in Iraq. From December 2003 through September 2007, the number of non-U.S. coalition troops decreased from 24,000 to 12,300 and the number of coalition nations contributing troops to military operations decreased from 33 to 26. See appendix II for a comparison of U.S and coalition troops from December 2003 through September 2007. As this committee is called upon to provide more resources to help stabilize and rebuild Iraq, continued oversight is needed of the key issues highlighted in today’s testimony. While U.S. troops have performed courageously under difficult and dangerous circumstances, the continued violence and polarization of Iraqi society as well as the Iraqi government’s continued difficulties in funding its reconstruction needs diminishes the prospects for achieving current U.S. security, political, and economic goals in Iraq. Of particular concern is the lack of strategic plans to guide U.S. and Iraqi efforts to rebuild and stabilize the country. Our assessment of the U.S. strategy for Iraq and recent efforts to build central ministry capacity show that U.S. planning efforts have been plagued by unclear goals and objectives, changing priorities, inadequate risk assessments, and uncertain costs. Weaknesses in U.S. strategic planning are compounded by the lack of strategic planning in Iraq’s energy sector, the sector that provides the most government revenues. Madam Chair this concludes my statement. I would be pleased to answer any questions that you or other Members may have. For questions regarding this testimony, please contact me on (202) 512- 8979 or [email protected]. Other key contributors to this statement were Stephen Lord, David Bruno, Thomas Costa, Lynn Cothern, Mattias Fenton, Muriel Forster, Lisa Helmer, Dorian Herring, Patrick Hickey, Bruce Kutnicky, Tetsuo Miyabara, Judith McCloskey, and Mary Moutsos. 152. 126. 12. 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.
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Since 2003, the Congress has obligated nearly $400 billion for U.S. efforts in Iraq, of which about $40 billion has supported reconstruction and stabilization efforts. Congressional oversight of this substantial investment is crucial as the Administration requests additional military and economic funds for Iraq. This testimony summarizes the results of recent GAO audit work and proposes three areas for which continued oversight is needed: (1) progress in improving security and national reconciliation, (2) efforts to develop clear U.S. strategies, and (3) Iraqi and international contributions to economic development. We reviewed U.S. agency documents and interviewed agency officials, including the departments of State, Defense, and Treasury; and the U.S. Agency for International Development; the UN; and the Iraqi government. We also made multiple trips to Iraq as part of this work. Since GAO last reported in September 2007, on the status of the 18 Iraqi benchmarks, the number of enemy attacks in Iraq has declined. While political reconciliation will take time, Iraq has not yet advanced key legislation on equitably sharing oil revenues and holding provincial elections. In addition, sectarian influences within Iraqi ministries continue while militia influences divide the loyalties of Iraqi security forces. U.S. efforts lack strategies with clear purpose, scope, roles, and performance measures. The U.S. strategy for victory in Iraq partially identifies the agencies responsible for implementing key aspects of the strategy and does not fully address how the United States would integrate its goals with those of the Iraqis and the international community. U.S. efforts to develop Iraqi ministry capability lack an overall strategy, no lead agency provides overall direction, and U.S. priorities have been subject to numerous changes. The weaknesses in U.S. strategic planning are compounded by the Iraqi government's lack of integrated strategic planning in its critical energy sector. The U.S. strategy assumed that the Iraqis and international community would help finance Iraq's reconstruction. However, the Iraqi government has limited capacity to spend reconstruction funds. For example, Iraq allocated $10 billion of its revenues for capital projects and reconstruction in 2007. However, a large portion of this amount is unlikely to be spent, as ministries had spent only 24 percent of their capital budgets through mid-July 2007. Iraq has proposed spending only $4 billion for capital projects in 2008, a significant reduction from 2007. The international community has pledged $15.6 billion for reconstruction efforts in Iraq, but about $11 billion of this is in the form of loans.
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The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), as amended, is the primary authority under which the federal government provides major disaster and emergency assistance, and FEMA is responsible for administering its provisions. At the time of Hurricanes Katrina and Rita, the Stafford Act contained no explicit authority to fund disaster case management services. However, the passage of the Post-Katrina Emergency Management Reform Act of 2006 (Post-Katrina Act), which amended the Stafford Act, granted the President the authority to provide financial assistance for case management services to victims of major disasters. In addition to its responsibilities under the Stafford Act, FEMA has responsibility for administering and ensuring implementation of the National Response Framework, which became effective in March 2008 and replaced the former National Response Plan. The Framework maintains FEMA’s responsibility for coordinating human services and specifically includes disaster case management as a category of human services. Moreover, the Framework requires federal agencies involved in mass care, housing, and human services to coordinate federal response efforts with the efforts of state, local, private, nongovernmental, and faith-based organizations. In September 2009, the President announced the formation of a Long-Term Disaster Recovery Working Group, co-chaired by the secretaries of the Department of Homeland Security (DHS) and HUD, to examine lessons learned during previous catastrophic disaster recovery efforts, and areas for improved collaboration between federal agencies and between the federal government and state and local governments and stakeholders. As part of this initiative, FEMA and HUD are co-chairing the National Disaster Recovery Framework Working Group, which will define the federal, state, local, tribal, private non-profit, private sector, and individual citizen’s roles in disaster recovery; design and establish an effective coordinating structure for disaster recovery programs; identify gaps, as well as, duplications, in recovery programs and funding; and establish performance standards for the federal support of state and local recovery. Multiple federal agencies provided resources for disaster case management programs to help thousands of households cope with the devastation caused by Hurricanes Katrina and Rita, but breaks in federal funding and coordination challenges adversely affected the delivery of these services to some hurricane victims. More than $231 million of FEMA and HHS funds have been used to support disaster case management programs to assist victims of Hurricanes Katrina and Rita. These programs include: Katrina Aid Today (KAT)––FEMA awarded a $66 million grant to the United Methodist Committee on Relief, which then used the grant to establish KAT, a national consortium consisting of nine social service and voluntary organizations, to provide case management services to Hurricane Katrina victims. The Cora Brown Bridge Program––Following the termination of KAT, Louisiana and Mississippi received Cora Brown Funds from FEMA to continue providing services to individuals and families affected by Hurricanes Katrina and Rita. The Disaster Case Management Pilot Program (DCM-P)––Following the termination of the Cora Brown Bridge Program, FEMA used funds from its Disaster Relief Fund to establish a state-managed DCM-P program to serve Hurricane Katrina and Rita victims in Louisiana and Mississippi, with the primary goal of helping them achieve sustainable permanent housing. The Louisiana Family Recovery Corps (LFRC) case management program—HHS distributed emergency Temporary Assistance for Needy Families and Social Services Block Grant funds to Louisiana, which contracted with LFRC, to provide disaster case management services to victims of Hurricanes Katrina and Rita. The case management portion of the Disaster Housing Assistance Program (DHAP)––Using funding provided by FEMA, HUD designed and implemented this program to provide rental assistance to eligible victims of Hurricanes Katrina and Rita. To participate in the program, clients also had to receive case management services. The case management portion of the DHAP Transitional Closeout Program—Some DHAP clients continued to receive housing assistance following the completion of DHAP. In Louisiana, housing assistance was accompanied by disaster case management services. The state has used funding provided by HUD and through HHS’ Social Services Block Grant program. These programs began at different times and sometimes overlapped as federal agencies identified ongoing need for services (see fig. 1). Breaks in federal funding for disaster case management programs initiated after Hurricanes Katrina and Rita adversely affected case management agencies and may have left victims most in need of assistance without access to case management services. For example, as the first federally funded disaster case management program, Katrina Aid Today (KAT), drew to a close in March 2008, some case management agencies began to shut down their operations. Some cases were closed not because clients’ needs had been met, but because the program was ending, and it is unknown whether these clients obtained assistance elsewhere or whether their cases were eventually reopened under the Cora Brown Bridge Program. Clients with open cases under the Bridge program were supposed to seamlessly transition from the Bridge program into FEMA’s new state managed DCM-P program. However, in Mississippi, the state-managed pilot program did not begin until approximately two months after its scheduled start date, and many of the smaller case management organizations had to lay off case managers with the hope of hiring them back once they received federal funding. In addition, in Louisiana, the state-managed pilot became operational in September 2009, approximately 15 months after it was scheduled to begin. The program will serve an estimated 3,300 households that remained in FEMA temporary housing as of April 2009. Initial coordination activities among federal agencies and case management agencies were minimal following the hurricanes, which may have resulted in some victims not receiving case management services and others receiving services from multiple agencies. In previous work, GAO has identified key practices to enhance and sustain coordination among federal agencies, and has since recommended these same key practices to strengthen partnerships between government and nonprofit organizations. Key practices for coordination include establishing mutually reinforcing or joint strategies and compatible policies, procedures, and other means of operating across agency boundaries. Difficulties in coordinating disaster case management services resulted in a lack of accurate and timely information sharing between federal agencies and case management agencies. Case management agencies providing federally funded disaster case management services said they faced challenges in obtaining timely and accurate information from FEMA; however, FEMA officials said requests for information often did not meet their requirements. For example, FEMA approached HHS about serving some victims of Hurricanes Katrina and Rita under its pilot disaster case management program following Hurricanes Gustav and Ike. When the case management agency implementing the HHS pilot requested client information from FEMA, FEMA only provided aggregate data, which the case management agency found unusable. According to FEMA officials, its routine use policy precluded it from sharing client-level information for this purpose. However, FEMA officials said they have fulfilled many requests for information and worked with states on how to request information. For example, FEMA provided information to the Louisiana Department of Social Services so as to prevent duplication of efforts or benefits in determining eligibility for disaster assistance. In a previous report, we identified as a lesson learned the value of standing agreements for data sharing among FEMA and state not-for-profit agencies as a means to expedite recovery services. Such agreements can clarify what data can be shared and the procedures for sharing it while protecting the data from improper disclosure. Federally funded case management programs used different databases, making it difficult to track clients across case management agencies, and potentially allowing hurricane victims who applied to more than one program to receive duplicate services. For example, clients who received case management services through KAT may have also received services through the LFRC disaster case management program, but because the KAT and LFRC databases were not compatible, some case management agencies for these two programs may not have been able to screen for duplication of services. Case management agencies experienced a variety of challenges in delivering federally funded disaster case management services. Some agencies had high staff turnover, and some case managers had large caseloads, making it difficult to meet client needs. Clients frequently needed housing and employment, according to case managers and program data, but these resources were limited following the hurricanes. Further, case management agencies saw the ability to provide direct financial assistance for items such as home repair, clothing, or furniture as key to helping victims, yet only one federally funded program allowed case management agencies to use federal funds for direct financial assistance. Some case management agencies experienced high staff turnover and large caseloads, which made it difficult to meet clients’ needs. For example, one agency reported 100 percent turnover in case managers during the KAT program, which an agency official attributed to case managers’ expectations of a short-term assignment or to the work being too emotionally draining. In terms of caseload size, KAT and LFRC case managers had larger caseloads than program guidance recommended. For example, KAT case managers had caseloads ranging between 40 and 300 clients even though the guidance recommended an average of 20 to 30 cases. Several factors may have contributed to high caseloads, including the magnitude of the disaster and a shortage of case managers. Case managers and program data indicated that one of the main needs of clients was housing (see fig. 2). clothing nd frnitre) According to program data, approximately 67 percent of KAT clients were displaced from their primary residence as a result of Hurricane Katrina. As GAO recently reported, one commonly cited challenge faced by displaced households was finding affordable rental housing, since rents increased significantly following the storms in certain Gulf Coast metropolitan areas. For example, HUD’s fair market rent for a two-bedroom unit in the New Orleans-Metairie-Kenner metropolitan area increased from $676 to $1,030, or about 52 percent, between fiscal years 2005 and 2009. We also reported that disaster victims faced other obstacles in returning to permanent housing, such as insufficient financing to fund home repairs and significantly higher insurance premiums. Case managers said client needs also included employment and transportation, but these resources were limited. According to the Bureau of Labor Statistics, between August 2005 and August 2006, almost 128,000 jobs were lost in eight areas of Louisiana and Mississippi that were heavily affected by Hurricane Katrina. In addition, the unemployment rate in the New Orleans-Metairie-Kenner metropolitan area more than tripled between August 2005 and September 2005, and the unemployment rate remained above pre-Katrina levels until March 2006. We previously reported that transportation services can provide a vital link to other services and to employment for displaced persons; yet multiple sources stated that case management clients, particularly those living in FEMA group sites, lacked transportation following Hurricanes Katrina and Rita. Case management officials said lack of access to transportation made it difficult to connect clients living in remote group sites to services such as employment, education, and child care. Federal agencies developed the LA Moves program to provide free, statewide transit service for residents in Louisiana group sites; however, LA Moves service was limited to FEMA defined “essential services,” specifically, banks, grocery stores, and pharmacies and did not include transportation to welfare-to-work sites, employment, and human and medical services. Case management agencies saw the ability to provide direct financial assistance for items such as home repairs, clothing, or furniture as key to helping clients with their basic needs; yet such assistance was not always available. An official from a case management umbrella organization said that without direct service funds, short-term needs ultimately can become long-term issues, and individuals may then become dependent on government assistance rather than becoming self-sufficient. Case management agencies that were part of KAT or that provided services under FEMA-funded programs, including the state-managed DCM-P program in Mississippi and the Disaster Housing Assistance Program, were not permitted to provide direct financial assistance. According to a FEMA official, direct financial assistance was not part of these programs because FEMA already provided funding for this purpose through the Individual and Households Program. The maximum amount that an individual or household may receive through the program is $25,000, adjusted annually to reflect changes in the Consumer Price Index; however, a FEMA official noted that the maximum amount may not be enough to meet all disaster- related needs. While long-term recovery committees were a resource for case managers to obtain direct assistance to address clients’ unmet needs, in some cases, the efforts to utilize these committees were unsuccessful. Some committees were unable to help clients since the member organizations were depleted of goods or donations to pass on to clients. In addition, case managers also cited challenges in the process of working with these committees. They said the process for obtaining assistance could be onerous, time consuming, and confusing. Eligibility requirements for receiving disaster case management services varied depending on the funding source, which may have left some in need without services. For example, KAT services were available to victims of Hurricane Katrina but not Hurricane Rita. In addition, LFRC officials said they initially received TANF funds only, which limited their agencies to serving families with children. Lastly, programs such as the Mississippi DCM-P program were restricted to serving those receiving FEMA housing assistance. As a result of certain eligibility requirements, some programs may not have been able to assist individuals and families in need of case management services. Many case management agencies conducted little, if any, coordinated outreach and, as a result, those most in need of case management, such as those residing in FEMA group trailer sites, may not have received services. According to LFRC officials, there was no coordinated approach for providing case management services among federally funded programs, and as a result, residents in these group sites may not have received needed case management services. According to a KAT official, KAT case management agencies were not required to conduct outreach to residents in FEMA group sites. In addition, we have previously reported that federal efforts to assist victims of Hurricanes Katrina and Rita with employment, services for families with children, and transportation generally did not target group site residents. Several agencies’ evaluations of the various disaster case management pilot programs are ongoing, but to date, little is known about program outcomes. FEMA and HHS completed evaluations of the initial implementation of two pilot programs, but neither of those evaluations included information on program outcomes, or results, such as the extent to which clients’ disaster related needs were met and what factors contributed to client outcomes. In our July 2009 report, we recommended that FEMA conduct an outcome evaluation of the disaster case management pilot programs. FEMA does not plan to conduct its own outcome evaluation, but will determine lessons learned and best practices from third party evaluations of ongoing pilot programs submitted by each of the agencies administering a pilot program. According to a FEMA official, each of the third party evaluations will examine program outcomes. Using information from the ongoing evaluations, FEMA will develop a model for a federal disaster case management program for future disasters. In our report, we also recommended that FEMA establish a time line for developing this program and ensure that the program includes practices to enhance and sustain coordination among federal and nonfederal stakeholders. FEMA agreed with our recommendations, and, according to a FEMA official, the agency is hoping to formalize the program in June 2010. Going forward, FEMA intends to implement disaster case management services in two phases. In the first phase, HHS will administer disaster case management services for up to 180 days using FEMA funding. The second phase will be a state-managed disaster case management program funded by a direct grant from FEMA to the affected state. According to an agency official, FEMA is working closely with HHS on all program development requirements and plans to obtain feedback from relevant stakeholders prior to formalizing the program. In conclusion, the federally funded disaster case management programs implemented following Hurricanes Katrina and Rita faced unprecedented challenges, yet they played a key role in assisting victims in their recovery. A critical component of future recovery efforts is FEMA’s timely development of a single, federal disaster case management program. The success of those efforts will depend, in part, on whether agencies can improve coordination to help ensure that those most in need receive services, and to prevent duplication of services. The experiences of past and ongoing disaster case management pilots likely provide valuable lessons learned regarding client outcomes and contributing factors, and it is important to understand those lessons and apply them to future disaster recovery efforts. Madam Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this statement, please contact Kay E. Brown at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Kathryn A. Larin, Assistant Director; Susan Aschoff, Jessica Botsford, Melinda Bowman, Nisha R. Hazra, Ryan Siegel and Walter Vance. 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.
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As a result of the damage caused by Hurricanes Katrina and Rita in 2005, the federal government funded several disaster case management programs. These programs help victims access services for disaster-related needs. This testimony addresses the following questions: 1) How did the federal government support disaster case management programs after Hurricanes Katrina and Rita, and how did federal agencies coordinate their efforts?; 2) What challenges did disaster case management agencies experience in delivering services under federally funded programs?; and 3) How will previous or existing federally funded programs be used to inform the development of a federal case management program for future disasters? This testimony is based on a July 2009 report (GAO-09-561). To complete this report GAO reviewed federal laws, regulations, and guidance, obtained data from two programs, conducted site visits to Louisiana and Mississippi, and interviewed case management providers and federal and state officials. For this testimony, GAO updated certain information. The federal government provided more than $231 million to support disaster case management programs for victims of Hurricanes Katrina and Rita; however, breaks in federal funding hindered service delivery, and federal agencies and case management agencies faced coordination challenges. A lack of accurate and timely information sharing and incompatible data systems may have left some victims most in need without access to disaster case management services. Case management agencies experienced challenges in delivering federally funded disaster case management services due to staff turnover and large caseloads, limited community resources, federal funding rules, and a lack of coordinated outreach. For example, case management agencies saw the ability to provide direct financial assistance for items such as home repair, clothing, or furniture as key to helping victims, yet case management agencies that provided services under FEMA-funded programs could not provide direct financial assistance. Long-term recovery committees were a resource for case management agencies to obtain direct assistance, but utilizing these committees was sometimes unsuccessful. Ongoing evaluations of disaster case management pilot programs will inform the development of a federal disaster case management program, but to date, little is known about program outcomes. FEMA plans to analyze third-party evaluations submitted by the agencies administering the pilot programs to determine lessons learned and best practices for the future. According to an agency official, FEMA hopes to formalize the new program in June 2010.
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The EPA library network was established in 1971 to provide staff and the public with access to environmental information in support of EPA’s mission to protect human health and the environment. The libraries differ in function, scope of collections, extent of services, and public access. Before the 2007 reorganization, the network comprised 26 libraries, each funded and managed by several different program offices at EPA: 1 library was managed by OEI and 10 by regional offices; 8 libraries were located at EPA laboratories within the Office of Research and Development (ORD), and 2 were within the Office of Administration and Resources Management (OARM). In addition, each of the following program offices had 1 library: Office of the Administrator, Office of General Counsel, Office of Prevention, Pesticides, and Toxic Substances (OPPTS), Office of Enforcement and Compliance Assurance, and Office of Air and Radiation. A national program manager within OEI was responsible for coordinating the major activities of the entire EPA library network. Aside from visiting a physical location, the network provides access to its collections to its staff and to the public through (1) a Web-based database of library holdings—the Online Library System (OLS); (2) interlibrary loans from another network library or a public library; and (3) through a separate online database—the National Environmental Publications Internet Site (NEPIS). EPA staff also have access to other information sources—such as online journals, the Federal Register, news, databases of bibliographic information, and article citations—from their desktop computers. EPA began to evaluate its library network in 2003. It developed and issued studies to determine the value of library services and inform regional management of their options to support library services beyond fiscal year 2006. EPA also issued an internal report in November 2005, which offered recommendations on how to maintain an effective library network if the library support budget were reduced. After these reports were issued, EPA established a Library Steering Committee—composed of senior managers from EPA’s program offices and regions—to develop a new model for providing library services to EPA staff. In August 2006, the steering committee issued the EPA FY 2007 Library Plan: National Framework for the Headquarters and Regional Libraries. The August 2006 library plan provided the framework for the network to begin reorganizing in the summer of 2006 in preparation for the proposed fiscal year 2007 budget reduction beginning in October 2006. The plan provided guidelines for EPA staff to determine how the collections would be managed; noted that OEI libraries in Regions 5, 6, and 7 would close, and that the headquarters library would close physical access to its collection but would function as a repository library, along with the OARM libraries in Cincinnati, Ohio, and Research Triangle Park, North Carolina. In addition, according to the plan, EPA is to develop Library Centers of Excellence, where a library with more expertise in a specific area of reference research would provide that service to staff in other regions. As a part of EPA’s 2006 reorganization effort, some EPA libraries have closed, reduced their hours of operation, or changed the way that they provide library services. Furthermore, some of these libraries have digitized, dispersed, or disposed of their materials. The future of EPA’s library network—its configuration and its operations—are contingent on final policies and procedures, on EPA’s response to directions accompanying its fiscal year 2008 appropriation, and on EPA’s 2008 library plan. Owing to the decentralized nature of the EPA library network, each library decided on its own whether to change its operations. Table 1 shows the operating status of each library in the EPA library network. While EPA’s August 2006 library plan noted that three regional libraries— Regions 5, 6, and 7—and the headquarters library would close physical access to their libraries, it did not reflect other changes that occurred, as shown in table 1. According to EPA officials, the plan focused on the OEI headquarters and regional office libraries, and they did not think it was necessary to reflect all changes that were planned for other libraries. The focus of the plan, according to EPA officials, was to set the framework on how library services would be provided electronically and not on what physical changes were to occur. Although no longer accessible to walk-in traffic from EPA staff and the public, the closed regional and headquarters libraries continue to provide library services, such as interlibrary loans and research/reference requests, to EPA staff through service agreements that the closed libraries established with libraries managed by OARM or with the Region 3 library located in Philadelphia, Pennsylvania. As part of the library reorganization, each library in the network that was planning to close access to walk-in services independently decided which materials would be retained at their library or be selected for digitization, dispersal to EPA or non-EPA libraries, or disposal. Table 2 shows the actions taken by the closed libraries. In terms of digitization, the criteria in the August 2006 library plan noted that unique EPA materials—which, according to EPA officials, refers to materials created by or for EPA—that are not already electronically available in NEPIS would be digitized and made available in NEPIS. At the time of our review, 15,260 titles had been digitized, and EPA anticipates that a total of about 51,000 unique EPA library materials from closed and open libraries will be digitized. In terms of dispersal, EPA’s library plan noted that a library choosing to disperse its materials can send materials to one of the EPA-designated repositories, other libraries in the library network, EPA regional record management centers, other federal agency libraries, state libraries and state environmental agency libraries, colleges and university libraries, public libraries, or e-mail networks used specifically to exchange library materials. Finally, in terms of disposal, the OEI headquarters library and the OPPTS Chemical Library disposed of some of their materials as a part of the reorganization. EPA’s library plan noted that certain materials not claimed during the dispersal process could be destroyed. In total, the OEI headquarters library has disposed of over 800 journals and books, and the Chemical Library has disposed of over 3,000 journals and books. Recognizing that libraries could function more cohesively as a network, EPA established a new interim library policy in 2007 and established uniform governance and management for the network. This interim policy, among other things, (1) reestablished the National Library Program Manager position, which was left vacant from 2005 through 2007 and (2) resulted in 12 draft agencywide library procedures, including procedures on digitizing and dispersing library materials, and developing a communication strategy. EPA officials told us that they do not have a time frame for completing these procedures but will complete them before the moratorium on changes to the network is lifted. The January 2007 moratorium was imposed in response to congressional and other concerns, and extended indefinitely in February 2007. The future of the library network, its configuration, and its operations are contingent on the completion of the final policies and procedures, on EPA’s response to directions accompanying its fiscal year 2008 appropriation, and on EPA’s 2008 library plan. In an explanatory statement accompanying the fiscal year 2008 Consolidated Appropriations Act, $1 million was allocated to restore the network of EPA libraries that were recently closed or consolidated. The explanatory statement also directed EPA to submit a plan to the Committees on Appropriations within 90 days of enactment regarding actions it will take to restore the network. Separately, EPA officials told us that they are developing a Library Strategic Plan for 2008 and Beyond, which details EPA’s library services for staff and the public and a vision for the future of the library network. EPA reorganized its library network primarily to save costs by creating a more coordinated library network and increasing the electronic delivery of library services. However, EPA did not fully complete several analyses, including many that its 2004 study recommended. In addition, EPA’s decision to reorganize its library network was not based on a thorough analyses of the costs and benefits associated with such a reorganization. EPA initiated its 2004 Business Case study because of ongoing budget uncertainties and because of technological changes in how users obtain information and how commercial information resources are made available. While the study concluded that EPA’s libraries provide “substantial value” to the agency and the public, it raised concerns about EPA’s ability to continue services in its present form. As such, the study recommended that EPA take several actions to foster an agencywide discussion on the library network’s future. In addition, according to Office of Management and Budget guidance, a benefit-cost analysis should be conducted to support decisions to initiate, renew, or expand programs or projects, and that in conducting such an analysis, tangible and intangible benefits and costs should be identified, assessed, and reported. One element of this analysis is an evaluation of alternatives to consider different methods of providing services to achieve program objectives. However, EPA did not fully complete these assessments before it closed libraries and began to reorganize the network. According to EPA officials, EPA decided to reorganize its libraries without fully completing the recommended analyses in order to reduce its fiscal year 2007 funding for the OEI headquarters and regional office libraries by $2 million. This claimed savings, however, was not substantiated by any formal EPA cost assessment. According to EPA officials, the $2 million funding reduction was informally estimated in 2005 with the expectation that EPA would have been further along in its library reorganization before fiscal year 2007. Furthermore, EPA did not comprehensively assess library network spending in advance of the $2 million estimation of budget cuts. By not completing a full assessment of its library resources and not conducting a benefit-cost analysis of various approaches to reorganizing the network, EPA did not justify the reorganization actions in a way that fully considered and ensured adequate support for the mission of the library network, the continuity of services provided to EPA staff and the public, the availability of EPA materials to a wider audience, and the potential cost savings. In effect, EPA attempted to achieve cost savings without (1) first determining whether potential savings were available and (2) performing the steps that its own study specified as necessary before moving forward. Communicating with and soliciting views from staff and other stakeholders are key components of successful mergers and transformations. We have found that an organization’s transformation or merger is strengthened when it (1) makes public implementation goals and a timeline; (2) establishes an agencywide communication strategy and involves staff to obtain their ideas, which among other things, involves communicating early and often to build trust, ensuring consistency of message, and incorporating staff feedback into new policies and procedures; and (3) adopts leading practices, such as those for library services, to build a world-class organization. While EPA did not fully take these actions during the library reorganization, it is now reaching out to both EPA staff and external stakeholders. EPA’s August 2006 library plan did not inform stakeholders on the final configuration for the library network or implementation goals and a timeline. Through the library plan, EPA generally informed internal and external stakeholders of its vision for the reorganized library network, noting that EPA would be moving toward a new model of providing library services to EPA staff and the public. However, EPA did not provide enough information on how the final library network would be configured or the implementation goals and timeline it would take to achieve this configuration. For example, EPA did not inform its staff or the public that OPPTS would close its Chemical Library and that other libraries would reduce their hours of operation or make other changes to their library services. According to OEI officials, the plan was intended to provide a framework for how new services would be provided and not to lay out the network’s physical configuration. Without a clear picture of what EPA intends to achieve with the library network reorganization and the implementation goals and timeline to achieve this intended outcome, EPA staff may not know if progress is being made, which could limit support for the network reorganization. Because EPA’s library structure was decentralized, EPA did not have an agencywide communication strategy to inform EPA staff of, and solicit their views on, the changes occurring in the library network, leaving that responsibility to each EPA library. As a result, EPA libraries varied considerably in the information they provided to staff on library changes. For example, management in only a few of the regions solicited views from their regional staff through discussions with their regional science councils—an employee group located in each region composed of EPA scientists and technical specialists—or unions. In addition, EPA generally did not communicate with and solicit views from external stakeholders before and during the reorganization because it was moving quickly to make changes in response to proposed funding cuts. Of the libraries that closed, only the headquarters library informed the public of the changes occurring at its library by posting a notification in the Federal Register. EPA also did not fully communicate with and solicit views from professional library associations while planning and implementing its library reorganization. EPA did meet with the American Library Association, a professional library association, on a few occasions, but did so later in the reorganization planning process. Without an agencywide communication strategy, staff ownership for the changes may be limited, and staff may be confused about the changes. Furthermore, EPA cannot be sure that the changes are meeting the needs of EPA staff and external stakeholders. Finally, EPA did not solicit views from federal and industry experts regarding the digitization of library materials and other issues. These experts could have provided leading practice information and guidance on digitization processes and standards for library materials. As such, EPA cannot be sure that it is using leading practices for library services. Recognizing the need to communicate with and solicit the views of staff, external stakeholders, and industry experts, EPA recently increased its outreach efforts. For example, EPA asked local unions to comment on a draft of the 2008 library plan, and attended and presented information at a stakeholder forum at which a number of professional library associations were present. Furthermore, OEI started working with the Federal Library Information Center Committee, a committee managed by the Library of Congress, to develop a board of advisers that will respond to EPA administrators and librarians’ questions about the future direction of EPA libraries. EPA does not yet have a strategy to ensure that library services will continue and does not know the full effect of the reorganization on library services. However, several changes it has made may have limited access to library materials and services. According to our review of key practices and implementation steps to assist mergers and organizational transformations, organizations that are undergoing change should seek and monitor staff attitudes and take the appropriate follow-up actions. While EPA’s library plan describes the reorganization effort as a “phased approach,” it does not provide specific goals, timelines, or feedback mechanisms so that the agency can measure performance and monitor user needs to ensure a successful reorganization while maintaining quality services. In addition, to balance the continued delivery of services with merger and transformation activities, it is essential that top leadership drives the transformation. However, during the reorganization, EPA did not have a national program manager for the library network to oversee and guide the reorganization effort. Several changes that EPA made to its library network may have impaired the continued delivery of library materials and services. For example, because of copyright issues, only unique reports produced by or for EPA will be digitized in NEPIS—only about 10 percent of EPA’s holdings of books and reports. If the material is not available electronically, EPA staff in locations where libraries have closed will receive the material through an interlibrary loan—delaying access to the materials from 1 day to up to 20 days. EPA also does not have a plan to ensure the continuation of library services for the public, such as state and local government environmental agencies, environmental groups, and other nongovernmental organizations. Furthermore, EPA may have inadvertently limited access to information because it did not determine whether federal property management regulations applied to the dispersal and disposal of library materials and hence may have disposed of materials that should have been retained. For example, the Regions 5 and 6 libraries gave materials to private companies, and the OEI headquarters library and the Chemical Library discarded materials without first determining that they had no monetary value. EPA officials stated that it was unclear whether library materials, such as books and journals, were subject to federal property management regulations. EPA officials stated that they will engage federal property management officials at GSA regarding what steps should be taken in the future. The program offices responsible for the EPA libraries in the network generally decide how much of their available funding to allocate to their libraries out of larger accounts that support multiple activities. Until fiscal year 2007, library spending had remained relatively stable, ranging from about $7.14 million to $7.85 million between fiscal years 2002 and 2006. OEI, which is the primary source of funding for the regional libraries, typically provides funding for them through each region’s support budget, and generally allows regional management to decide how to allocate this funding among the library and other support services, such as information technology. For fiscal year 2007, OEI management decided to reduce funding for the OEI headquarters and regional office libraries by $2 million, from $2.6 million in enacted funding for fiscal year 2006—a 77- percent reduction for these libraries and a 28-percent reduction in total library funding. After $500,000 of the $2 million reduction was applied to the headquarters library, the regional administrators together decided that the remaining $1.5 million reduction should be spread equally across all regions, rather than by staffing ratios in each region or previous years’ spending. The $2 million reduction for the libraries was included in the President’s fiscal year 2007 budget proposal for EPA. However, like most agencies, EPA was included in the full-year continuing resolution, which held appropriations near fiscal year 2006 levels. The continuing resolution was enacted after EPA began reorganizing the library network. According to EPA, OEI restored $500,000 to the library budget in fiscal year 2007 to support reorganization activities. When planning the reorganization, EPA recognized that the responsible dispersal, disposal, and digitization of an EPA library collection is a major project requiring planning, time, and resources. However, EPA did not allocate funds specifically to help the closing libraries manage their collections. According to EPA, the funding for library closures was taken into account during the budget process. As a result, the program or regional office responsible for the library used its usual library funding available at the end of fiscal year 2006 to pay for closing costs. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you and Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact John B. Stephenson, at (202) 512-3841 or at [email protected]. Individuals who contributed to this statement include Roshni Davé, Ed Kratzer, Nathan A. Morris, Omari Norman, and Carol Herrnstadt Shulman. 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.
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Established in 1971, the Environmental Protection Agency's (EPA) library network provides access to critical environmental information that the agency needs to fulfill its mission of protecting human health and the environment. The library network also provides information and services to the public. In fiscal year 2006, the network included 26 libraries across headquarters, regional offices, research centers, and laboratories. These libraries were independently operated by several different EPA program offices, depending on the nature of the libraries' collections. In 2006, facing proposed budget cuts, EPA issued a plan to reorganize the network beginning in fiscal year 2007. The plan proposed a phased approach to closing libraries and dispersing, disposing of, and digitizing library materials. GAO was asked to summarize the findings in its report being released today, Environmental Protection: EPA Needs to Ensure That Best Practices and Procedures Are Followed When Making Further Changes to Its Library Network (GAO-08-304). GAO made four recommendations in this report aimed at best practices and procedures that EPA should follow when continuing to reorganize its library network. The agency agreed with the recommendations. Since 2006, EPA has implemented its library reorganization plan and has closed physical access to the Office of Environmental Information (OEI) headquarters library and three regional office libraries. In the same period, six other libraries in the network independently changed their operations. Some of these libraries digitized, dispersed, or disposed of their materials before EPA had drafted a common set of agencywide library procedures for doing so. Until these procedures are completed, EPA plans no further changes to the library network. EPA reorganized its library network primarily to generate cost savings through a more coordinated library network and more electronic delivery of services. However, GAO found that EPA did not effectively justify its reorganization decision. According to EPA officials, OEI decided to reorganize its libraries without fully completing the recommended analyses in order to reduce its fiscal year 2007 funding in response to the President's fiscal year 2007 budget proposal. EPA did not systematically inform the full range of stakeholders on the final configuration of the library network. In addition, EPA libraries varied considerably in the extent to which they communicated with and solicited views from staff, external stakeholders, and experts before and during the reorganization effort. EPA is currently reaching out to stakeholders, including EPA staff and library experts, by holding and attending stakeholder meetings and conferences. EPA does not yet have an effective strategy to ensure the continuity of library services following the reorganization and does not know the full effect of the reorganization on library services. EPA's library plan describes the reorganization effort as a "phased approach," but it does not provide specific goals, timelines, or feedback mechanisms that allow the agency to measure performance and monitor user needs to ensure a successful reorganization while maintaining quality services. EPA did not follow key practices for a successful transformation, even though the agency made several changes to the library network that could have impaired the continued delivery of library materials and services to its staff and the public. The several different program offices responsible for the EPA libraries in the network each generally decide how much of their available funding to allocate to their libraries and how to fund their reorganization. However, when faced with a proposed budget reduction of $2 million in fiscal year 2007, rather than following its normal procedures, OEI directed the regional and headquarters offices to reduce funding for OEI libraries--a reduction of 77 percent for these libraries from the previous fiscal year. EPA did not allocate funds to help closing libraries manage their collections; instead, the responsible program or regional office used its annual funding to pay for these costs.
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The Global Hawk unmanned aerial vehicle system is designed to support warfighting and peacekeeping missions by providing decision makers with up-to-date information about potential adversaries’ locations, resources, and personnel. Operators on the ground can change Global Hawk’s navigation and direct the onboard sensors to survey a geographic area the size of Illinois within a 24-hour cycle. As a high-altitude, long-endurance aircraft, Global Hawk was originally designed to reach an altitude of 65,000 feet and fly for up to 35 hours. Global Hawk began in 1994 as an acquisition concept technology demonstration program, managed first by the Defense Advanced Research Projects Agency and, since 1998, by the Air Force. Seven demonstrator aircraft were eventually produced; three have since been destroyed in mishaps. The demonstrator models logged several thousand-flight hours and effectively supported combat operations in Afghanistan and Iraq. The system passed a military usefulness assessment, completed several demonstrations and other tests, and DOD judged it a success. However, testing identified that significant improvements in reliability, sensor performance, and communications were needed before producing operationally effective and suitable systems. In March 2001, DOD approved the Global Hawk for a combined start of system development and low-rate initial production of six air vehicles based on the successful demonstrations and operational deployments of demonstrator aircraft. The Air Force planned to slowly develop more advanced capabilities and acquire 63 air vehicles. This model, now called the RQ-4A, is shown in figure 1. In March 2002, DOD restructured the acquisition strategy to include a second Global Hawk model, the RQ-4B. The new strategy includes 51 air vehicles, 10 ground stations, multiple intelligence sensors, support equipment, and facilities at a cost of $6.3 billion. Of the 51 air vehicles to be purchased, 7 are RQ-4As and 44 are RQ-4Bs. Separately, the Navy is procuring 2 RQ-4As and a ground station for about $300 million (including development costs) to evaluate the vehicles’ potential for the Broad Area Maritime Surveillance Program. In December 2002, DOD restructured the program again. Instead of buying all RQ-4Bs with multiple intelligence capability, the RQ-4Bs will now have a mix of multimission and single-mission capabilities. The two restructurings also increased low-rate initial production quantities to 19 (recently increased to 20) air vehicles: 7 RQ-4As and 12 (now 13) RQ-4Bs. The RQ-4A and the RQ-4B differ significantly. The new RQ-4B model is intended to have 50 percent greater payload capacity, a longer fuselage and longer wing span and will be heavier than the A model. DOD considered these changes necessary to carry new advanced sensor payloads and to provide multi-intelligence capabilities on a single RQ-4B. Even though the RQ-4B is bigger and heavier, it will use the same engine as the RQ-4A. Table 1 shows the key differences in the two models. In addition to the differences shown in table 1, the RQ-4B includes new requirements for advanced sensors payloads, enhancements to communications and ground stations, a new multiplatform common data link, and an open systems architecture. The new design will use more advanced technologies (such as lithium batteries and electric brakes), will require a larger power-generating capability, and will incorporate new landing gears that fold into the wing. Also, the design changes require new manufacturing processes and investments in new production tooling—the factory equipment and manufacturing items used to build large quantities of major weapon systems, such as Global Hawk. Global Hawk’s restructuring has impacted the acquisition program in a number of significant ways: the time span for funding has been compressed into roughly half the time and the overall funding amount has increased; concurrent development and production is causing the Air Force to invest in almost half the total fleet of the new and improved Global Hawk vehicle before a production model has proven that it will work as intended; and development costs have tripled because of the need to develop a new and improved vehicle. In addition, the program has deferred some capabilities and incurred delays that could affect the Air Force’s ability to deliver Global Hawk to the warfighter. The restructured program requires greater up-front investment, a faster ramp-up in funding, and a larger total budget. The development period was extended from 7 years to 12 years, and development funding increased significantly to develop the RQ-4B and to integrate advanced sensor and communication technologies. Procurement is now concentrated into 11 years instead of the 20 years of relatively level procurement set out in the original plan. The restructuring triples Global Hawk’s budgetary requirements in some years. Figure 2 illustrates the restructuring’s compression of the program and impact on annual funding requirements. Compared with the original plan, the restructured plan has much higher annual funding requirements, placing more budgeted funds at risk of not being fully funded when competing for the defense dollar. In their respective peak years of budget requirements, the original plan would have required $353 million (fiscal year 2010), while the restructured plan expects to request $781 million (fiscal year 2007). The upcoming fiscal year 2006 requirement is currently about $750 million, three times higher than the original plan for that same fiscal year. Cumulatively, the restructured plan requires $6.3 billion to be completed in fiscal year 2012, whereas the original plan would only have needed $3.4 billion by that year. Significant concurrency now exists between development and production that covers the period from fiscal years 2004 to 2010. The Air Force now plans to invest in almost half of the total RQ-4B fleet before a production model is flight-tested and operational evaluations are completed to show that the air vehicle design works as required. Full-rate production will begin before the airborne signals intelligence and multiplatform radar complete development and are flight-tested to prove the integrated system will work as intended. The primary reason for building the RQ-4B model was to integrate and carry the advanced sensors to provide added capability to the warfighter. Additionally, schedule delays have already occurred in the restructured plan that will continue to add pressure in the program. Collectively, the actions to restructure the program have materially changed the underpinnings in the original business case decision developed to justify the start of system development and low-rate production. The business case should provide sufficient evidence that resources are available to meet warfighter needs. This case would include technology and design demonstrations that added confidence that the integrated product can be developed within time and money constraints. The original plan was to first acquire basic RQ-4A systems very similar to the demonstrators and then slowly and incrementally develop and acquire systems with more advanced sensor capabilities while using the same air vehicle. This strategy incorporated an evolutionary approach in that a basic capability was to be produced in a first block of aircraft and a second, more advanced block was to be acquired once the new technologies were mature. Each block had separate decision points and testing plans and significant risk was removed from the program because the demonstrators had been built, tested, and extensively flown (and later used successfully in actual combat operations in Afghanistan and Iraq). While testing showed it needed some improvements, the RQ-4A was significantly more mature and proven than the RQ-4B model to begin production. Figure 3 illustrates the significantly greater concurrency of development and production activities resulting from the program’s restructuring compared with the original plan. Historically, programs with high degrees of concurrency are at greater risk of cost, schedule, and performance problems than programs with less overlap of development and production. The original acquisition strategy planned to complete most development testing prior to beginning production, thereby taking advantage of product knowledge. The restructured program added the new RQ-4B model, substantially increased low-rate production quantities, and established highly concurrent development and production cycles to acquire and test several different RQ-4B configurations over the life of the program. The Air Force plans to invest in 20 RQ-4Bs before completion of initial operational test and evaluation. The reason for designing a larger and heavier Global Hawk was to satisfy warfighter needs for the new advanced sensors. However, integration and operational testing of the advanced sensors on the fully configured air vehicle are not scheduled to be completed and reported on until fiscal year 2009 for the advanced signal intelligence sensor and fiscal year 2011 for the multiplatform radar. By this time, the entire RQ-4B fleet will already be produced or on order. Global Hawk’s development cost estimates have increased almost threefold, from $906.2 million in March 2001 to about $2.6 billion in March 2004, mostly due to the requirement for the new RQ-4B’s inclusion in the program. Total program costs have continued to increase, including an increase of $466 million since March 2003. The program acquisition unit cost increased 44 percent since program start, from $85.6 million to $123.2 million. Increasing costs for Global Hawk raises affordability issues and questions about employing the vehicle in medium- and high-threat environments because of its high replacement costs and limited numbers. Total procurement cost estimates decreased from program start due to the cut in quantities from 63 to 51 and inflation savings resulting from compressing the program and cutting 9 years of future procurement activities. Table 2 shows how costs have changed since March 2001 in millions of then-year dollars. The following factors caused the Global Hawk program’s cost estimates to change between 2001 and 2004: March 2001 cost estimate: Based on the original acquisition strategy to slowly and incrementally develop and acquire improved versions of the demonstrator model. The RQ-4B model was not yet part of the acquisition strategy. March 2002 cost estimate: Reflects changes for the first restructuring of the program, which introduced the RQ-4B. Development costs increased significantly because of plans to quickly build advanced capabilities into the RQ-4B. While the quantity of air vehicles—the RQ-4A and RQ-4B models—and ground stations decreased because of revised user requirements, total procurement costs increased because of the higher cost for the RQ-4Bs and the plan at that time to equip all the larger platforms with multi-intelligence mission capabilities. March 2003 cost estimate: Reflects a second restructuring for affordability reasons. In December 2002, DOD officials decided to switch from all multimission capabilities to a mix of multimission and single-mission RQ-4Bs. This switch lowered procurement costs by decreasing the required number of sensors. March 2004 cost estimate: Between March 2003 and March 2004, total program cost increased by $466 million, and officials added another 18 months to the development program to accomplish requirements deferred from prior years and to accommodate new requirements. Development costs increased to cover the extended schedule and additional requirements. Procurement costs increased primarily because of higher costs for structural components and for labor to build the RQ-4B. Space, weight, and power constraints of the RQ-4B limit what capabilities can be included now or added in the future. Some capabilities have already been eliminated or deferred to later years. For example, the warfighter wanted a defensive subsystem for Global Hawk, but development has been delayed and may be dropped because of weight limitations in the air vehicle, already at or near capacity with some of the new advanced sensor payloads. Also, the RQ-4B configured with the airborne signals intelligence payload is projected to have no capacity for future growth because this payload weighs more than allocated in the design of the air vehicle. Other development tasks have similarly been delayed or pushed out beyond the budget years, including efforts related to demonstrating that Global Hawk can operate in areas with extreme temperatures. The Air Force’s overall acquisition approach to add new technologies whenever they are deemed ready was designed to allow flexibility in responding to changes in priorities and new requirements. However, Global Hawk’s vehicle limitations and changing requirements have increased development challenges. For example, despite the space, weight, and power limitations of the RQ-4B, Air Force officials stated that Global Hawk users and other DOD officials continue to identify potential future technologies and capabilities for possible incorporation into Global Hawk. Absent major downsizing of the advanced sensors or other payloads, the Air Force will need to consider dedicating the RQ-4B to an increasing number of single and specific—rather than multi-intelligence—missions, if the goal is to utilize new and unproven emerging technologies not currently part of the Global Hawk plan. The new schedule for some key events and activities has slipped because of programmatic, budget, or external issues. Air Force and contractor officials say that a significant contributor to schedule delays was the episodic deployment of Global Hawk’s earlier model in Afghanistan and Iraq. The Global Hawk system—including considerable numbers of Air Force and contractor personnel, ground stations, and supporting equipment—has been used to support combat operations and is subject to future deployment orders. Some examples of program events that have been delayed and others whose future schedules have slipped include: government acceptance of the second RQ-4A production aircraft due to quality and performance problems identified during tests; delivery of the equipment and support needed to begin initial operations at the Global Hawk’s home base, Beale Air Force Base in California; the operational assessment of the RQ-4A; completion of the first phase of combined developmental and operational testing of Global Hawk; acquisition of production tooling, establishing manufacturing processes, and delivering parts needed for production; delivery schedules projected for RQ-4B air vehicles; and the expected start of initial operational test and evaluation to support the full-rate production decision. Delays and deficiencies in scheduled development testing could compromise upcoming decisions in the program. According to test officials in the Office of the Secretary of Defense, the first of five phases of Global Hawk’s combined development and operational testing is not as robust as originally planned and is taking significantly longer than expected. As of July 2004, only about 10 percent of the required flight test points had been completed and nearly 70 percent of the remaining test points were either on hold or not fully defined. The approved test plan required this testing to be completed by September 2004, but testing officials do not expect it to be completed until March 2005. Test delays are occurring due to late delivery of key subsystems, lack of resources, deployments in support of the global war on terrorism, other program priorities, and unexpected testing problems. Test officials told us that the lack of quality test data is hampering their ability to provide meaningful oversight. The results from this first phase of development testing were to be used in the operational assessment of the first two production RQ-4A aircraft starting in September 2004 to assess the Global Hawk’s mission readiness and suitability. Because of phase one delays, the start of the assessment has slipped until at least March 2005. Test officials believe further delays are likely because of other higher priorities, including the start-up activities at Beale Air Force Base. At this time, a firm date for the testing has not been scheduled and the unapproved test plan still lacks the necessary details to ensure effective testing. Test officials believe the operational assessment is in jeopardy of being cancelled or cut back in order to start the dedicated initial operational test and evaluation on time. The officials say that eliminating the operational assessment, or reducing its scope, would add risk to the program. Entering the next phase involves testing the new, larger RQ-4B aircraft and advanced sensor payloads, and, without having the assurances the production aircraft are mission-ready, additional tests will likely be required. In attempting to get advanced capabilities to the warfighter sooner, the Air Force’s restructured acquisition strategy for the Global Hawk program does not fully follow best practices and DOD acquisition guidance for an evolutionary, knowledge-based acquisition process. DOD recently rewrote its acquisition policy specifically to encourage acquisitions to develop and deliver increased capability to the warfighter incrementally (or on an evolutionary basis), only when appropriate knowledge concerning technology, design, and manufacturing has been attained. Compared with the original strategy, the new Global Hawk acquisition strategy has yielded less product knowledge in each of these areas, thereby raising the likelihood of future negative impacts on cost, schedule, and performance. Air Force and contractor officials acknowledge that—with its highly compressed and concurrent schedule—the program is risky and presents major management challenges. The Air Force has established management controls and processes intended to mitigate risks; however, without a disciplined process to capture and base investment decisions on key technology, design, and manufacturing knowledge, the controls are less robust and the risks remain high. By approving the start of system development and low-rate production at the same time, Global Hawk’s restructured acquisition strategy skipped the critical decision points that require the capture of key product knowledge used to inform decisions to move forward in an acquisition program. Skipping the necessary steps to capture technology, design, and manufacturing knowledge has added risk to the program. The Air Force would have captured more knowledge under the original March 2001 strategy, which more closely followed the knowledge-based approach. At that time, the plan was to acquire basic air vehicles and ground systems very similar to the demonstrators that had already been built, extensively flown, and (later) used in combat. The Air Force then planned to upgrade sensor and performance capabilities for the next production lot as the technologies matured while retaining the same airframe. Since the decision to start the program, additional information and experience have closed some of the gaps, but a substantial lack of knowledge continues to add risk to the RQ-4B acquisition. GAO has a body of work focused on best practices in product development and weapon systems acquisition. We have found that when program managers capture key product knowledge at three critical knowledge points during a major acquisition, the probability of meeting expected performance within cost and schedule objectives increases. Each of the points builds on previously attained knowledge. The acquired knowledge is used to identify and reduce any risks before moving a weapon system to the next stage of development. This approach to developing new products—commercial and defense—has been shown over time to continually produce successful outcomes in terms of cost, schedule, and performance. In recent years, DOD revised its acquisition policy to embrace an evolutionary and knowledge-based approach, which we believe provides a sound framework for the acquisition of major weapon systems. This policy covers most of DOD’s major acquisition programs. As noted in our November 2003 report, this revised policy is a step in the right direction. The acquisition policy states that program managers shall provide knowledge about the key aspects of the system at key decision points in the acquisition process and an evolutionary or incremental development approach should be used to establish a more manageable environment for attaining and applying knowledge. The customer may not get the ultimate capability right away, but the initial product is available sooner and at a lower cost. The policy adopts the essence of the following points from the knowledge-based approach: Knowledge point 1: Should occur when the acquisition program is scheduled to start, when the customer’s requirements are clearly defined, and resources—proven technology, engineering capability, time, and money—exist to satisfy them. This match should support the business case for starting system development and demonstration. Technology should be mature before starting a program, and, therefore, the technology development phase of an acquisition should be separate from the system development phase. Knowledge point 2: Should occur at the design readiness review, about halfway through the system development phase, when the product’s design is determined to be capable of meeting product requirements—the design is stable and ready to begin initial manufacturing of prototypes. Knowledge point 3: Should occur when managers commit to starting production, when information is available to determine that a reliable product can be produced repeatedly within established cost, schedule, and manufacturing quality targets. Figure 4 shows a generalized depiction of DOD’s acquisition policy, where DOD’s key milestones are anchored along a typical program’s acquisition path and where the three knowledge points from the knowledge-based approach fit along this path. Also shown in figure 4 is how the Global Hawk program overlaps technology and system development and begins production before the necessary knowledge is achieved. Global Hawk’s new strategy approved initial production of the improved RQ-4B well in advance of completing technology maturation and approved developing and integrating the vehicle’s design with the various sensor payloads desired by the warfighter. Furthermore, low-rate production was approved without ensuring the quality and reliability of manufacturing processes. This approach added significant risk in that sensor technologies and final design may not meet the space, weight, and power limitations of the RQ-4B, which is in low-rate production, and may not satisfy the warfighter’s requirements. By not closing knowledge gaps in the integrated product design (air vehicle, sensor payloads, and data links) needed to meet requirements, there is increased risk that sensor development schedules may need to be extended to achieve form, fit, and function for an integrated Global Hawk system. Otherwise, the program office may have to go back to the warfighter and further negotiate requirements. Table 3 compares the product knowledge available to support key decision points under the original plan in March 2001 with the knowledge obtained at the start of RQ-4B production in July 2004. A black dot indicates product knowledge meets best practice standards from knowledge-based approach. The table shows that the level of product knowledge approached best practice standards when the decision was made in March 2001 to start system development and low-rate production of the RQ-4A. The program’s restructurings in 2002, however, created substantial gaps in technology, design, and manufacturing knowledge that have not yet been closed by the start of RQ-4B production. Lack of product knowledge increases risks of poor cost, schedule, and performance outcomes. Appendix III includes a more detailed discussion of knowledge gaps at each knowledge point. Following are brief examples of knowledge gaps as they relate to each of the three critical knowledge points. Technology maturity: Using best practices, at the start of system development, a program’s critical technologies should be in the form, fit, and function needed for the intended product and should be demonstrated in a realistic environment. The RQ-4B development program is struggling to meet these criteria for several of its most critical technologies. Nearly 2 years after development began, the technologies required for the RQ-4B to perform its operational mission including enhanced imaging sensors, signals intelligence, multiplatform radar, and open system architecture are immature, basically at a functional rather than form or fit configuration. For example, the airborne signals intelligence payload and multiplatform radar technology insertion program are still in development under separate Air Force programs. These subsystems are key to providing the advanced intelligence, surveillance, and reconnaissance capabilities for which the RQ-4B is being developed. At the time of our review, neither of these technologies had been demonstrated in an operational environment using a system prototype. Air Force officials expect them to be mature by the time they begin buying sensors to incorporate them into the Global Hawk production line in fiscal years 2008 and 2009. However, by this time most of the air vehicles will have already been bought. Also, operational testing to evaluate performance in a realistic operating environment is not scheduled until late fiscal year 2008 for the signals intelligence sensor and late 2010 for the radar. Nevertheless, the Air Force continues to build the RQ-4B platform lacking solid assurance that these critical subsystems will work as planned. Design maturity: The program had completed 75 percent of RQ-4B model drawings by the design readiness review in comparison with the 90 percent completion standard for best practices. While the Air Force anticipated the design and experience on the RQ-4A would add assurances and speed efforts to mature the new RQ-4B design, the two vehicles ultimately had only about 10 percent commonality. While drawings completed were approaching best practice standards, the Air Force did not build a prototype of the RQ-4B design to demonstrate a stable design. Demonstration of the design is a key factor in ensuring a stable design. The Air Force had not established a reliability growth goal or plan and had not identified critical manufacturing processes, both essential to the next phase of production and needed to ensure quality and cost targets can be met. Production maturity: Officials have started to identify the critical manufacturing processes for the RQ-4B but do not intend to collect and use statistical process control data to ensure the manufacturing could deliver quality products. The new RQ-4B requires new manufacturing processes because of major differences from the RQ-4A. In addition, Officials from the program office, the prime contractor, and the Defense Contract Management Agency continue to identify problems and concerns about the performance and quality of work by several key subcontractors, including those producing the wing, the advanced sensor suite, and the vertical tail and aft fuselage parts. This latter subcontractor is new to large-scale manufacturing using advanced composite materials and has experienced significant start-up and quality problems. According to best practices, the subcontractor’s critical processes must be demonstrated to ensure good quality and limit rework. The prime contractor and DOD sent special teams of advisors to help develop the firm’s manufacturing processes and to train employees. Creating another gap in production maturity, a fully integrated system representative prototype was not tested before starting production and will not have been demonstrated before full-rate production, scheduled in 2007. By then, 45 percent of the RQ-4B planned quantities will be under contract. Air Force and contractor officials agree that the restructured program significantly increased program and technical risks. They acknowledge that the use of the approach to insert technology periodically affects all aspects of the program, making it more challenging to manage functional areas, including logistics support, contracting, program integration, and testing. To better manage the risks and challenges created by this acquisition approach and environment, the Global Hawk management team provided the following as examples of actions they are taking better teaming practices between the government and contractor to manage the program at all levels; better controls for the release of funds on both development and allocation of higher amounts of management reserve funding during use of a “buy to budget” concept that limits activity in the program to a ceiling amount of funds planned for the total program; and use of a risk management database to focus the attention of management on the most critical risks facing the program. These are all management practices that can be used to manage any product development program and will likely identify and help manage risks in the Global Hawk program. Nevertheless, using a knowledge-based approach that captures critical knowledge at key junctures in a program has been shown time and again in both commercial and defense acquisition programs to consistently produce successful outcomes—cost, schedule, quality, and performance. In March 2001, DOD approved the start of development and production for Global Hawk on the basis of a business case that matched requirements with resources—technologies, engineering capabilities, time, and funding. The first increment of Global Hawk was based on mature technologies and a design proven to meet the warfighter’s need through actual combat use of the technology demonstrator. The plan included a reasonable funding profile and embraced a knowledge-based acquisition strategy that completed development before entering production. The plan included future improvements to the baseline capability as technologies and funding became available. By December 2002, the Air Force had dramatically changed the Global Hawk’s acquisition plan and the knowledge-based foundation for the earlier decision to proceed into development and production. This change created large gaps between Global Hawk’s requirements and the resources available to meet them. The new plan required a new, larger, and heavier air vehicle with only 10 percent commonality with the previous proven design; increased development time; and accelerated production time, creating significant concurrency between development and production. To accommodate the changes, the plan calls for twice the annual funding amounts in peak years over the old plan. Overall, the new plan has increased risks significantly. Subsequent reviews by DOD have acknowledged the changes in the program have increased uncertainty. The new design has not been demonstrated to work using a prototype model; technologies to support the advanced sensor payloads that drove the need for a new Global Hawk design are still immature; and the Air Force will be requesting about $750 million in funding next year for the program. Yet, the Air Force has awarded a contract to start the production of the new, larger Global Hawk B model with the hope that simulations and analysis will be sufficient to allow decision makers to manage risk. The history of DOD managed programs suggests otherwise. To decrease risks of poor outcomes and to increase the chances of delivering required warfighter capabilities with the funds available, we are making recommendations to the Secretary of Defense to take the following two actions direct the Air Force to revisit the decision to begin concurrent development and production of the Global Hawk B design and direct the Air Force to create and present a new business case that defines the warfighter’s needs that can be accommodated given current available resources of technology, engineering capability, time, and money, and delay further procurement of the Global Hawk B, other than units needed for testing, until a new business case is completed that reduces risk and justifies further investments based on a knowledge-based acquisition strategy. DOD provided us with written comments on a draft of this report. The comments appear in appendix II. DOD stated that it did not concur with our two recommendations. Separately, DOD provided one technical comment that we incorporated in this report to more accurately characterize the issue of affordability and use of Global Hawks in threat conditions. Regarding our first recommendation on completing a new business case to justify and guide concurrent development and production of the RQ-4B model, DOD stated its belief that the Global Hawk’s acquisition strategy balances acquisition risks with the department’s demands to rapidly field new capabilities to the warfighter, thereby obviating the need for a new business case. Furthermore, by following what officials call an evolutionary development process, DOD said it is providing transformational warfighting capabilities to ongoing military operations without disrupting Global Hawk’s current development and production activities. DOD said it is effectively managing risk with the help of regular oversight meetings and by requiring monthly and quarterly activity reports. We continue to believe that a new business case is needed to support further investments and to improve oversight by Congress and DOD decision makers. The program today is much different than the one supported by the original business case. The Air Force started with an advanced concept technology demonstration program that proved the capability of a smaller and lighter Global Hawk air vehicle. Use of this vehicle on numerous occasions in actual combat situations has saved lives, according to Air Force and contractor officials. However, this is not the vehicle that the Air Force now plans to produce. Instead, the Air Force dramatically changed the acquisition strategy for the Global Hawk program and is not gaining some key knowledge before production. The Air Force plans to concurrently design and produce a new Global Hawk air vehicle that is significantly larger and heavier than the earlier version used in combat. The larger air vehicle is intended to accommodate new, heavier, and larger sensors that will not be available until the 2008 to 2009 time frame. In implementing the restructured strategy, the Air Force is not fully following a knowledge-based approach for developing the RQ-4B Global Hawk as called for by best practices and DOD’s new defense acquisition guidance. The new guidance clearly states that knowledge reduces risks, and we agree. While the Air Force believes it can manage the risk of a concurrent development and production program by holding regular meetings with acquisition executives and by issuing management reports, DOD’s own experience has shown this to be risky and a factor that led DOD to change its acquisition policy to a knowledge-based approach. History has shown concurrency usually delays the delivery of a needed capability and results in higher costs. From March 2003 to March 2004, estimated program costs have increased by $466 million, and the sensors and the new air vehicle are still being developed. Stepping back from this rush to produce the new air vehicle and establishing a new business case designed to capture key product knowledge before costly investments in production would better inform DOD decision makers and Congress about what is feasible with available technology and dollar resources to meet warfighter needs and to better assess the extent and/or severity of program acquisition risks. Regarding our second recommendation to delay further procurement of the RQ-4B (other than units needed for testing) until a new knowledge-based and risk-reducing business case is prepared, DOD stated that its current acquisition strategy effectively manages risk and fosters the rapid delivery of needed capabilities to the warfighter. DOD said we overstated risks from RQ-4B development, design changes, and insertion of advanced sensor capabilities. DOD further stated that our recommendation would result in a production break with serious cost and schedule complications and that GAO’s sequential knowledge-based approach does not consider real-world events, such as the September 11, 2001, terrorist attack in the United States or issues related to North Korea and Iraq. We believe the risks in the Global Hawk program are real and continue to support delaying the near-term procurement of air vehicles not needed for testing. We think this is a prudent way for the program to gain knowledge before significantly increased resource investments and to reduce risks until a new air vehicle integrated with the advanced signals intelligence payload and the multiplatform radar can be demonstrated through testing to meet warfighter requirements. Our report notes that operational testing of the air vehicle’s performance and suitability will not take place until almost half the fleet is already purchased and that integration and testing of the advanced sensors will not occur until late in the program after the full- rate production decision is made and most systems are bought. DOD’s comments appear to decouple the air vehicle from the advanced sensors by stating that, if a sensor diverges from its current plan, alternate future payloads could fill the RQ-4B’s greater payload capacity. However, the need for designing a new larger air vehicle was predicated on its ability to carry these specific sensors to meet the warfighter’s requirements. Therefore, we believe that knowledge based on a demonstration of the integrated capability is key to supporting production and delivery of the product within estimated cost and schedule. Additionally, the new Global Hawk program strategy requires significantly greater amounts of funding earlier, putting that investment at risk should changes occur as development and testing is completed. Regarding a potential break in production, our analysis indicates that a break is neither impending nor certain if our recommendation were adopted. We are not recommending that DOD stop production or reduce the total quantity but rather a near-term delay in procuring the portion of annual buys for air vehicles not needed for testing. Funds currently on contract and approved appropriations for fiscal year 2005 would continue production on the Air Force’s planned schedule through mid-fiscal year 2007 at least. Only then would a production break or slowdown happen, and only if the Air Force has not yet prepared a business case to justify its investments beyond that point based on demonstrated product knowledge of the new air vehicle. If the current acquisition strategy and financial plan are feasible and appropriate, the Air Force would be able to prepare and justify a comprehensive business plan for the RQ-4B well in advance of a potential break. DOD indicated that our knowledge-based acquisition approach was untimely and not adaptive to fast-changing world events. When we developed the knowledge-based approach, our high priority was to focus on better ways to deliver capability to the warfighter more quickly through incremental, or evolutionary, development. Our approach is based on a careful study of historical DOD acquisition programs and the best efforts in the private sector. Our prior work shows that proceeding without requisite knowledge ultimately costs programs more money and takes longer to complete than those adopting a more rigorous and comprehensive strategy basing investment decisions on key product knowledge—technology, design, and production maturity levels. DOD agreed with our findings and changed its acquisition guidance to reflect a knowledge-based approach. We note in this report that the original Global Hawks were produced through a successful demonstration program that effectively and quickly provided the warfighter with transformational intelligence, surveillance, and reconnaissance capabilities. Defense Contract Management Agency reports, contract cost reports, corporate briefings, design drawing changes, new tooling and new production processes, and the evident need for Air Force and prime contractor task teams to be extensively deployed to subcontractor facilities, all indicate that the RQ-4B program entails higher degrees of risk, greater management challenges, and significant changes from production of the RQ-4A and earlier demonstrators. We believe that our recommendation to delay further procurement of the RQ-4B until a new knowledge-based and risk-reducing business case is prepared prudently balances real-world internal investment risks with military demands from real-world external events. The Air Force could have continued to deliver the capability of the Global Hawk that was the direct outgrowth of the demonstration program while allowing the sensor and radar technology time to mature before investing in a new larger and more risky Global Hawk program. This would have allowed continued delivery of the enhanced RQ-4A capability to the warfighter while minimizing the impacts of design changes that come out of normal development and testing and that grow more costly as a product enters the production environment. The heavy cost of design changes after production is underway could impact DOD’s ability to respond to other warfighter needs in the post-9/11 world. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to interested congressional committees, the Secretary of Defense, the Secretary of the Air Force, the Secretary of the Navy, and the Director, Office of Management and Budget. In addition, the report will be available 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) 512-4163 or Michael J. Hazard at (937) 258-7917. Other staff making key contributions to this report were Lily J. Chin, Bruce D. Fairbairn, Steven M. Hunter, Matthew B. Lea, Charlie Shivers, and Adam Vodraska. To determine the effects of Global Hawk’s restructuring on cost, schedule, and performance goals, we compared the original acquisition strategy, two major revisions, and the current acquisition strategy as implemented. We identified changes in cost, quantity, fleet composition, and sensor capability mixes as well as overall consequences of restructuring on total funding requirements, annual budget requests, and program cycles for developing, testing, and producing the Global Hawk. We reviewed management plans, cost reports, contract files, progress briefings, and risk data to identify program execution efforts and results to date. We identified cost changes, schedule delays, and performance issues. To evaluate whether the current acquisition approach can help forestall risks, we applied GAO’s methodology for assessing risks in major weapon systems. This methodology is derived from the best practices and experiences of leading commercial firms and successful defense acquisition programs. We reviewed program office and prime contractor organizations, processes, and management actions. We extracted and evaluated program and technical risks maintained in a risk database used by the program office and contractor to identify major risks and the steps taken to mitigate risks. We compared the program office’s plans and results to date against best practice standards in achieving product knowledge in terms of technology, design, and production maturity information and in applying knowledge to support major program decisions. We identified gaps in product knowledge, reasons contributing to those gaps, and the elevated risks expected as a consequence of inadequate product knowledge. We further analyzed original and current acquisition approaches to demonstrate the high concurrency of development, production, and testing and the elevated risks imposed as a result. In performing our work, we obtained information and interviewed officials from the Global Hawk System Program Office, Wright-Patterson Air Force Base, Ohio; 452nd Flight Test Squadron, Air Force Flight Test Center, and Detachment 5, Air Force Operational Test and Evaluation Center, Edwards Air Force Base, CA; Defense Contract Management Agency, San Diego and Palmdale, CA; Northrop Grumman Integrated Systems, Rancho Bernardo and Palmdale, CA; and offices of the Director, Operational Test and Evaluation, and Unmanned Aerial Vehicle Planning Office, which are part of the Office of the Secretary of Defense in Washington, D.C. We conducted our work from February to September 2004 in accordance with generally accepted government auditing standards. Achieving a high level of technology maturity at the start of system development is a particularly important best practice. This means that the critical technologies needed to meet essential product requirements are in the form, fit, and function needed for the intended product and have been demonstrated to work in their intended environment. The RQ-4B development program is struggling to meet these criteria for several of its most critical technologies. More than 2 years after development began, the technologies required for the RQ-4B to perform its operational mission including enhanced imaging sensors, signals intelligence, multiplatform radar, and open system architecture are immature, basically at a functional rather than form or fit configuration. Nevertheless, the Air Force continues to build the RQ-4B platform, lacking solid assurance that these critical subsystems will work as planned. In particular, the airborne signals intelligence payload and multiplatform radar technology insertion program are still in development under separate Air Force programs and will be purchased by the Global Hawk program as government furnished equipment. These subsystems are key to providing the advanced intelligence, surveillance, and reconnaissance capabilities for which the RQ-4B is being developed. At the time of our review, neither of these technologies had been demonstrated in an operational environment using a system prototype. Air Force officials characterized their current stages of development as laboratory settings demonstrating basic performance, technical feasibility, and functionality but not form or fit (size, weight, materials, etc.). Technology maturity of the sensors is critical because the basic design of the RQ-4B has been completed and allocates limited space, weight, and power for the new capability. If the new sensors cannot be developed within these constraints, some performance trade-offs—such as reduced frequency coverage—are likely. The airborne signals intelligence payload currently exceeds the weight allocated for its integration into the RQ-4B, while the multiplatform radar uses most of the vehicle’s available power-generation capability. Officials expect them to be mature by the time they begin buying sensors to incorporate them into the Global Hawk production line in fiscal years 2008 and 2009. However, by this time most of the air vehicles will have already been bought; additional time and money might be needed to fix or retrofit any remaining differences. Also, operational testing to evaluate performance in a realistic operating environment is not scheduled until late fiscal year 2008 for the signals intelligence sensor and late 2010 for the radar. Any changes or delays in these programs would likely impact Global Hawk cost, schedule, and/or performance. Seventy-five percent of engineering drawings were released at the Global Hawk design readiness review that triggered the start of RQ-4B manufacturing and assembly. This figure is 15 percent less than the best practices’ standard of 90 percent. The Air Force and contractor had anticipated being able to use much of the design work and production experience on the RQ-4A to prove the design and decrease the time and extent of engineering work on the RQ-4B. However, officials found out that the two models had much less in common than anticipated. About 90 percent of the airframe had to be redesigned—only 10 percent was common to both models. Therefore, relying on the experience of the RQ-4A increased the risk of poor program outcomes because the RQ-4B is substantially heavier; incorporates a new wing, fuselage, and vertical tail; has a 50 percent greater payload capacity to carry advanced sensors still in development; and requires new production tooling, new materials, and changed manufacturing processes. The Air Force also did not build an RQ-4B prototype—a best practice to demonstrate design stability—before awarding a contract to start production. An analysis of the development contract performance, as of May 2004, shows that development and integration efforts needed to finalize the design and prepare the RQ-4B for production is behind schedule and over cost. The planned work efforts were just over one-half completed, but two-thirds of the budget allocated for these efforts was expended. Defense Contract Management Agency analysts cited cost growth in labor and materials and problems in finalizing and releasing design drawings as causes for the problems. Neither the original nor the current plan established comprehensive reliability targets and growth curves. Reliability growth is the result of an iterative design, build, test, analyze, and fix process. Improvements in reliability of a product’s design can be measured by tracking reliability metrics and comparing the product’s actual reliability with the growth plan and, ultimately, to the overall goal. Although both models are in production, the Air Force did not establish reliability growth programs to measure how reliability is improving and to uncover design problems so fixes could be incorporated before the design was frozen and before committing to production. Officials have started to identify the critical manufacturing processes for the RQ-4B but do not intend to collect and use statistical process control data to ensure that the manufacturing could deliver quality products within best practices quality standards and that the end product meets the design and specifications. The officials’ assessments of the program continue to identify significant concerns about the quality, performance, and timeliness of the work of several subcontractors. For example, the subcontractor building the vertical tail and main parts of the fuselage is new to large-scale manufacture using advanced composite materials. The firm experienced significant start-up problems and the prime contractor and DOD sent special teams of advisors to help develop the firm’s manufacturing processes and to train employees. The subcontractor’s critical processes must be demonstrated to ensure good quality and limit rework. Officials have identified similar concerns with the subcontractors building the wing and imaging sensor. The Air Force started producing the A and B models without first demonstrating that the systems would meet reliability goals. Reliability is a function of the specific elements of a product’s design and making changes after production begins is costly and inefficient. Best practices for system development require reliability to be demonstrated by the start of production. The RQ-4A is a production version of the demonstrators with few changes. Testing of the demonstrators identified a need to evaluate reliability under a stressful operating tempo. Air Force officials told us that reliability improvements on the RQ-4A were constrained, as were demonstrations of reliability. The RQ-4B design has incorporated improvements in such areas as flight control actuators, mission computers, avionics, and structures that officials expect will fix some of the identified problems and improve reliability, but these have not been demonstrated. Finally, the Air Force did not acquire and test a fully integrated system representative prototype before committing to production. The contract for the first three units was awarded and work began in late fiscal year 2004. Budget plans call for procuring 13 RQ-4Bs in low-rate production through the fiscal year 2006. The Air Force has also programmed advance procurement funds in fiscal year 2006 for 7 more, meaning that the government will have made investments in 20 RQ-4Bs—45 percent of the entire RQ-4B fleet—before the basic air vehicle is flight tested and before evaluations are made leading to the full-rate production decision, scheduled in fiscal year 2007. The Air Force also plans to enter full-rate production without complete testing to demonstrate that a fully integrated system—with advanced sensors and data links—will work as intended, is reliable, and can be produced within cost, schedule, and quality targets. Initial operational test and evaluation will only test the RQ-4B air vehicle with its basic imagery intelligence payloads. Complete operational testing and incorporation of the advanced signals intelligence payload and the multiplatform radar capabilities—the reasons for acquiring the larger model in the first place—will not occur until later in the program, after the full-rate decision is made. In the absence of specific product knowledge required by best practices and DOD acquisition guidance, the Air Force and its contractor are depending on the operational experience of the demonstrators, lab modeling and simulation efforts, and production of the RQ-4A to help “close the gaps” and provide some assurance on the RQ-4B design maturity, its reliability, and its producibility within cost, schedule, and quality targets. Although the demonstrator program had notable successes, testing identified significant improvements were needed before producing operationally effective and suitable air vehicles. Areas needing improvement included reliability under a stressful operating tempo, performance of sensors, mission planning, and communications bandwidth burden. We also note that the RQ-4A is a production version of the demonstrators with few changes and that government acceptance of the second production RQ-4A was delayed due to deficiencies, including flight problems. Moreover, as previously discussed, the RQ-4B is significantly different than the RQ-4A and requires investing in new tooling and changed manufacturing processes. These factors contribute to increased risks of poor cost, schedule, and performance outcomes due to incomplete product knowledge. Defense Acquisitions: Assessments of Major Weapon Programs. GAO-04-248. Washington, D.C. Washington, D.C.: March 31, 2004. Force Structure: Improved Strategic Planning Can Enhance DOD’s Unmanned Aerial Vehicles Efforts. GAO-04-342. Washington, D.C.: March 17, 2004. Defense Acquisitions: DOD’s Revised Policy Emphasizes Best Practices, but More Controls Are Needed. GAO-04-53. Washington, D.C.: November 10, 2003. Defense Acquisitions: Matching Resources with Requirements Is Key to the Unmanned Combat Air Vehicle Program’s Success. GAO-03-598. Washington, D.C.: June 30, 2003. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems’ Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002. Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapons 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. Unmanned Aerial Vehicles: Progress of the Global Hawk Advanced Concept Technology Demonstration. GAO/NSIAD-00-78. Washington, D.C.: April 25, 2000. Unmanned Aerial Vehicles: DOD’s Demonstration Approach Has Improved Project Outcomes. GAO/NSIAD-99-33. Washington, D.C.: August 16, 1999. Best Practices: DOD Training Can Do More to Help Weapon System Program 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 Acquisition: Improved Program Outcomes Are Possible. GAO/T-NSIAD-98-123. Washington, D.C.: March 18, 1998. Best Practices: DOD Can Help Suppliers Contribute More to Weapon System Programs. GAO/NSIAD-98-87. 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. Major Acquisitions: Significant Changes Underway in DOD’s Earned Value Management Process. GAO/NSIAD-97-108. Washington, D.C.: May 5, 1997. Best Practices: Commercial Quality Assurance Practices Offer Improvements for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26,1996. 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. 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Global Hawk offers significant military capabilities to capture and quickly transmit high-quality images of targets and terrain, day or night, and in adverse weather--without risk to an onboard pilot. Global Hawk first flew in the late 1990s as a demonstrator and supported recent combat operations in Afghanistan and Iraq. In 2001, the Air Force began an acquisition program to develop and produce improved Global Hawks. In 2002, the Department of Defense (DOD) restructured and accelerated the program to include a new, larger and more capable air vehicle. GAO was asked to review the program and discuss (1) the restructuring's effect on the Air Force's ability to deliver new capabilities to the warfighter and (2) whether its current business case and management approach is knowledge-based and can help forestall future risks. The restructuring of the Global Hawk program impacts the acquisition program in multiple ways. More and accelerated funding: Funding, which previously spanned 20 years, now is compressed in about half the time. The restructured plan requires $6.3 billion through fiscal year 2012; the original plan would have needed $3.4 billion by that time. The budget request is now three times higher for some years. Immature technologies: Several critical technologies needed to provide the advanced capabilities are immature and will not be tested on the new air vehicle until late in the program, after which most of the air vehicles will already have been bought. New requirements, new costs: DOD's desire to add additional Global Hawk capabilities tripled development costs. The program acquisition unit cost increased 44 percent since program start, yet fewer vehicles are to be produced than originally planned. Challenges, trade-offs, and delays: The addition of new capabilities has led to space, weight, and power constraints for the advanced Global Hawk model. These limitations may result in deferring some capabilities. Some key events and activities--many related to testing issues--have been delayed. Global Hawk's highly concurrent development and production strategy is risky and runs counter in important ways to a knowledge-based approach and to DOD's acquisition guidance. The restructuring caused gaps in product knowledge, increasing the likelihood of unsuccessful cost, schedule, quality, and performance outcomes. Because the restructured program is dramatically different from the initial plan for the basic model, the business case now seems out of sync with the realities of the acquisition program.
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The use of SSNs on identification cards by federal, state, and private organizations, such as health insurance companies, was prevalent until the early 2000s. However, many organizations have since replaced these types of identification cards with those that do not contain SSNs. This step was taken, in large part, in response to certain federal and state laws that place restrictions on entities’ use and disclosure of consumers’ personal information, including SSNs. Examples of federal laws include the Driver’s Privacy Protection Act, which generally prohibits a state department of motor vehicles from disclosing or otherwise making available SSNs and other personal information from a motor vehicle record, and the Health Insurance Portability and Accountability Act (HIPAA) and its implementing regulations, which protect the privacy of health information that identifies an individual (including by SSNs) and restricts health care organizations from disclosing such information to others without the patient’s consent. Additionally, several state statutes include provisions related to restricting the display of SSNs, their unnecessary collection, and their disclosure without the individual’s consent. Many state agencies have discontinued the use of the numbers on identification cards and other documents, such as driver’s licenses, to comply with such laws. Similarly, private sector health insurers have discontinued use of SSNs on insurance cards in an effort to protect beneficiaries’ personal health information. The numbers on the VA cards are identification numbers that allow beneficiaries to access facilities; the cards are not insurance cards. DOD’s cards are also used primarily for identification purposes, and are not insurance cards. the numbers in magnetic stripes on the cards. However, both DOD and VA continued to use the number as an identifier and have described other steps they are taking to better protect beneficiaries against theft or improper use of the numbers. Specifically, DOD officials stated that the department is in the process of developing and implementing a solution for removing embedded SSNs from the bar codes on military identification cards and replacing them with a new identifier; they plan to complete this project in late 2016. Additionally, VA is working to remove the number embedded in magnetic stripes because of increased security risks introduced by the prevalence of electronic readers on devices such as smart phones; it plans to complete this project in late 2016. Since the inception of Medicare in 1965, CMS and its program stakeholders—SSA, the Railroad Retirement Board, and state Medicaid programs—have used an SSN-based identifier when filing and processing fee-for-service claims, and when exchanging data related to the Medicare program. This number, referred to as the Health Insurance Claim Number (HICN), is displayed on Medicare beneficiaries’ health insurance cards. Individuals’ eligibility to participate in the Medicare fee-for-service programs is initially determined by SSA, based on factors such as age, work history, contributions made to the programs through payroll deductions, and the presence of certain medical conditions. Once SSA determines that an individual is eligible, it provides information about the individual to CMS, including the SSN and a 1- or 2-digit beneficiary identification code.Enrollment Database—the repository of data about individuals who are or have ever been on Medicare. This system combines these two data fields to create the 10- or 11-digit HICN. CMS prints and issues to the individual These data are transmitted to and stored in CMS’s a paper identification card (similar to the example shown in fig. 1) that displays the HICN (i.e., the Medicare claim number), the cardholder’s full name, his or her gender, and the effective dates of Medicare program eligibility. The HICN is maintained and referenced throughout CMS’s IT environment. For example, health care providers may reference Medicare beneficiaries’ printed cards at the point of care to determine eligibility for the fee-for-service program. Providers may then query a CMS system using the HICN printed on the card, along with other demographic data, to obtain information regarding eligibility for specific treatments or services they intend to deliver, such as glaucoma screening or smoking cessation counseling. Specifically, the agency provides verification services through its HIPAA Eligibility Transaction System (HETS), which allows providers to access real-time data regarding beneficiaries’ eligibility at the point at which care is scheduled or delivered. Likewise, providers are required by CMS to use the number when they submit claims to receive payment for those treatments and services. CMS’s and its contractors’ systems also process data based on the HICN to check for duplicate claims, apply claims and medical policy edits, issue Medicare Summary Notices, authorize or deny payment of claims, and conduct printing and mailing operations. For example, CMS’s Medicare Administrative Contractors, who are responsible for processing and paying claims, use their own systems to determine whether fee-for- service claims meet certain requirements, such as completeness of data. Specifically, if a claim did not include the HICN or other required data, the contractor’s system would return it to the provider as incomplete or invalid. The shared systems are the Fiscal Intermediary Shared System, which processes part A claims; the Multi-carrier system, which processes part B claims; and the ViPS Medicare System, which is used to process claims for durable medical equipment. including HETS, on a daily basis. These data are used to update those systems’ databases. In addition to using the HICN to support the provision of and payment for health care to Medicare beneficiaries, CMS and its federal stakeholders, SSA and the Railroad Retirement Board, use the number to share data needed to coordinate health insurance coverage and payments for premiums. In this regard, CMS provides information that includes the number to SSA when beneficiaries’ eligibility status or other data change, and SSA refers to the HICN when beneficiaries request replacement of lost Medicare cards. CMS also shares data that include the number with the Railroad Retirement Board when it administers health benefits for railroad retirees who are eligible for Medicare. Further, CMS and the 56 state and territorial Medicaid programs share data based on beneficiaries’ HICNs. Specifically, these programs provide the number along with other data on their beneficiaries that are used to help identify individuals who are eligible for both Medicare and Medicaid benefits. The states also provide information regarding Medicaid beneficiaries for whom their programs pay Medicare Part A or B premiums. In turn, CMS provides several types of data to the Medicaid programs based on the HICN, including data needed to coordinate payment for claims when a beneficiary is covered by multiple insurers and information on the current drug prescription insurer for beneficiaries who are covered by Medicare Part D private plans. Figure 2 depicts a simplified view of the flow of data and the use of the HICN in CMS’s and its stakeholders’ systems. In 2010, CMS officials developed a plan to upgrade the agency’s IT environment and noted that the modernization of enterprise information systems and the supporting infrastructure was necessary in order for CMS to continue to meet its mission. Further, two scientific advisory committees that later evaluated CMS’s IT environmentagency operated in a “stove-piped” environment in which many systems were developed to meet specific time-sensitive and legislatively driven needs, such as claims processing and eligibility determination, without consideration of the need for systems to interoperate or integrate data from other sources. The committees indicated that, because the agency continues to operate in such an environment, enhancement and sharing of data across its systems can be costly, risky, and time-consuming. In 2013 the agency took steps to update the 2010 IT modernization plan. According to officials in the Office of Information Services, this was to address recommendations resulting from the two advisory committees’ evaluations. These officials described seven goals of the plan, the first of which is to establish an architecture that supports the development and implementation of IT functions, known as “shared services,” that can be provided to support multiple needs of organizations conducting business within or between federal agencies. limited to, the transformation of the agency’s IT operations to enable CMS to use technologies such as cloud computing and virtual data centers; improvements to privacy and security controls to better protect personal health information stored and processed by the agency; and the transition to a coordinated, enterprise approach toward developing and implementing IT solutions. The Chief Information Officer stated that the agency was continuing to work toward addressing the seven goals defined in 2013. Use of shared services can be cost efficient because when a service is reused by multiple IT systems, initial system development costs occur once, and these costs can be avoided each time the service is reused. In addition, use of shared services promotes standardization and interoperation of data and can reduce stove piping. Both the SSA and HHS inspectors general have reported on risks associated with the use of the SSN on Medicare cards and have recommended that SSA and CMS work toward identifying alternate identifiers to better safeguard Medicare beneficiaries’ SSNs. Additionally, we have previously issued reports that addressed federal agencies’ use and display of SSNs on identification cards and for other purposes, as well as CMS’s study of this issue. In a 2004 study, we found that SSNs were widely exposed to view in a variety of public records, particularly those held by state and local governments, and appeared in some public records nearly everywhere in the nation. in identity thefts, and that the widespread use and retention of the number by both the public and private sectors may provide opportunities for criminals to easily obtain and misuse this personal information. We stressed that the display of nine-digit SSNs on such cards, which may need to be carried and must often be disclosed, puts cardholders at risk for identity theft due to the increased potential for accidental loss, theft, or visual exposure. To help mitigate this risk, we recommended that the Office of Management and Budget (OMB) identify those federal activities that require or engage in the display of SSNs on health insurance, identification, or any other cards issued to federal government personnel or program beneficiaries, and devise a governmentwide policy to ensure a consistent approach to this type of display. In response to our recommendation, in May 2007 OMB issued a memorandum that required federal departments to establish a plan to eliminate unnecessary use of SSNs. GAO, Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards, GAO-05-59 (Washington, D.C.: Nov. 9, 2004). SSNs shared with contractors by private companies. We also reported in 2006 that the threat of identity theft was heightened by the visual display of SSNs on federal identification cards. We noted that there were gaps in federal and state agencies’ practices for protecting SSNs and that Congress was still considering actions to address the issues that remain. More recently, in 2012 we assessed the results of CMS’s 2011 study of the cost and effort associated with three approaches to removing SSNs from Medicare cards. As a result of our assessment, we reported in August 2012 that CMS had not committed to removing the SSNs and lagged behind other federal agencies. We recommended that the agency select an approach for removing the SSN from the Medicare card that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS. We also recommended that it develop an accurate, well-documented cost estimate for such an option using standard cost-estimating procedures. CMS officials concurred with our recommendations and, as discussed later in this report, took actions to address them. CMS has not yet taken steps needed to select and implement a technical solution for removing SSNs from Medicare cards. Since 2006, the agency has conducted three studies on potential approaches to replacing the SSN-based Medicare identifier, issuing reports to Congress on the results of those studies in October 2006, November 2011, and May 2013. However, while each of the studies addressed, at a high level, the impact of various approaches on CMS’s IT environment, they were not intended to identify a specific technical solution for removing SSNs from cards. Specifically, according to CMS, a 2006 study was initiated in response to congressional concerns regarding identity theft and expectations that the Secretary of Health and Human Services would accelerate ongoing plans to convert the HICN to a non-SSN based identifier for display on Medicare beneficiaries’ health insurance cards. The second study was conducted to respond to congressional requests for CMS to re-examine approaches and costs of removing the SSN from the cards. Officials in the Office of Information Services, the CMS entity that would be responsible for identifying and implementing a technical solution for SSN removal, stated that the 2006 and 2011 studies were intended to develop “rough order of magnitude” estimates of costs and efforts associated with a potential SSN removal project. In response to a request by congressional committee members and to address our August 2012 recommendation, the agency initiated a third study in August 2012 and issued the resulting report to Congress in May 2013. According to CMS officials, the third study was conducted to provide cost estimates that were more reliable than those previously reported. The new estimates for two approaches documented in the 2013 report were approximately $255 million and approximately $317 million, including the cost of efforts to develop, test, and implement modifications that would have to be made to the agency’s IT systems. The costs of the IT-related efforts for the two approaches were estimated at about $26 million (10 percent of the $255 million total estimated cost) and $64 million (20 percent of the $317 million total estimated cost), respectively.According to the May 2013 report, the estimates were based on the assumption that these efforts would span an 18-month period, from October 2013 to April 2015. According to Office of Information Services officials, however, these costs and schedules represented high-level estimates based on the two overall approaches and did not fully reflect the effort that would be required to implement a specific IT solution. Furthermore, while the 2013 report noted that one of the two approaches would better protect beneficiaries’ personal information, the officials said that the agency did not intend for this study to result in the identification of an IT solution to address SSN removal. CMS officials stated that any initiatives specifically intended to identify an IT solution to address SSN removal would need to be conducted in accordance with departmental processes and requirements for managing the life cycle of IT projects. In this regard, CMS’s IT project life-cycle management guidance, the Expedited Life Cycle (XLC) framework, defines the activities that are required to execute and monitor the development of IT projects throughout five phases—project initiation, requirements analysis and design, development and test, implementation, and operations and maintenance. The framework requires the following activities to be completed as part of a project initiation phase before the IT organization takes subsequent steps to identify technical solutions that support business needs: designate a business owner to serve as an advocate for the project; identify a business need for which a technological solution is required and a business case is established; explore alternative concepts and methods to satisfy the need; develop and approve initial project cost, preliminary schedule, performance baseline, and basic business and technical risks; conduct a preliminary enterprise architecture review to determine whether the proposed project potentially duplicates, interferes with, contradicts, or can leverage another project that already exists or is proposed, under development, or planned for near-term disposition; identify significant assumptions and constraints on solutions relative to that need; issue a project charter; and conduct a selection review to determine if the proposed project is sound, viable, and worthy of funding, support, and inclusion in the information technology project portfolio. However, CMS has not taken a number of the key steps called for by the IT project life-cycle management guidance to identify an IT solution to address SSN removal and has not made plans to do so. For example, it has not completed several steps of a project initiation phase, such as designating a business owner who would submit a request to the Chief Information Officer to initiate an IT project. Additionally, the agency has not established a business case for developing an IT solution to address SSN removal, issued a project charter, or presented a potential IT project for SSN removal to an architectural review board for preliminary review and approval. Furthermore, CMS has not conducted a selection review to determine if such an IT project should be included in its portfolio of IT investments. Nonetheless, when conducting the 2013 study, agency officials undertook activities that could address certain steps called for by the agency’s IT project life-cycle management processes for initiating a project, and that could provide information needed for identifying and implementing a technical solution, including the following: CMS officials and program stakeholders explored alternative concepts for addressing the business need, which is one of the steps called for by agency IT project management guidance. Specifically, from September 2012 through December 2012, Railroad Retirement Board and SSA officials participated in work groups with CMS to determine potential approaches to SSN removal. As a result, they identified two approaches: (1) replacing the SSN-based HICN with a new identifier that does not include the SSN, referred to as the Medicare Beneficiary Identifier; and (2) truncating the first five digits of the SSN for display on Medicare cards. Agency officials conducting the study ruled out other options, such as embedding the number in smart cards or magnetic strips, because they were determined to be too costly, technically infeasible, or burdensome to providers and beneficiaries. Project officials collected information that could be used to develop initial project costs and identify basic business and technical risks associated with implementing each approach. Specifically, officials conducting the 2013 study collected data that could be used for establishing a technical baseline for cost estimates, such as the level of effort system owners estimated would be required for each life- cycle phase. Project officials also collected input from system and business owners regarding technical and business risks associated with the two approaches. For example, the owners of one of the shared systems described a risk that unacceptable processing times would result from the implementation of a mechanism for translating between the HICN and a new identifier. This information could be useful in identifying efficient translation mechanisms that would be less likely to introduce such a risk. Agency officials took steps to determine the changes that would have to be made throughout the agency’s and program stakeholders’ IT environment. The results of these actions could provide information essential to conducting a preliminary enterprise architecture review— another step required for initiating an IT project. Specifically, officials conducting the 2013 study identified internal and external stakeholder systems that could be affected if the SSN was removed from cards, and identified other IT initiatives that could be coordinated with an SSN removal project. For example, during the 2013 study, CMS system and functional-level business owners conducted high-level impact assessments of the two approaches on the agency’s business processes and all systems identified in its information technology inventory. Of CMS’s more than 200 systems, these officials identified 72 systems that could be affected by the introduction of a new identifier and 41 that would be affected by the second approach (masking the first 5 digits of the SSN). They conducted high-level assessments of the types of changes that would need to be made to those systems, including the level of complexity of the changes, the number of hours of work at each life-cycle phase, and the potential to leverage related efforts. Appendix II provides a detailed assessment of the types of system changes that would have to be made to three internal CMS systems that provide functionality key to determining beneficiaries’ eligibility for specific treatments and services, validating and adjudicating Part A claims, and sharing data for coordination of benefits payment between Medicare and program stakeholders. Agency officials also established assumptions regarding the two approaches for SSN removal. For example, when collecting data regarding the impact on its internal systems, system owners were instructed to assume that a crosswalk service would be available to translate the HICN to a new identifier, and that the new identifier would retain the same length as the existing HICN but have a different format. CMS officials also established assumptions regarding conditions under which data exchanged with external stakeholders would include either number. CMS collected data from its federal partners to estimate the impact of the proposed approaches on external systems. For example, officials conducting the 2013 study collected level-of-effort estimates from SSA and the Railroad Retirement Board for implementing changes to their affected systems. Although their estimates varied, the changes these stakeholder officials described were similar. SSA officials stated that they would have to make system changes to identify beneficiaries when they contact SSA and provide the new identifier, instead of the HICN, to request a new Medicare card. Railroad Retirement Board officials also stated that they would have to make changes in order to use the new identifier instead of the HICN when issuing or replacing retirees’ Medicare cards. CMS also involved state program stakeholders and collected high- level estimates of changes that would have to be made to states’ Medicaid systems. Because each state implements IT solutions to support its unique Medicaid program, the design, implementation, and level of effort estimated to modify their systems varied widely. For example, we assessed Medicaid program estimates provided to CMS by eight states. Of these, three states estimated that less than 500 hours would be needed to make the changes, in part because some of the systems already convert identifiers. One of these states reported that no effort would be required since their systems were already capable of updating records when changes to identifiers are made. On the other hand, officials with another state Medicaid program estimated that about 22,000 hours of effort would be needed to, among other things, expand databases to include a new identifier, and another estimated that over 58,000 hours would be required to modify systems to process functions based on a new identifier, including Medicare buy-in, eligibility determination, and Part D processing systems. Three other states estimated around 4,000 hours of work to implement mechanisms to cross reference or convert the HICN to a new identifier. While the data and information collected during the 2013 study could be leveraged to support a future IT project to address SSN removal, according to officials with CMS’s Office of Information Services, the agency’s Chief Information Officer has not received direction from CMS’s leadership to submit a proposal for an IT project that would lead to the identification, development, and implementation of a technical solution. We have noted in prior reports the importance of protecting Medicare beneficiaries from increased risks of identity theft, and OMB has required federal agencies to take steps to eliminate unnecessary uses of SSNs. We have also noted that federal agencies’ Chief Information Officers are responsible for, among other key IT management areas, information security along with systems development and integration. Additionally, CMS has designated the Office of Information Services as the lead for developing and enforcing the agency’s IT policies, standards, and practices. As such, these entities should play an active role in pursuing IT solutions for securing personal data, such as Medicare beneficiaries’ SSNs. The data and information the Office of Information Services collected during the 2013 study could provide valuable input to future efforts to define such a solution. Nonetheless, until the agency designates a business owner, establishes a business case, issues a project charter, and conducts architectural and IT project selection reviews for SSN removal, it will lack sufficient information and resources needed to actively pursue the identification of an IT solution for SSN removal that best protects beneficiaries’ identities. CMS has efforts under way to modernize its IT systems, a number of which could be leveraged to facilitate the removal of SSNs from Medicare cards. For example, one of the agency’s modernization goals is to establish IT functionality that can be used to support multiple business needs of organizations and facilitate data sharing among the agency and its stakeholders. This and other goals were described by Office of Information Services officials who indicated that the agency is in the process of developing an agencywide IT modernization strategy to align with newly defined business goals. A well-defined modernization strategy includes plans for systems that are integrated into an enterprise’s IT environment and that do not duplicate other systems’ functionality. By planning accordingly, agencies increase the likelihood that they will design and develop systems that easily exchange information with other systems and improve their ability to modernize systems in a timely and cost-effective manner. In this regard, CMS has initiated actions that could eliminate duplicative programming efforts and help establish standards for integrating new systems and making the modifications to existing systems needed to implement an IT solution for SSN removal. For example, CMS officials with the Office of Information Services described modernization projects that were initiated to support administrators’ ability to carry out other programs and that were aligned with the first of the seven stated modernization goals—to establish an IT architecture capable of supporting the development and implementation of shared services. Specifically, the agency established such an architecture to implement five shared services to support the administration of other agency programs, including but not limited to, programs established by the Affordable Care Act. The shared services are Enterprise Identity Management, which is planned to enable individuals to use a single online identity (e.g., user ID) for engaging in business with CMS that meets all federal security requirements; Master Data Management, which is a suite of data records and services that will allow CMS to link and synchronize beneficiary, provider, and organization data to multiple disparate sources; Enterprise Portal, a central channel for beneficiaries, providers, organizations, and states to receive CMS information, products, and services via consistent web pages; Business Rules Enterprise Service, which provides a framework for automating and managing decision logic and routines for CMS programs (e.g., provider and beneficiary cross check for Accountable Care Organization programs); and Enterprise Eligibility, a consistent and reusable way for business applications to access beneficiary eligibility data for a variety of uses (e.g., claims processing, providers and plans, and external programs). In implementing these services, the agency has taken some steps that could help define and put into place the necessary architectural components and standardized interfaces to enable sharing of the services’ capabilities across the IT infrastructure and CMS’s business areas. One of the five shared services that CMS implemented, the Business Rules Enterprise Service could facilitate the implementation of an IT solution for SSN removal. For example, the IT infrastructure that was established to implement the service could support the implementation of a crosswalk service needed by multiple systems to translate a new identifier to the HICN (and vice versa). By providing this functionality through a shared service, the crosswalk would be available for use by any system within CMS’s IT infrastructure and therefore eliminate the need to duplicate programming efforts for each system to implement such functionality. Specifically, if such a shared service were implemented to support an SSN-removal IT project, it would be available for use by all the systems that, according to CMS officials, would have to be modified to use a new identifier. As a result, of the 20 systems that the agency estimated would account for 86 percent of the costs to modify, systems changes would only have to be developed and tested for one implementation rather than for 18 of the 20 systems that would need to perform a crosswalk between a new identifier and the existing HICN. In addition to the five shared services described, another shared service, the Beneficiary Data Streamlining service, was designed to consolidate into one system the functionality for determining fee-for-service eligibility that is currently implemented in four different systems (the Common Working File and the three shared systems). This new service, which is planned to be implemented in October 2013, would be used by these systems to eliminate duplicate or unnecessary processing. Consequently, the implementation of the service could also facilitate SSN removal efforts. For example, it could reduce the extent of modifications that would have to be made to the four systems by eliminating the need to make changes to their current eligibility determination functions to process a new non-SSN-based identifier. Instead, that capability would be provided by the new service. As a result, the agency could save unnecessary costs and efforts associated with duplicative programming changes to the four affected systems. While these projects could offer opportunities for leveraging ongoing modernization initiatives to facilitate SSN removal, CMS officials stated that because the agency has not yet established a business case and IT project for removing SSNs from Medicare cards, they have not included shared services or other IT initiatives in their modernization activities and related plans to specifically support changes needed as a result of SSN removal. Until CMS establishes an IT project for SSN removal that could be incorporated into ongoing agencywide modernization initiatives, it may miss opportunities to leverage other ongoing system development activities that could facilitate efforts to design, develop, and implement an IT solution in a timely and cost-effective manner. While CMS has spent time and resources over the past 7 years studying approaches that could be taken toward removing the SSN from Medicare beneficiaries’ cards, the agency has not actively established and pursued a goal to identify an IT solution for doing so. The efforts made thus far by CMS and its stakeholders could provide some of the information needed to initiate an IT project to design and develop the system changes that would have to be made to address an agencywide effort to better safeguard Medicare beneficiaries’ identity. However, until the agency takes other critical steps, such as designating a business owner, establishing a business case, issuing a project charter, and conducting architectural and IT project selection reviews, it will not be in a position to design, develop, and implement the changes that would have to be made to systems affected by the removal of SSNs from display on Medicare beneficiaries’ health insurance cards. Additionally, the agency may miss opportunities to improve the timeliness and cost effectiveness of any actions taken to develop and implement a technical solution that could be achieved if it incorporated such actions into plans for ongoing enterprisewide IT modernization initiatives. To better position the agency to efficiently and cost-effectively identify, design, develop, and implement an IT solution that addresses the removal of SSNs from Medicare beneficiaries’ health insurance cards, we recommend that the Administrator of CMS take the following two actions: direct the initiation of an IT project for identifying, developing, and implementing changes that would have to be made to CMS’s affected systems, including designating a business owner and establishing a business case, issuing a project charter, and conducting project selection and architectural reviews of proposed approaches for the removal of SSNs from Medicare beneficiaries’ cards; and incorporate such a project into plans for ongoing enterprisewide IT modernization initiatives. In written comments on a draft of this report, signed by HHS’s Assistant Secretary for Legislation (and reprinted in appendix III), HHS stated that it appreciated the opportunity to review the report prior to its publication. Further, the department stated that it concurred with both of our recommendations under the condition that certain constraints were addressed. With respect to our first recommendation, HHS agreed that removing the SSN from Medicare cards is an appropriate step toward reducing the risk of identity theft, but that the agency could not make a decision to proceed with such a project without agreement from SSA and the Railroad Retirement Board. In addition, the department stated that a clear source of funding for both IT and non-IT activities associated with SSN removal would need to be identified before proceeding. However, as we noted in our report, CMS’s Chief Information Officer and the Office of Information Services should play an active role in pursuing IT solutions for securing personal data, such as Medicare beneficiaries’ SSNs. For this reason, it is important that CMS determine the appropriate actions to take toward initiating an IT project for addressing the removal of SSNs from cards and guide its stakeholders, such as SSA and the Railroad Retirement Board, in taking the steps needed to achieve the goals of any SSN removal project. In addition, the final step of the IT project initiation phase, as defined by CMS’s IT life-cycle project management guidance, is a review to determine if proposed projects are worthy of funding and inclusion in an IT project portfolio. Accordingly, uncertainties regarding a clear source of funding should not constrain CMS from taking steps to initiate an IT project to address SSN removal. Regarding our second recommendation, HHS concurred, again with the caveat that the above-mentioned constraints were addressed. The department also noted that while CMS had not implemented its shared services initiative specifically for the purpose of SSN removal, the general functionality exists in the shared services to support this effort, and this was reflected in the agency’s 2013 cost estimate. However, unless the agency considers SSN removal as part of its enterprisewide modernization initiative, it may miss additional opportunities for leveraging system changes being made as part of the modernization to support SSN removal. In this regard, we believe that CMS is currently positioned to implement both our recommendations, regardless of perceived constraints, and to take the actions needed to initiate an IT project as part of its agencywide modernization initiative. If such actions are taken CMS could improve HHS’s ability to protect Medicare beneficiaries against increased risk of identity theft introduced by the use of SSNs on Medicare cards. HHS also provided technical comments, which we incorporated into the report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of HHS and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs 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 objectives of our review were to (1) assess the actions the Centers for Medicare and Medicaid Services (CMS) has been taking to identify and implement information technology (IT) solutions for removing Social Security numbers (SSN) from Medicare beneficiaries’ cards, and (2) determine whether CMS’s ongoing information technology modernization initiative could offer opportunities to facilitate efforts to remove the SSN from the cards. To determine the extent to which CMS has been taking steps to implement a technical solution for removing the SSN from Medicare cards, we examined studies conducted by agency officials in 2006, 2011, and 2013 of different approaches. We reviewed supporting documents that were used by project officials to gather information from system and business owners regarding the impact that two approaches would have on the agency’s IT systems, including estimates of the levels of effort that would be needed to implement the changes that would have to be made to affected systems. We assessed the data from these documents, referred to as “workbooks,” to determine the steps agency officials took that could be used to identify a technical solution for the two approaches– one to introduce a new identifier that does not include the SSN and another to mask the first five digits of the SSN in the existing SSN-based identifier, the Health Insurance Claim Number (HICN). We determined which activities resulted in outcomes that could be used to initiate actions towards identifying a specific technical solution by comparing documented results of CMS’s efforts to requirements defined by CMS’s processes for managing information technology projects to develop and implement technical solutions for business processes. To better understand the extent of changes that would have to be made to the systems, we assessed a sample of the systems that the agency identified as being affected by the removal of the SSN from cards and replacement with a unique, non-SSN-based number. To select the systems for our sample, we obtained and analyzed system impact workbooks for 29 systems that we determined accounted for over 90 percent of the total estimated level of effort needed to modify existing systems to process the new identifier. Based on our assessment, we determined that these systems provided adequate examples of the types of system modifications that would be required to implement a technical solution for agencywide efforts to remove the SSN from Medicare cards. Additionally, we focused our analysis of the data included in the workbooks on the option to replace the SSN-based identifier, the HICN, on the Medicare card with a new identifier since findings resulting from our prior assessment of CMS’s 2011 report on SSN removal established this option as the one most likely to protect beneficiaries’ SSNs and help prevent identify theft. From the 29 systems, we selected 3—1 system that represented a low level of effort based on the estimated levels of effort reported by system and business owners in the workbooks, 1 that represented a high level of effort, and 1 of the shared systems that performs a critical function—fee-for-service claims processing. To determine the types of changes that would have to be made to the systems, we examined technical documents to identify architectural components, data types, message formats, and interfaces with other systems that would have to be modified to either translate a new identifier to the HICN for internal processing, or translate the HICN back to the new identifier for purposes such as printing notices or new cards. We also held discussions with owners of the selected systems to confirm our understanding of the systems and related files and databases, along with the functionality they provide. In addition, we held discussions with CMS officials from the agency’s Office of Information Services, including the Chief Information Officer, regarding actions taken to complete the 2013 study, particularly steps taken to collect information regarding the impact on CMS’s existing IT systems. To further address the first objective, we determined the extent to which CMS involved stakeholders to estimate the levels of effort that would have to be made to address the two approaches for removing the SSN from Medicare cards. To do so, we reviewed documentation that described the actions CMS took to solicit input from its federal Medicare and state Medicaid program stakeholders, such as CMS’s most recent report to Congress and documented results of stakeholders’ assessment of the impact the SSN removal would have on their systems. We obtained and analyzed such documentation from the Social Security Administration and the Railroad Retirement Board, CMS’s two federal program stakeholders. To select states for our study, we examined documents that were provided by 49 states and the District of Columbia in response to CMS’s request for data related to the system changes that would have to be made. We then calculated the median level of effort estimated and selected states whose estimates represented high, medium, and low levels of effort. Specifically, we identified the 3 states that estimated the highest level of effort, 4 states that estimated a medium (or closest to the median) level of effort, and the 3 that estimated the lowest level of effort. Of the 10 that we selected, we received responses from 8—the 3 lowest, 3 of the medium, and 2 of the highest estimators. We assessed the data they provided to CMS and collected additional data by conducting semistructured interviews or through written responses to a standard set of questions. While we could not generalize the information we collected from the 8 states to reflect the level of participation by all 49 states and the District of Columbia, the views obtained from these state officials offered insights into the extent to which CMS involved its program stakeholders in assessing approaches for removing SSNs. We also held discussions with program stakeholders from each of the federal and state entities. See Government Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 285 (1993), as amended by the GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 3866 (2011); Office of Management and Budget, Management of Federal Information Resources, Circular A-130 (Washington, D.C.: Nov. 28, 2000), and Planning, Budgeting, Acquisition, and Management of Capital Assets, Circular A-11, Part 7 (Washington, D.C.: July 2003). services, one of the modernization goals described by the Chief Information Officer and officials from the Office of Information Services. We then compared information obtained from this plan to descriptions of modifications to systems that would have to be made if the SSN were removed from cards. We also reviewed documentation provided to the Office of Information Services by the owners of these systems to identify other IT projects that could facilitate the development and implementation of a technical solution for an SSN removal effort. We interviewed CMS officials, including the Chief Information Officer, to obtain additional information regarding the agencywide IT modernization goals and objectives and the extent to which the goals and objectives addressed the removal of SSNs from Medicare cards. For each of the objectives, we assessed the reliability of the documentation we received from CMS, including the workbooks and technical documentation, by obtaining corroborating evidence through interviews with the agency’s system and business owners who were knowledgeable of the various systems, the individuals who were responsible for filling out the workbooks at the states, and individuals knowledgeable about CMS’s modernization efforts, including the Chief Information Officer. Based on how we used the information and the corroborating evidence provided in the interviews, we determined that the documentation and data provided by the agency were sufficiently reliable for the purposes of our review. We conducted this performance audit from October 2012 to September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We selected three systems for assessment to better understand the types of changes that would have to be made to process beneficiary data based on the introduction of a new identifier, or Medicare Beneficiary Identifier (MBI), to replace SSNs as data entered into the systems. The three systems are the HIPAA Eligibility Transaction System (HETS), the Fiscal Intermediary Standard System (FISS), and the Medicare Beneficiary Database Suite of Systems (MBDSS). (See app. I for a description of the methodology used to select and assess the systems.) The following tables provide descriptions of the systems and the functionality they provide, the number of hours that owners of the systems estimated would be required to modify the systems, and a summary of the technical characteristics and components (e.g., the programming languages and tools, software applications, data bases, data storage files, and outcomes of data processing) that would have to be considered in estimating the impact of removing SSNs from Medicare cards on these systems. Our assessments were conducted based on information collected from technical documentation relevant to each of the systems and from discussions with system owners in CMS’s Office of Information Services. In addition to the contact named above, Teresa F. Tucker (Assistant Director), Wilfred B. Holloway, Lee A. McCracken, Thomas E. Murphy, Maria Stattel, Daniel K. Wexler, Merry L. Woo, and Charles E. Youman made significant contributions to this report.
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The health insurance claims number on Medicare beneficiaries' cards includes as one component the beneficiary's (or other eligible person's, such as a spouse's) SSN. This introduces risks to beneficiaries' personal information, as the number may be obtained and used to commit identity theft. Many organizations have replaced SSNs on these types of cards with alternative identifiers. However, the introduction of such a new data element into IT environments can require changes to systems that process and share data. Moreover, previous assessments of CMS's IT environment have found that it consists of many aging, "stove-piped" systems that cannot easily share data or be enhanced; thus the agency has ongoing efforts to modernize its environment. As requested, GAO studied CMS's efforts related to the removal of SSNs from Medicare cards. GAO's objectives were to (1) assess actions CMS has taken to identify and implement IT solutions for removing SSNs from Medicare cards and (2) determine whether CMS's ongoing IT modernization initiatives could facilitate SSN removal efforts. To do this, GAO reviewed agency documentation and interviewed officials. The Centers for Medicare and Medicaid Services (CMS)--which is the agency within the Department of Health and Human Services (HHS) responsible for administering Medicare--has not taken needed steps, such as designating a business owner and establishing a business case for an information technology (IT) project, that would result in selecting and implementing a technical solution for removing Social Security numbers (SSN) from Medicare cards. However, the agency has collected information and data as part of its most recent study of SSN removal that could contribute to the identification and development of an IT solution. These include information relevant to examining alternative approaches, identifying costs and risks, and assessing the impact of different approaches on the agency's existing IT systems. For example, the agency identified two approaches for removing the SSN: (1) replacing it with a new identifier, referred to as the Medicare Beneficiary Identifier, and (2) masking the first five digits of the SSN for display on Medicare cards. CMS system and business owners also conducted high-level assessments of the types of changes that would need to be made to systems identified in the agency's IT inventory. For example, system owners estimated the level of complexity of the changes, the number of hours of work at each life-cycle phase, business and technical risks, and the potential to leverage related efforts. CMS noted in its most recent study that replacing the SSN with a new identifier could reduce the risk of identity theft from a lost or stolen card, and actions taken thus far could inform a future IT project to address SSN removal. However, according to CMS officials, agency leadership has not directed them to initiate such a project. Until such a project is undertaken, the agency will not be positioned to identify or implement a solution to support the removal of SSNs from beneficiaries' cards. CMS has efforts under way to modernize its IT systems, some of which could be leveraged to facilitate the removal of SSNs from Medicare cards. Specifically, one of CMS's high-level modernization goals is to establish an architecture to support "shared services"--IT functions that can be used by multiple organizations and facilitate data sharing. According to agency officials, a service established to automate and manage certain aspects of CMS programs could be used to support a "crosswalk" function that would translate the existing claims number to the new beneficiary identifier (and vice versa). This would enable internal systems to receive information containing the new identifier and continue to process data based on the existing number. Another project was intended to consolidate eligibility determination services from four systems, which could reduce the extent of modifications that would have to be made to each of the systems. However, because the agency has not initiated a project for removing SSNs from identification cards, officials have not considered including shared services or other IT initiatives in their modernization activities and related plans to specifically support changes needed as a result of SSN removal. As a result, CMS may miss opportunities to incorporate such a project into ongoing agencywide modernization initiatives that could facilitate efforts to design, develop, and implement an IT solution for SSN removal in a timely and cost-effective manner. GAO recommends that CMS initiate an IT project to develop a solution for SSN removal and incorporate such a project into plans for ongoing IT modernization initiatives. HHS agreed with GAO's recommendations, if certain constraints were addressed. However, GAO maintains that its recommendations are warranted as originally stated.
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In July 2002, President Bush issued the National Strategy for Homeland Security. The strategy set forth overall objectives to prevent terrorist attacks within the United States, reduce America’s vulnerability to terrorism, and minimize the damage and assist in the recovery from attacks that occur. The strategy set out a plan to improve homeland security through the cooperation and partnering of federal, state, local, and private sector organizations on an array of functions. The National Strategy for Homeland Security specified a number of federal departments, as well as nonfederal organizations, that have important roles in securing the homeland. In terms of federal departments, DHS was assigned a leading role in implementing established homeland security mission areas. In November 2002, the Homeland Security Act of 2002 was enacted into law, creating DHS. This act defined the department’s missions to include preventing terrorist attacks within the United States; reducing U.S. vulnerability to terrorism; and minimizing the damages, and assisting in the recovery from, attacks that occur within the United States. The act also specified major responsibilities for the department, including to analyze information and protect infrastructure; develop countermeasures against chemical, biological, radiological, and nuclear, and other emerging terrorist threats; secure U.S. borders and transportation systems; and organize emergency preparedness and response efforts. DHS began operations in March 2003. Its establishment represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. A variety of factors have affected DHS’s efforts to implement its mission and management functions. These factors include both domestic and international events, such as Hurricanes Katrina and Rita, and major homeland security-related legislation. Figure 1 provides a timeline of key events that have affected DHS’s implementation. Our report assesses DHS’s progress across 14 mission and management areas. We based these areas on those identified in the National Strategy for Homeland Security, the goals and objectives set forth in the DHS strategic plan and homeland security presidential directives, our reports, and studies conducted by the DHS IG and other organizations and groups, such as the 9/11 Commission and the Century Foundation. The 14 we identified are 5. Surface transportation security 7. Emergency preparedness and response 8. Critical infrastructure and key resources protection 9. Science and technology 12. Human capital management 13. Information technology management 14. Real property management For each mission and management area, we identified performance expectations and vetted them with DHS officials. These performance expectations are a composite of the responsibilities or functions—derived from legislation, homeland security presidential directives and executive orders, DHS planning documents, and other sources—that the department is to achieve. Our analysts and subject matter experts reviewed our prior work, DHS IG work, and evidence DHS provided between March and July 2007, including DHS officials’ assertions when supported by documentation. On the basis of this analysis and our experts’ judgment, we then assessed the extent to which DHS had achieved each of the expectations we identified. We made preliminary assessments for each performance expectation based solely on GAO and DHS IG work. In March through July, we received additional information from DHS, which we reviewed and used to inform our final assessments. In some cases the assessments remained the same as our preliminary ones, and in other cases they changed. When our review of our prior work, the DHS IG’s work, and DHS’s documentation indicated that DHS had satisfied most of the key elements of a performance expectation, we concluded that DHS had generally achieved it. When our reviews showed that DHS had not yet satisfied most of the key elements of a performance expectation, we concluded that DHS had generally not achieved it. More specifically, where our prior work or that of the DHS IG indicated DHS had not achieved a performance expectation and DHS did not provide documentation to prove otherwise, we concluded that DHS had generally not achieved it. For a small number of performance expectations we could not make an assessment because neither we nor the DHS IG had completed work and the information DHS provided did not enable us to clearly assess DHS’s progress. We used these performance expectation assessments to determine DHS’s overall progress in each mission and management area. After making an assessment for each performance expectation, we added up those rated as generally achieved. We divided this number by the total number of performance expectations for the mission or management area, excluding those performance expectations for which we could not make an assessment. If DHS generally achieved more than 75 percent of the identified performance expectations, we identified its overall progress as substantial. When the number achieved was more than 50 percent but 75 percent or less, we identified its overall progress as moderate. If DHS generally achieved more than 25 percent but 50 percent or less, we identified its overall progress as modest. For mission and management areas in which DHS generally achieved 25 percent or less of the performance expectations, we identified overall progress as limited. We and the DHS IG have completed varying degrees of work for each mission and management area, and DHS’s components and offices provided us with different amounts and types of information. As a result, our assessments of DHS’s progress in each mission and management area reflect the information available for our review and analysis and are not equally comprehensive across all 14 mission and management areas. It is also important to note that while there are qualitative differences between the performance expectations, we did not weigh some more heavily than others in our overall assessments of mission and management areas. We also recognize that these expectations are not time bound, and DHS will take actions to satisfy these expectations over a sustained period of time. Our assessment of DHS’s progress relative to each performance expectation refers to the progress made by the department since March 2003 and does not imply that DHS should have fully achieved each performance expectation at this point. In commenting on a draft of our report, DHS took issues with our methodology. First, DHS believed that we altered the criteria we used to judge the department’s progress. We did not change our criteria; rather we made a change in terminology to better convey the intent behind the performance expectations that DHS achieve them instead of merely take actions that apply or relate to them. Second, DHS took issue with the binary standard approach we used to assess each performance expectation. We acknowledge the limitations of this standard in our report but believe it was appropriate for our review given that the Administration has generally not established quantitative goals and measures for the expectations. Therefore, we could not assess where along a spectrum of progress DHS stood in achieving each performance expectation. Third, DHS was concerned about an apparent shift in criteria we applied after the department provided us additional information and documents. What DHS perceived as a change in criteria for certain performance expectations was really the process by which we disclosed our preliminary assessment; analyzed additional documents and information from DHS; and updated and, in many cases revised, our assessments based on the additional inputs. Fourth, DHS raised concerns with consistency in our application of the methodology. Our core team of GAO analysts and managers reviewed all inputs from GAO staff to ensure consistent application of our methodology, criteria, and analytical process, and our quality control process included detailed reviews of the report’s facts as well as assurances that we followed generally accepted government auditing standards. Finally, DHS points outs that we treated all performance expectations as if they were of equal significance. In our report, we acknowledged that differences exist, but we did not weight the performance expectations because congressional, departmental, and others’ views on the relative priority of each expectation may be different, and we did not believe it was appropriate to substitute our judgment for theirs. Overall, we appreciate DHS’s concerns and recognize that in such a broad- based endeavor, some level of disagreement is inevitable, especially at any given point in time. However, we have been as transparent as possible regarding our purpose, methodology, and professional judgments and believe that our methodology provides a sound basis for the progress report. Our report shows that since March 2003, DHS has attained some level of progress in implementing the performance expectations in all of its major mission and management areas, but the rate of progress among these areas has varied. Overall, DHS has made more progress in its mission areas than in its management areas, reflecting an understandable focus on implementing efforts to secure the homeland. As DHS continues to mature as an organization, we believe it will be able to put more focus—and achieve more expectations—in the management areas. Within its mission areas, DHS has made more progress in developing strategies, plans, and programs than in implementing them. For example, in the area of border security we found that DHS has developed a multiyear strategy and initiative for identifying illegal border crossings between ports of entry. However, DHS is in the early stages of implementing this strategy, and we and the DHS IG identified problems with implementation of past programs with similar objectives. Likewise, in the area of emergency preparedness and response, DHS has developed the National Incident Management System. However, we have reported that much more work remains for DHS to effectively coordinate its implementation. Below we provide more information on progress made by DHS in its mission and management areas. DHS’s border security mission includes detecting and preventing terrorists and terrorist weapons from entering the United States; facilitating the orderly and efficient flow of legitimate trade and travel; interdicting illegal drugs and other contraband; apprehending individuals who are attempting to enter the United States illegally; inspecting inbound and outbound people, vehicles, and cargo; and enforcing laws of the United States at the border. As shown in table 2, we identified 12 performance expectations for DHS in the area of border security and found that DHS has generally achieved 5 of them and has generally not achieved 7 others. DHS’s immigration enforcement mission includes apprehending, detaining, and removing criminal and illegal aliens; disrupting and dismantling organized smuggling of humans and contraband as well as human trafficking; investigating and prosecuting those who engage in benefit and document fraud; blocking and removing employers’ access to undocumented workers; and enforcing compliance with programs to monitor visitors. As shown in table 3, we identified 16 performance expectations for DHS in the area of immigration enforcement and found that DHS has generally achieved 8 of them and has generally not achieved 4 others. For 4 performance expectations, we could not make an assessment. DHS’s immigration services mission includes administering immigration benefits and working to reduce immigration benefit fraud. As shown in table 4, we identified 14 performance expectations for DHS in the area of immigration services and found that DHS has generally achieved 5 of them and has generally not achieved 9 others. DHS’s aviation security mission includes strengthening airport security; providing and training a screening workforce; prescreening passengers against terrorist watch lists; and screening passengers, baggage, and cargo. As shown in table 5, we identified 24 performance expectations for DHS in the area of aviation security and found that DHS has generally achieved 17 of them and has generally not achieved 7 others. DHS’s surface transportation security mission includes establishing security standards and conducting assessments and inspections of surface transportation modes, which include passenger and freight rail; mass transit; highways, including commercial vehicles; and pipelines. As shown in table 6, we identified 5 performance expectations for DHS in the area of surface transportation security and found that DHS has generally achieved 3 of them and has generally not achieved 2. DHS’s maritime security responsibilities include port and vessel security, maritime intelligence, and maritime supply chain security. As shown in table 7, we identified 23 performance expectations for DHS in the area of maritime security and found that DHS has generally achieved 17 of them and has generally not achieved 4 others. For 2 performance expectations, we could not make an assessment. DHS’s emergency preparedness and response mission includes preparing to minimize the damage and recover from terrorist attacks and disasters; helping to plan, equip, train, and practice needed skills of first responders; and consolidating federal response plans and activities to build a national, coordinated system for incident management. As shown in table 8, we identified 24 performance expectations for DHS in the area of emergency preparedness and response and found that DHS has generally achieved 5 of them and has generally not achieved 18 others. For 1 performance expectation, we could not make an assessment. DHS’s critical infrastructure and key resources protection activities include developing and coordinating implementation of a comprehensive national plan for critical infrastructure protection, developing partnerships with stakeholders and information sharing and warning capabilities, and identifying and reducing threats and vulnerabilities. As shown in table 9, we identified 7 performance expectations for DHS in the area of critical infrastructure and key resources protection and found that DHS has generally achieved 4 of them and has generally not achieved 3 others. DHS’s science and technology efforts include coordinating the federal government’s civilian efforts to identify and develop countermeasures to chemical, biological, radiological, nuclear, and other emerging terrorist threats. As shown in table 10, we identified 6 performance expectations for DHS in the area of science and technology and found that DHS has generally achieved 1 of them and has generally not achieved 5 others. DHS’s acquisition management efforts include managing the use of contracts to acquire goods and services needed to fulfill or support the agency’s missions, such as information systems, new technologies, aircraft, ships, and professional services. As shown in table 11, we identified 3 performance expectations for DHS in the area of acquisition management and found that DHS has generally achieved 1 of them and has generally not achieved 2 others. DHS’s financial management efforts include consolidating or integrating component agencies’ financial management systems. As shown in table 12, we identified 7 performance expectations for DHS in the area of financial management and found that DHS has generally achieved 2 of them and has generally not achieved 5 others. DHS’s key human capital management areas include pay, performance management, classification, labor relations, adverse actions, employee appeals, and diversity management. As shown in table 13, we identified 8 performance expectations for DHS in the area of human capital management and found that DHS has generally achieved 2 of them and has generally not achieved 6 others. DHS’s information technology management efforts include developing and using an enterprise architecture, or corporate blueprint, as an authoritative frame of reference to guide and constrain system investments; defining and following a corporate process for informed decision making by senior leadership about competing information technology investment options; applying system and software development and acquisition discipline and rigor when defining, designing, developing, testing, deploying, and maintaining systems; establishing a comprehensive, departmentwide information security program to protect information and systems; having sufficient people with the right knowledge, skills, and abilities to execute each of these areas now and in the future; and centralizing leadership for extending these disciplines throughout the organization with an empowered Chief Information Officer. As shown in table 14, we identified 13 performance expectations for DHS in the area of information technology management and found that DHS has generally achieved 2 of them and has generally not achieved 8 others. For 3 performance expectations, we could not make an assessment. DHS’s responsibilities for real property management are specified in Executive Order 13327, “Federal Real Property Asset Management,” and include establishment of a Senior Real Property Officer, development of an asset inventory, and development and implementation of an asset management plan and performance measures. As shown in table 15, we identified 9 performance expectations for DHS in the area of real property management and found that DHS has generally achieved 6 of them and has generally not achieved 3 others. Our report contains detailed information on DHS’s progress in achieving each of the performance expectations, including a detailed summary of our work, the DHS IG’s work, and DHS documentation and officials’ statements. We also provide our basis for each assessment. In commenting on a draft of our report, DHS disagreed with our assessments for 42 of the 171 performance expectations noted above. In our report, we provide detailed responses to DHS’s comments on the 42 performance expectations. We look forward to discussing our assessments in all the mission and management areas in more detail with the committee and subcommittees to help inform their ongoing oversight efforts. Our work has identified cross-cutting issues that have hindered DHS’s progress in its mission and management areas. These issues include: (1) transforming and integrating DHS’s management functions; (2) establishing baseline performance goals and measures and engaging in effective strategic planning efforts; (3) applying and improving a risk management approach for implementing missions and making resource allocation decisions; (4) sharing information with key stakeholders; and (5) coordinating and partnering with federal, state, local, and private sector agencies entities. The creation of DHS is an enormous management challenge, and DHS faces a formidable task in its transformation efforts as it works to integrate over 170,000 federal employees from 22 component agencies. Each component agency brought differing missions, cultures, systems, and procedures that the new department had to efficiently and effectively integrate into a single, functioning unit. At the same time it weathers these growing pains, DHS must still fulfill its various homeland security and other missions. DHS has developed a strategic plan, is working to integrate some management functions, and has continued to form necessary partnerships to achieve mission success. Despite these efforts, we reported earlier this year that DHS implementation and transformation remains high-risk because DHS has not yet developed a comprehensive management integration strategy and its management systems and functions⎯especially related to acquisition, financial, human capital, and information management⎯are not yet fully integrated and wholly operational. A number of DHS’s programs lack outcome goals and measures, a fact that may hinder the department’s ability to effectively assess the results of program efforts or fully assess whether the department is using resources effectively and efficiently, especially given various agency priorities for resources. In particular, we have reported that some of DHS’s components have not developed adequate outcome-based performance measures or comprehensive plans to monitor, assess, and independently evaluate the effectiveness of their plans and performance. For example, in August 2005 we reported that U.S. Immigration and Customs Enforcement lacked outcome goals and measures for its worksite enforcement program and recommended that the agency set specific time frames for developing these goals and measures. Further, we have reported that many of DHS’s border- related performance goals and measures are not fully defined or adequately aligned with one another, and some performance targets are not realistic. We have also recognized that DHS faces some inherent difficulties in developing performance goals and measures to address its unique mission and programs, such as in developing measures for the effectiveness of its efforts to prevent and deter terrorist attacks. Within its sphere of responsibility, DHS cannot afford to protect everything against all possible threats. As a result, DHS must make choices about how to allocate its resources to most effectively manage risk. In April 2007, DHS established the new Office of Risk Management and Analysis to serve as the DHS Executive Agent for national-level risk management analysis standards and metrics; develop a standardized approach to risk; develop an approach to risk management to help DHS leverage and integrate risk expertise across components and external stakeholders; assess DHS risk performance to ensure programs are measurably reducing risk; and communicate DHS risk management in a manner that reinforces the risk-based approach. It is too early to tell what effect this office will have on strengthening departmentwide risk management activities. Several DHS component agencies have taken steps toward integrating risk- based decision making into their decision-making processes. For example, the Coast Guard has developed security plans for seaports, facilities, and vessels based on risk assessments. Other components have not always utilized such an approach. In addition, DHS has not performed comprehensive risk assessments in transportation, critical infrastructure, and the immigration and customs systems to guide resource allocation decisions. For example, DHS has not fully utilized a risk-based strategy to allocate resources among transportation sectors. Although TSA has developed tools and processes to assess risk within and across transportation modes, it has not fully implemented these efforts to drive resource allocation decisions. In 2005, we designated information sharing for homeland security as high-risk and continued that designation in 2007. We recently reported that the nation still lacked an implemented set of governmentwide policies and processes for sharing terrorism-related information but has issued a strategy on how it will put in place the overall framework, policies, and architecture for sharing with all critical partners—actions that we and others have recommended. DHS has taken some steps to implement its information-sharing responsibilities. For example, DHS implemented a network to share homeland security information. States and localities are also creating their own information “fusion” centers, some with DHS support. However, DHS did not fully adhere to key practices in coordinating efforts on its homeland security information network with state and local information sharing initiatives and faces other information-sharing challenges, including developing productive information-sharing relationships among the federal government, state and local governments, and the private sector. To secure the nation, DHS must form effective and sustained partnerships among legacy component agencies and also with a range of other entities, including other federal agencies, state and local governments, the private and nonprofit sectors, and international partners, but has faced difficulties in doing so. Thirty-three of the 43 initiatives the National Strategy for Homeland Security are required to be implemented by three or more federal agencies. In addition, the private sector is a key homeland security partner. For example, DHS must partner with individual companies and organizations to protect vital national infrastructure, such as the nation’s water supply, transportation systems, and chemical facilities. In October 2006 we reported that all 17 critical infrastructure sectors had established their respective government councils, and nearly all sectors had initiated their voluntary private sector councils in response to the National Infrastructure Protection Plan. In addition, through its Customs-Trade Partnership Against Terrorism Program, CBP has worked in partnership with private companies to review their supply chain security plans. However, DHS has faced some challenges in developing other effective partnerships and in clarifying the roles and responsibilities of various homeland security stakeholders. For example, federal and private sector stakeholders stated that the Transportation Security Administration (TSA) has not provided them with the information they would need to support TSA’s efforts for the Secure Flight program. Further, lack of clarity regarding roles and responsibilities caused DHS difficulties in coordinating with its emergency preparedness and response partners in responding to Hurricanes Katrina and Rita. Given the leading role that DHS plays in securing the homeland, it is critical that the department’s mission programs and management systems and functions operate as efficiently and effectively as possible. In the more than 4 years since its establishment, the department has taken important actions to secure the border and the transportation sector and to defend against, prepare for, and respond to threats and disasters. DHS has had to undertake these critical missions while also working to transform itself into a fully functioning cabinet department—a difficult undertaking for any organization and one that can take, at a minimum, 5 to 7 years to complete even under less daunting circumstances. At the same time, a variety of factors, including Hurricanes Katrina and Rita, threats to and attacks on transportation systems in other countries, and new responsibilities and authorities provided by Congress have forced the department to reassess its priorities and reallocate resources to address key domestic and international events and to respond to emerging issues and threats. As it moves forward, DHS will continue to face the challenges that have affected its operations thus far, including transforming into a high- performing, results-oriented agency; developing results-oriented goals and measures to effectively assess performance; developing and implementing a risk-based approach to guide resource decisions; and establishing effective frameworks and mechanisms for sharing information and coordinating with homeland security partners. DHS has undertaken efforts to address these challenges but will need to give continued attention to these efforts in order to efficiently and effectively identify and prioritize mission and management needs, implement efforts to address those needs, and allocate resources accordingly. Efforts to address these challenges are especially important given the threat environment and long-term fiscal imbalance facing the nation. While this testimony contains no new recommendations, in past products GAO has made approximately 700 recommendations to DHS. DHS has implemented some of these recommendations and taken actions to implement others. However, we have reported that the department still has much to do to ensure that it conducts its missions efficiently and effectively while it simultaneously prepares to address future challenges that face the department and the nation. A well-managed, high-performing Department of Homeland Security is essential to meeting the significant homeland security challenges facing the nation. As DHS continues to evolve, implement its programs, and integrate its functions, we will continue to review its progress and performance and provide information to Congress and the public on its efforts. 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 testimony, please contact Norman J. Rabkin, Managing Director, Homeland Security and Justice, at 202-512- 8777 or [email protected]. Other key contributors to this statement were Jason Barnosky, Rebecca Gambler, Kathryn Godfrey, Christopher Keisling, Thomas Lombardi, Octavia Parks, and Sue Ramanathan. 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.
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The Department of Homeland Security's (DHS) recent 4-year anniversary provides an opportunity to reflect on the progress DHS has made. The creation of DHS was one of the largest federal reorganizations in the last several decades, and GAO has reported that it was an enormous management challenge and that the size, complexity, and importance of the effort made the challenge especially daunting and critical to the nation's security. Our prior work on mergers and acquisitions has found that successful transformations of large organizations, even those faced with less strenuous reorganizations than DHS, can take at least 5 to 7 years to achieve. This testimony is based on our August 2007 report evaluating DHS's progress since March 2003. Specifically, it addresses DHS's progress across 14 mission and management areas and key themes that have affected DHS's implementation efforts. Since its establishment in March 2003, DHS has made varying levels of progress in implementing its mission and management areas, as shown in the following table. In general, DHS has made more progress in its mission areas than in its management areas. Within its mission areas, DHS has made progress in developing plans and programs, but has faced challenges in its implementation efforts. Key underlying themes have affected DHS's implementation efforts. These include strategies to achieve agency transformation, strategic planning and results management, risk management, information sharing, and partnerships and coordination. For example, we have designated DHS's implementation and transformation as high-risk. While DHS has made progress in transforming its component agencies into a fully functioning department, it has not yet addressed elements of the transformation process, such as developing a comprehensive transformation strategy. DHS also has not yet fully adopted and applied a risk management approach in implementing its mission and management functions. Some DHS component agencies have taken steps to do so, but this approach is not yet used departmentwide. In addition, DHS has taken steps to share information and coordinate with homeland security partners but has faced difficulties in these partnership efforts. Given DHS's leading role in securing the homeland, it is critical that the department's mission and management programs operate as efficiently and effectively as possible. DHS has taken important actions to secure the border and transportation sectors and to prepare for and respond to disasters. DHS has had to undertake these missions while also working to transform itself into a fully functioning cabinet department--a difficult task for any organization. As DHS moves forward, it will be important for the department to continue to develop more measurable goals to guide implementation efforts and to enable better accountability. It will also be important for DHS to continually reassess its mission and management goals, measures, and milestones to evaluate progress made, identify past and emerging obstacles, and examine alternatives to effectively address those obstacles.
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Each year, OMB and federal agencies work together to determine how much the government plans to spend on IT projects and how these funds are to be allocated. Planned federal IT spending in fiscal year 2009 totaled about $71 billion—of which $22 billion was planned for IT system development work, and the remainder was planned for operations and maintenance of existing systems. OMB plays a key role in overseeing federal agencies’ IT investments and how they are managed, stemming from its functions of assisting the President in overseeing the preparation of the federal budget and supervising budget preparation in executive branch agencies. In helping to formulate the President’s spending plans, OMB is responsible for evaluating the effectiveness of agency programs, policies, and procedures; assessing competing funding demands among agencies; and setting funding priorities. To carry out these responsibilities, OMB depends on agencies to collect and report accurate and complete information; these activities depend, in turn, on agencies having effective IT management practices. To drive improvement in the implementation and management of IT projects, Congress enacted the Clinger-Cohen Act in 1996, expanding the responsibilities delegated to OMB and agencies under the Paperwork Reduction Act. The Clinger-Cohen Act requires agencies to engage in performance- and results-based management, and to implement and enforce IT management policies and guidelines. The act also requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by executive agencies. Over the past several years, we have reported and testified on OMB’s initiatives to highlight troubled projects, justify IT investments, and use project management tools. We have made multiple recommendations to OMB and federal agencies to improve these initiatives to further enhance the oversight and transparency of federal IT projects. As a result, OMB recently used this body of work to develop and implement improved processes to oversee and increase transparency of IT investments. Specifically, in June 2009, OMB publicly deployed a Web site that displays dashboards of all major federal IT investments to provide OMB and others with the ability to track the progress of these investments over time. Given the size and significance of the government’s investment in IT, it is important that projects be managed effectively to ensure that public resources are wisely invested. Effectively managing projects entails, among other things, pulling together essential cost, schedule, and technical information in a meaningful, coherent fashion so that managers have an accurate view of the program’s development status. Without meaningful and coherent cost and schedule information, program managers can have a distorted view of a program’s status and risks. To address this issue, in the 1960s, the Department of Defense (DOD) developed the EVM technique, which goes beyond simply comparing budgeted costs with actual costs. This technique measures the value of work accomplished in a given period and compares it with the planned value of work scheduled for that period and with the actual cost of work accomplished. Differences in these values are measured in both cost and schedule variances. Cost variances compare the value of the completed work (i.e., the earned value) with the actual cost of the work performed. For example, if a contractor completed $5 million worth of work and the work actually cost $6.7 million, there would be a negative $1.7 million cost variance. Schedule variances are also measured in dollars, but they compare the earned value of the completed work with the value of the work that was expected to be completed. For example, if a contractor completed $5 million worth of work at the end of the month but was budgeted to complete $10 million worth of work, there would be a negative $5 million schedule variance. Positive variances indicate that activities are costing less or are completed ahead of schedule. Negative variances indicate activities are costing more or are falling behind schedule. These cost and schedule variances can then be used in estimating the cost and time needed to complete the program. Without knowing the planned cost of completed work and work in progress (i.e., the earned value), it is difficult to determine a program’s true status. Earned value allows for this key information, which provides an objective view of program status and is necessary for understanding the health of a program. As a result, EVM can alert program managers to potential problems sooner than using expenditures alone, thereby reducing the chance and magnitude of cost overruns and schedule slippages. Moreover, EVM directly supports the institutionalization of key processes for acquiring and developing systems and the ability to effectively manage investments—areas that are often found to be inadequate on the basis of our assessments of major IT investments. In August 2005, OMB issued guidance outlining steps that agencies must take for all major and high-risk development projects to better ensure improved execution and performance and to promote more effective oversight through the implementation of EVM. Specifically, this guidance directs agencies to (1) develop comprehensive policies to ensure that their major IT investments are using EVM to plan and manage development; (2) include a provision and clause in major acquisition contracts or agency in-house project charters directing the use of an EVM system that is compliant with the American National Standards Institute (ANSI) standard; (3) provide documentation demonstrating that the contractor’s or agency’s in-house EVM system complies with the national standard; (4) conduct periodic surveillance reviews; and (5) conduct integrated baseline reviews on individual programs to finalize their cost, schedule, and performance goals. Building on OMB’s requirements, in March 2009, we issued a guide on best practices for estimating and managing program costs. This guide highlights the policies and practices adopted by leading organizations to implement an effective EVM program. Specifically, in the guide, we identify the need for organizational policies that establish clear criteria for which programs are required to use EVM, specify compliance with the ANSI standard, require a standard product-oriented structure for defining work products, require integrated baseline reviews, provide for specialized training, establish criteria and conditions for rebaselining programs, and require an ongoing surveillance function. In addition, we identify key practices that individual programs can use to ensure that they establish a sound EVM system, that the earned value data are reliable, and that the data are used to support decision making. We have previously reported on the weaknesses associated with the implementation of sound EVM programs at various agencies, as well as on the lack of aggressive management action to correct poor cost and schedule performance trends based on earned value data for major system acquisition programs: In July 2008, we reported that the Federal Aviation Administration’s EVM policy was not fully consistent with best practices. For example, the agency required its program managers to obtain EVM training, but did not enforce completion of this training or require other relevant personnel to obtain this training. In addition, although the agency was using EVM to manage IT acquisitions, not all programs were ensuring that their earned value data were reliable. Specifically, of the three programs collecting EVM data, only one program adequately ensured that its earned value data were reliable. As a result, the agency faced an increased risk that managers were not getting the information they needed to effectively manage the programs. In response to our findings and recommendations, the Federal Aviation Administration reported that it had initiatives under way to improve its EVM oversight processes. In September 2008, we reported that the Department of the Treasury’s EVM policy was not fully consistent with best practices. For example, while the department’s policy addressed some practices, such as establishing clear criteria for which programs are to use EVM, it did not address others, such as requiring and enforcing EVM training. In addition, six programs at Treasury and its bureaus were not consistently implementing practices needed for establishing a comprehensive EVM system. For example, when executing work plans and recording actual costs, a key practice for ensuring that the data resulting from the EVM system are reliable, only two of the six investments that we reviewed incorporated government costs with contractor costs. As a result, we reported that Treasury may not be able to effectively manage its critical programs. In response to our findings and recommendations, Treasury reported that it would release a revised EVM policy and further noted that initiatives to improve EVM-related training were under way. In a series of reports and testimonies from September 2004 to June 2009, we reported that the National Oceanic and Atmospheric Administration’s National Polar-orbiting Operational Environmental Satellite System program was likely to overrun its contract at completion on the basis of our analysis of contractor EVM data. Specifically, the program had delayed key milestones and experienced technical issues in the development of key sensors, which we stated would affect cost and schedule estimates. As predicted, in June 2006 the program was restructured, decreasing its complexity, delaying the availability of the first satellite by 3 to 5 years, and increasing its cost estimate from $6.9 billion to $12.5 billion. However, the program has continued to face significant technical and management issues. As of June 2009, launch of the first satellite was delayed by 14 months, and our current projected total cost estimate is approximately $15 billion. We made multiple recommendations to improve this program, including establishing a realistic time frame for revising the cost and schedule baselines, developing plans to mitigate the risk of gaps in satellite continuity, and tracking the program executive committee’s action items from inception to closure. While the eight agencies we reviewed have established policies requiring the use of EVM on their major IT investments, none of these policies are fully consistent with best practices, such as standardizing the way work products are defined. We recently reported that leading organizations establish EVM policies that establish clear criteria for which programs are to use EVM; require programs to comply with the ANSI standard; require programs to use a product-oriented structure for defining work products; require programs to conduct detailed reviews of expected costs, schedules, and deliverables (called an integrated baseline review); require and enforce EVM training; define when programs may revise cost and schedule baselines (called require system surveillance—that is, routine validation checks to ensure that major acquisitions are continuing to comply with agency policies and standards. Table 1 describes the key components of an effective EVM policy. The eight agencies we reviewed do not have comprehensive EVM policies. Specifically, none of the agencies’ policies are fully consistent with all seven key components of an effective EVM policy. Table 2 provides a detailed assessment, by agency, and a discussion of the agencies’ policies follows the table. Criteria for implementing EVM on all IT major investments: Seven of the eight agencies fully defined criteria for implementing EVM on major IT investments. The agencies with sound policies typically defined “major” investments as those exceeding a certain cost threshold, and, in some cases, agencies defined lower tiers of investments requiring reduced levels of EVM compliance. Veterans Affairs only partially met this key practice because its policy did not clearly state whether programs or major subcomponents of programs (projects and subprojects) had to comply with EVM requirements. According to agency officials, this lack of clarity may cause EVM to be inconsistently applied across the investments. Without an established policy that clearly defines the conditions under which new or ongoing acquisition programs are required to implement EVM, these agencies cannot ensure that EVM is being appropriately applied on their major investments. Compliance with the ANSI standard: Seven of the eight agencies required that all work activities performed on major investments be managed by an EVM system that complies with industry standards. One agency, Transportation, partially met this key practice because its policy contained inconsistent criteria for when investments must comply with standards. Specifically, in one section, the policy requires a certain class of investments to adhere to a subset of the ANSI standard; however, in another section, the policy merely states that the investments must comply with general EVM principles. This latter section is vague and could be interpreted in multiple ways, either more broadly or narrowly than the specified subset of the ANSI standard. Without consistent criteria on investment compliance, Transportation may be unable to ensure that the work activities for some of its major investments are establishing sound EVM systems that produce reliable earned value data and provide the basis for informed decision making. Standard structure for defining the work products: DOD was the only agency to fully meet this key practice by developing and requiring the use of standard product-oriented work breakdown structures. Four agencies did not meet this key practice, while the other three only partially complied. Of those agencies that partially complied, National Aeronautics and Space Administration (NASA) policy requires mission (or space flight) projects to use a standardized product-oriented work breakdown structure; however, IT projects do not have such a requirement. NASA officials reported that they are working to develop a standard structure for their IT projects; however, they were unable to provide a time frame for completion. Homeland Security and Justice have yet to standardize their product structures. Among the agencies that did not implement this key practice, reasons included, among other things, the difficulty in establishing a standard structure for component agencies that conduct different types of work with varying complexity. While this presents a challenge, agencies could adopt an approach similar to DOD’s and develop various standard work structures based on the kinds of work being performed by the various component agencies (e.g., automated information system, IT infrastructure, and IT services). Without fully implementing a standard product-oriented structure (or structures), agencies will be unable to collect and share data among programs and may not have the information they need to make decisions on specific program components. Integrated baseline review: All eight agencies required major IT investments to conduct an integrated baseline review to ensure that program baselines fully reflect the scope of work to be performed, key risks, and available resources. For example, DOD required that these reviews occur within 6 months of contract award and after major modifications have taken place, among other things. Training requirements: Commerce was the only agency to fully meet this key practice by requiring and enforcing EVM training for all personnel with investment oversight and program management responsibilities. Several of the partially compliant agencies required EVM training for project managers—but did not extend this requirement to other program management personnel or executives with investment oversight responsibilities. Many agencies told us that it would be a significant challenge to require and enforce EVM training for all relevant personnel, especially at the executive level. Instead, most agencies have made voluntary EVM training courses available agencywide. However, without comprehensive EVM training requirements and enforcement, agencies cannot effectively ensure that programs have the appropriate skills to validate and interpret EVM data, and that their executives will be able to make fully informed decisions based on the EVM analysis. Rebaselining criteria: Three of the eight agencies fully met this key practice. For example, the Justice policy outlines acceptable reasons for rebaselining, such as when the baseline no longer reflects the current scope of work being performed, and requires investments to explain why their current plans are no longer feasible and to develop realistic cost and schedule estimates for remaining work. Among the five partially compliant agencies, Agriculture and Veterans Affairs provided policies, but in draft form; NASA was in the process of updating its policy to include more detailed criteria for rebaselining; and Homeland Security did not define acceptable reasons but did require an explanation of the root causes for cost and schedule variances and the development of new cost and schedule estimates. In several cases, agencies were unaware of the detailed rebaselining criteria to be included in their EVM policies. Until their policies fully meet this key practice, agencies face an increased risk that their executive managers will make decisions about programs with incomplete information, and that these programs will continue to overrun costs and schedules because their underlying problems have not been identified or addressed. System surveillance: All eight agencies required ongoing EVM system surveillance of all programs (and contracts with EVM requirements) to ensure their continued compliance with industry standards. For example, Agriculture required its surveillance teams to submit reports—to the programs and the Chief Information Officer—with documented findings and recommendations regarding compliance. Furthermore, the agency also established a schedule to show when EVM surveillance is expected to take place on each of its programs. Our studies of 16 major system acquisition programs showed that all agencies are using EVM; however, the extent of that implementation varies among the programs. Our work on best practices in EVM identified 11 key practices that are implemented on acquisition programs of leading organizations. These practices can be organized into three management areas: establishing a sound EVM system, ensuring reliable data, and using earned value data to make decisions. Table 3 lists these 11 key EVM practices by management area. Of the 16 case study programs, 3 demonstrated a full level of maturity in all three management areas; 3 had full maturity in two areas; and 4 had reached full maturity in one area. The remaining 6 programs did not demonstrate full levels of maturity in any of the management areas; however, in all but 1 case, they were able to demonstrate partial capabilities in each of the three areas. Table 4 identifies the 16 case study programs and summarizes our results for these programs. Following the table is a summary of the programs’ implementation of each key area of EVM program management responsibility. Additional details on the 16 case studies are provided in appendix II. Most programs did not fully implement the key practices needed to establish comprehensive EVM systems. Of the 16 programs, 3 fully implemented the practices in this program management area, and 13 partially implemented the practices. The Decennial Response Integration System, Next Generation Identification, and Surveillance and Broadcast System programs demonstrated that they had fully implemented the six practices in this area. For example, our analysis of the Decennial Response Integration System program schedule showed that activities were properly sequenced, realistic durations were established, and labor and material resources were assigned. The Surveillance and Broadcast System program conducted a detailed integrated baseline review to validate its performance baseline. It was also the only program to fully institutionalize EVM at the program level—meaning that it collects performance data on the contractor and government work efforts—in order to get a complete view into program status. Thirteen programs demonstrated that they partially implemented the six key practices in this area. In most cases, programs had work breakdown structures that defined work products to an appropriate level of detail and had identified the personnel responsible for delivering these work products. However, for all 13 programs, the project schedules contained issues that undermined the quality of their performance baselines. Weaknesses in these schedules included the improper sequencing of activities, such as incomplete or missing linkages between tasks; a lack of resources assigned to all activities; invalid critical paths (the sequence of activities that, if delayed, will impact the planned completion date of the project); and the excessive or unjustified use of constraints, which impairs the program’s ability to forecast the impact of ongoing delays on future planned work activities. These weaknesses are of concern because the schedule serves as the performance baseline against which earned value is measured. As such, poor schedules undermine the overall quality of a program’s EVM system. Other key weaknesses included the following examples: Nine programs did not adequately determine an objective measure of earned value and develop the performance baseline—that is, key practices most appropriately addressed through a comprehensive integrated baseline review, which none of them fully performed. For example, the Air and Space Operations Center—Weapon System program conducted an integrated baseline review in May 2007 to validate one segment of work contained in the baseline; however, the program had not conducted subsequent reviews for the remaining work because doing so would preclude staff from completing their normal work activities. Other reasons cited by the programs for not performing these reviews included the lack of a fully defined scope of work or management’s decision to use ongoing EVM surveillance to satisfy these practices. Without having performed a comprehensive integrated baseline review, programs have not sufficiently evaluated the validity of their baseline plan to determine whether all significant risks contained in the plan have been identified and mitigated, and that the metrics used to measure the progress made on planned work elements are appropriate. Four programs did not define the scope of effort using a work breakdown structure. For example, the Veterans Health Information Systems and Technology Architecture—Foundations Modernization program provided a list of its subprograms; however, it did not define the scope of the detailed work elements that comprise each subprogram. Without a work breakdown structure, programs lack a basis for planning the performance baseline and assigning responsibility for that work, both of which are necessary to accomplish a program’s objectives. Many programs did not fully ensure that their EVM data were reliable. Of the 16 programs, 7 fully implemented the practices for ensuring the reliability of the prime contractor and government performance data, and 9 partially implemented the practices. All 7 programs that demonstrated full implementation conduct monthly reviews of earned value data with technical engineering staff and other key personnel to ensure that the data are consistent with actual performance; perform detailed performance trend analyses to track program progress, cost, and schedule drivers; and make estimates of cost at completion. Four programs that we had previously identified as having schedule weaknesses (Farm Program Modernization; Joint Tactical Radio System—Handheld, Manpack, Small Form Fit; Juno; and Warfighter Information Network—Tactical) were aware of these issues and had sufficient controls in place to mitigate them in order to ensure that the earned value data are reliable. Nine programs partially implemented the three practices for ensuring that earned value data are reliable. In all cases, the program had processes in place to review earned value data (from monthly contractor EVM reports in all but one case), identify and record cost and schedule variances, and forecast estimates at completion. However, 5 of these programs did not adequately analyze EVM performance data and properly record variances from the performance baseline. For example, 2 programs did not adequately document justifications for cost and schedule variances, including root causes, potential impacts, and corrective actions. Other weaknesses in this area include anomalies in monthly performance reports, such as negative dollars being spent for work performed, which impacts the validity of performance data. In addition, 7 of these programs did not demonstrate that they could adequately execute the work plan and record costs because, among other things, they were unaware of the schedule weaknesses we identified and did not have sufficient internal controls in place to deal with these issues to improve the reliability of the earned value data. Lastly, 2 of these programs could not adequately forecast estimates at completion due, in part, to anomalies in the prime contractor’s EVM reports, in combination with the weaknesses contained in the project schedule. Programs were uneven in their use of earned value data to make decisions. Of the 16 programs, 9 fully implemented the practices for using earned value data for decision making, 6 partially implemented them, and 1 did not implement them. Among the 9 fully implemented programs, both the Automated Commercial Environment and Juno programs integrated their EVM and risk management processes to support the program manager in making better decisions. The Automated Commercial Environment program actively recorded risks associated with major variances from the EVM reports in the program’s risk register. Juno further used the earned value data to analyze threats against remaining management reserve and to estimate the cost impact of these threats. Six programs demonstrated limited capabilities in using earned value data for making decisions. In most cases, these programs included earned value performance trend data in monthly program management review briefings. However, the majority had processes for taking management action to address the cost and schedule drivers causing poor trends that were ad hoc and separate from the programs’ risk management processes—and, in most cases, the risks and issues found in the EVM reports did not correspond to the risks contained in the program risk registers. In addition, 4 of these programs were not able to adequately update the performance baseline as changes occurred because, in many cases, the original baseline was not appropriately validated. For example, the Mars Science Laboratory program just recently updated its performance baseline as part of a recent replan effort. However, without validating the original and current baselines with a project-level integrated baseline review, it is unclear whether the changes to the baseline were reasonable, and whether the risks assumed in the baseline have been identified and appropriately mitigated. One program (Veterans Health Information Systems and Technology Architecture—Foundations Modernization) was not using earned value data for decision making. Specifically, the program did not actively manage earned value performance trends, nor were these data incorporated into programwide management reviews. The inconsistent application of EVM across the investments exists in part because of the weaknesses we previously identified in the eight agencies’ policies, as well as a lack of enforcement of the EVM policy components already in place. For example, deficiencies in all three management areas can be attributed, in part, to a lack of comprehensive EVM training requirements—which was a policy component that most agencies did not fully address. The only 3 programs that had fully implemented all key EVM practices either had comprehensive training requirements in their agency EVM policy or enforced rigorous training requirements beyond that for which the policy called. Most of the remaining programs met the minimum requirements of their agencies’ policies. However, all programs that had attained full maturity in two management areas had also implemented more stringent training requirements, although none could match the efforts made on the other 3 programs. Without making this training a comprehensive requirement, these agencies are at risk that their major system acquisition programs will continue to have management and technical staff who lack the skills to fully implement key EVM practices. Our case study analysis also highlighted multiple areas in which programs were not in compliance with their agencies’ established EVM policies. This is an indication that agencies are not adequately enforcing program compliance. These policy areas include requiring EVM compliance at the start of the program, validating the baseline with an integrated baseline review, and conducting ongoing EVM surveillance. Until key EVM practices are fully implemented, selected programs face an increased risk that program managers cannot effectively optimize EVM as a management tool to mitigate and reverse poor cost and schedule performance trends. Earned value data trends of the 16 case study programs indicate that most are currently experiencing cost overruns and schedule slippages, and, based on our analysis, it is likely that when these programs are completed, the total cost overrun will be about $3 billion. To date, these programs, collectively, have already overrun their original life-cycle cost estimates by almost $2 billion (see table 5). Taking the current earned value performance into account, our analysis of the 16 case study programs indicated that most are experiencing shortfalls against their currently planned cost and schedule targets. Specifically, earned value performance data over a 12-month period showed that the 16 programs combined have exceeded their cost targets by $275 million. During that period, they also experienced schedule variances and were unable to accomplish almost $93 million worth of planned work. In most cases, the negative cost and schedule performance trends were attributed to ongoing technical issues in the development or testing of system components. Furthermore, our projections of future estimated costs at completion based on our analysis of current contractor performance trends indicate that these programs will most likely continue to experience cost overruns to completion, totaling almost $1 billion. In contrast, the programs’ contractors estimate the cost overruns at completion will be approximately $469.7 million. These estimates are based on the contractors’ assumption that their efficiency in completing the remaining work will significantly improve over what has been done to date. Furthermore, it should be noted that in 4 cases, the contractor-estimated overrun is smaller than the cost variances they have already accumulated—which is an indication that these estimates are aggressively optimistic. With the inclusion of the overruns already incurred to date, the total increase in life-cycle costs will be about $3 billion. Our analysis is presented in table 6. Additional details on the 16 case studies are provided in appendix II. Eleven programs are expected to incur a cost overrun at contract completion. In particular, two programs (i.e., the James Webb Space Telescope and Veterans Health Information Systems and Technology Architecture—Foundations Modernization programs) will likely experience a combined overrun of $798.7 million, which accounts for about 80 percent of our total projection. With timely and effective action taken by program and executive management, it is possible to reverse negative performance trends so that the projected cost overruns at completion may be reduced. To get such results, management at all levels could be strengthened, including contractor management, program office management, and executive-level management. For example, programs could strengthen program office controls and contractor oversight by obtaining earned value data weekly (instead of monthly) so that they can make decisions with immediate and greater impact. Additionally, key risks could be elevated to the program level and, if necessary, to the executive level to ensure that appropriate mitigation plans are in place and that they are tracked to closure. Key agencies have taken a number of important steps to improve the management of major acquisitions through the implementation of EVM. Specifically, the agencies have established EVM policies and require their major system acquisition programs to use EVM. However, none of the eight agencies that we reviewed have comprehensive EVM policies. Most of these policies omit or lack sufficient guidance on the type of work structure needed to effectively use EVM data and on the training requirements for all relevant personnel. Without comprehensive policies, it will be difficult for the agencies to gain the full benefits of EVM. Few of our 16 case study programs had fully implemented EVM capabilities, raising concerns that programs cannot efficiently produce reliable estimates of cost at completion. Many of these weaknesses found on these programs can be traced back to inadequate agency EVM policies and raise questions concerning the agencies’ enforcement of the policies already established, including the completion of the integrated baseline reviews and system surveillance. Until agencies expand and enforce their EVM policies, it will be difficult for them to optimize the effectiveness of this management tool, and they will face an increased risk that managers are not getting the information they need to effectively manage the programs. In addition to concerns about their implementation of EVM, the programs’ earned value data show trends toward cost overruns that are likely to collectively total about $3 billion. Without timely and aggressive management action, this projected overrun will be realized, resulting in the expenditure of over $1 billion more than currently planned. To address the weaknesses identified in agencies’ policies and practices in using EVM, we are making recommendations to the eight major agencies included in this review. Specifically, we recommend that the following three actions be taken by the Secretaries of the Departments of Agriculture, Commerce, Defense, Homeland Security, Justice, Transportation, and Veterans Affairs and the Administrator of the National Aeronautics and Space Administration: modify policies governing EVM to ensure that they address the weaknesses that we identified, taking into consideration the criteria used in this report; direct key system acquisition programs to implement the EVM practices that address the detailed weaknesses that we identified in appendix II, taking into consideration the criteria used in this report; and direct key system acquisition programs to take action to reverse current negative performance trends, as shown in the earned value data, to mitigate the potential cost and schedule overruns. We provided the selected eight agencies with a draft of our report for review and comment. The Department of Homeland Security responded that it had no comments. The remaining seven agencies generally agreed with our results and recommendations. Agencies also provided technical comments, which we incorporated in the report as appropriate. The comments of the agencies are summarized in the following text: In e-mail comments on a draft of the report, officials from the U.S. Department of Agriculture’s Office of the Chief Information Officer stated that the department has begun to address the weaknesses in its EVM policy identified in the report. In written comments on a draft of the report, the Secretary of Commerce stated that, regarding the second and third recommendations, the Department of Commerce was pleased that the Decennial Response Integration System was found to have fully implemented all 11 key EVM practices, and that the Field Data Collection Automation program fully implemented six key practices. The department added that its recent actions on the Field Data Collection Automation program should move this program to full compliance with the key EVM practices. Furthermore, regarding the first recommendation, the Secretary stated that while the department understands and appreciates the value of standardized work breakdown structures, it maintained that the development of these work structures should take place at the department’s operating units (e.g., Census Bureau), given the wide diversity of missions and project complexity among these units. As noted in our report, we agree that agencies could develop standard work structures based on the kinds of work being performed by the various component agencies. Therefore, we support these efforts described by the department because they are generally consistent with the intent of our recommendation. Commerce’s comments are printed in appendix III. In written comments on a draft of the report, the Department of Defense’s Director of Defense Procurement and Acquisition Policy stated that the department concurred with our recommendations. Among other things, DOD stated that it is essential to maintain the appropriate oversight of acquisition programs, including the use of EVM data to understand program status and anticipate potential problems. DOD’s comments are printed in appendix IV. In written comments on a draft of the report, the Department of Justice’s Assistant Attorney General for Administration stated that, after discussion with our office, it was agreed that the second recommendation, related to implementing EVM practices that address identified weakness, was inadvertently directed to the department, and that no response was necessary. We agreed because the case study program reviewed fully met all key EVM practices. The department concurred with the two remaining recommendations related to modifying EVM policies and reversing negative performance trends. Furthermore, the Assistant Attorney General noted that Justice had begun to take steps to improve its use of EVM, such as modifying its policy to require EVM training for all personnel with investment oversight and program management responsibilities. Justice’s comments are printed in appendix V. In written comments on a draft of the report, the National Aeronautics and Space Administration’s Deputy Administrator stated that the agency concurred with two recommendations and partially concurred with one recommendation. In particular, the Deputy Administrator agreed that opportunities exist for improving the implementation of EVM, but stated that NASA classifies the projects included in the scope of the audit as space flight projects (not as IT-specific projects), which affects the applicability of the agency’s EVM policies and guidance that were reviewed. We recognize that different classifications of IT exist; however, consistent with other programs included in the audit, the selected NASA projects integrate and rely on various elements of IT. As such, we reviewed both the agency’s space flight and IT-specific guidance. Furthermore, the agency partially concurred with one recommendation because it stated that efforts were either under way or planned that will address the weaknesses we identified. We support the efforts that NASA described in its comments because they are generally consistent with the intent of our recommendation. NASA’s comments are printed in appendix VI. In e-mail comments on a draft of the report, the Department of Transportation’s Director of Audit Relations stated that the department is taking immediate steps to modify its policies governing EVM, taking into consideration the criteria used in the draft report. In written comments on a draft of the report, the Secretary of Veterans Affairs stated that the Department of Veterans Affairs generally agreed with our conclusions and concurred with our recommendations. Furthermore, the Secretary stated that Veterans Affairs has initiatives under way to address the weaknesses identified in the report. Veterans Affairs’ comments are printed in appendix VII. 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 Secretaries of the Departments of Agriculture, Commerce, Defense, Homeland Security, Justice, Transportation, and Veterans Affairs; the Administrator of the National Aeronautics and Space Administration; and other interested parties. In addition, the report will be available at no charge on our Web site at http://www.gao.gov. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VIII. Our objectives were to (1) assess whether key departments and agencies have appropriately established earned value management (EVM) policies, (2) determine whether these agencies are adequately using earned value techniques to manage key system acquisitions, and (3) evaluate the earned value data of these selected investments to determine their cost and schedule performances. For this governmentwide review, we assessed eight agencies and 16 investments. We initially identified the 10 agencies with the highest amount of spending for information technology (IT) development, modernization, and enhancement work as reported in the Office of Management and Budget’s (OMB) Fiscal Year 2009 Exhibit 53. These agencies were the Departments of Agriculture, Commerce, Defense, Health and Human Services, Homeland Security, Justice, Transportation, the Treasury, and Veterans Affairs and the National Aeronautics and Space Administration. We excluded Treasury from our selection because we recently performed an extensive review of EVM at that agency. We also subsequently removed Health and Human Services from our selection because the agency did not have investments in system acquisition that met our dollar threshold (as defined in the following text). The resulting eight agencies also made up about 75 percent of the government’s planned IT spending for fiscal year 2009. To ensure that we examined significant investments, we chose from investments (related to system acquisition) that were expected to receive development, modernization, and enhancement funding in fiscal year 2009 in excess of $90 million. We limited the number of selected investments to a maximum of 3 per agency. For agencies with more than 3 investments that met our threshold, we selected the top 3 investments with the highest planned spending. For agencies with 3 or fewer such investments, we chose all of the investments meeting our dollar threshold. Lastly, we excluded investments with related EVM work already under way at GAO. To assess whether key agencies have appropriately established EVM policies, we analyzed agency policies and guidance for EVM. Specifically, we compared these policies and guidance documents with both OMB’s requirements and key best practices recognized within the federal government and industry for the implementation of EVM. These best practices are contained in the GAO cost guide. We also interviewed key agency officials to obtain information on their ongoing and future EVM plans. To determine whether these agencies are adequately using earned value techniques to manage key system acquisitions, we analyzed program documentation, including project work breakdown structures, project schedules, integrated baseline review briefings, risk registers, and monthly management briefings for the 16 selected investments. Specifically, we compared program documentation with EVM and scheduling best practices as identified in the cost guide. We determined whether the program implemented, partially implemented, or did not implement each of the 11 practices. We also interviewed program officials (and observed key program status review meetings) to obtain clarification on how EVM practices are implemented and how the data are used for decision-making purposes. To evaluate the earned value data of the selected investments to determine their cost and schedule performances, we analyzed the earned value data contained in contractor EVM performance reports obtained from the programs. To perform this analysis, we compared the cost of work completed with budgeted costs for scheduled work for a 12-month period to show trends in cost and schedule performances. We also used data from these reports to estimate the likely costs at completion through established earned value formulas. This resulted in three different values, with the middle value being the most likely. To assess the reliability of the cost data, we compared it with other available supporting documents (including OMB and agency financial reports); electronically tested the data to identify obvious problems with completeness or accuracy; and interviewed agency and program officials about the data. For the purposes of this report, we determined that the cost data were sufficiently reliable. We did not test the adequacy of the agency or contractor cost-accounting systems. Our evaluation of these cost data was based on what we were told by the agency and the information they could provide. We conducted this performance audit from February to October 2009 at the agencies’ offices in the Washington, D.C., metropolitan area; Fort Monmouth, New Jersey; Jet Propulsion Lab, Pasadena, California; Hanscom Air Force Base, Massachusetts; and Naval Base San Diego, California. Our work was done in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We conducted case studies of 16 major system acquisition programs (see table 7). For each of these programs, the remaining sections of this appendix provide the following: a brief description of the program, including a graphic illustration of the investment’s life cycle; an assessment of the program’s implementation of the 11 key EVM practices; and an analysis of the program’s recent earned value (EV) data and trends. These data and trends are often described in terms of cost and schedule variances. Cost variances compare the earned value of the completed work with the actual cost of the work performed. Schedule variances are also measured in dollars, but they compare the earned value of the completed work with the value of the work that was expected to be completed. Positive variances are good—they indicate that activities are costing less than expected or are completed ahead of schedule. Negative variances are bad—they indicate activities are costing more than expected or are falling behind schedule. The following information describes the key that we used in tables 8 through 23 to convey the results of our assessment of the 16 case study programs’ implementation of the 11 EVM practices. The program fully implemented all EVM practices in this program management area. The program partially implemented the EVM practices in this program management area. The program did not implement the EVM practices in this program management area. The Farm Program Modernization (MIDAS) program is intended to address the long-term needs in delivering farm benefit programs via business process reengineering and implementation of a commercial off- the-shelf enterprise resource planning solution. MIDAS is an initiative of the Farm Service Agency, which is responsible for administering 35 farm benefit programs. To support these programs, the agency uses two primary systems—a distributed network of legacy computers and a centralized Web farm (to store customer data and host Web-based applications)—both of which have shortcomings. While MIDAS is to replace these computers, it is also intended to provide new applications and redesigned business processes. The Web farm is expected to remain in operation in a supporting role for the program. Currently, MIDAS is in the initiation phase of its life cycle and plans to award the system integration contract in the first quarter of fiscal year 2010. MIDAS fully met 6 of the 11 key practices for implementing EVM and partially met 5 practices. Specifically, a key weakness in the EVM system is the lack of a comprehensive integrated baseline review. Instead, MIDAS focused solely on evaluating the program’s compliance with industry standards and chose not to validate the quality of the baseline. Program officials stated that they plan to conduct a full review to address the risks and realism of the baseline after the prime contract has been awarded. Furthermore, while the MIDAS schedule is generally sound, resources were not assigned to all activities, and the critical path (the longest duration path through the sequenced list of key activities) could not be identified because the current schedule ends in September 2009. Finally, MIDAS met all key practices associated with data reliability, such as executing the work plan and recording costs, as well as all key practices for decision making. The Decennial Response Integration System (DRIS) is to be used during the 2010 Census for collecting and integrating census responses from all sources, including forms and telephone interviews. The system is to improve accuracy and timeliness by standardizing the response data and providing the data to other Census Bureau systems for analysis and processing. Among other things, DRIS is expected to process census data provided by respondents via census forms, telephone agents, and enumerators; assist the public via telephone; and monitor the quality and status of data capture operations. The DRIS program’s estimated life-cycle costs have increased by $372 million, which is mostly due to increases in both paper and telephone workloads. For example, the paper workload increased due to an April 2008 redesign of the 2010 Census that reverted planned automated operations to paper-based processes and requires DRIS to process an additional estimated 40 million paper forms. DRIS fully implemented all 11 of the key EVM practices necessary to manage its system acquisition program. Specifically, the program implemented all practices for establishing a comprehensive EVM system, such as defining the scope of work and scheduling the work. The program’s schedule appropriately captured and sequenced key activities and assigned realistic resources to all key activities. Furthermore, the DRIS team ensured that the resulting EVM data were appropriately verified and validated for reliability by analyzing performance data to identify the magnitude and effect of problems causing key variances, tracking related risks in the program’s risks register, and performing quality checks of the schedule and critical path. Lastly, the DRIS program management team conducted rigorous reviews of EV performance on a monthly basis and took the appropriate management actions to mitigate risks. The Field Data Collection Automation (FDCA) program is intended to provide automation support for the 2010 Census field data collection operations. The program includes the development of handheld computers for identifying and correcting addresses for all known living quarters in the United States (known as address canvassing) and the systems, equipment, and infrastructure that field staff will use to collect data. FDCA handheld computers were originally to be used for other census field operations, such as following up with nonrespondents through personal interviews. However, in April 2008, due to problems identified during testing and cost overruns and schedule slippages in the FDCA program, the Secretary of Commerce announced a redesign of the 2010 Census, and rebaselined FDCA in October 2008. As a result, FDCA’s life-cycle costs have increased from an estimated $596 million to $801 million, a $205 million increase. Furthermore, the responsibility for the design, development, and testing of IT systems for other key field operations was moved from the FDCA contractor to the Census Bureau. FDCA fully met 6 of the 11 key practices for implementing EVM and partially met 5 others. Specifically, the program fully met most practices for establishing a comprehensive EVM system, such as defining the scope of the work effort; however, it only partially met the practice for scheduling the work. Specifically, the program schedule contained weaknesses, including key milestones with fixed completion dates—which hampers the program’s ability to see the impact of delays experienced on open tasks on successor tasks. As such, the FDCA program cannot use the schedule as an active management tool. Furthermore, anomalies in the prime contractor’s EVM reports, combined with weaknesses in the master schedule, affect FDCA’s ability to execute the work plan, analyze variances, and make reliable estimates of cost at completion. Lastly, cost and schedule drivers identified in EVM reports were not fully consistent with the program’s risk register, which prevents the program from taking the appropriate management action to mitigate risks and effectively using EV data for decisions. The Air and Space Operations Center—Weapon System (AOC) is the air and space operations planning, execution, and assessment system for the Joint Force Air Component Commander. According to the agency, there are currently 11 AOCs located around the world, each aligned to the Combatant Commands of the Unified Command Plan, with additional support units for training, help desk, testing, and contingency manpower augmentation. Each AOC is designed to enable commanders to exercise command and control of air, space, information operations, and combat support forces to achieve the objectives of the joint force commander and combatant commander in joint and coalition military operations. As such, the AOC system is intended as the planning and execution engine of any air campaign. AOC fully met 7 of the 11 key practices and partially met 4 others. AOC applied EVM at the contract level and has a capable government team that has made it an integral part of project management. AOC performed detailed analyses of the EV data and reviews the data with engineering staff to ensure that the appropriate metrics have been applied for accurate reporting. AOC has also integrated EVM with its risk management processes to ensure that resources are applied to watch or mitigate risks associated with the cost and schedule drivers reported in the EVM reports. Weaknesses found in AOC’s EVM processes relate to the development and validation of the contractor baseline. In particular, AOC has not performed an integrated baseline review for all work that is currently on contract. The master schedule also contained issues, such as a high number of converging tasks and out-of-sequence tasks, that hamper AOC’s ability to determine the start dates of future tasks. Taken together, these issues undermine the reliability of the schedule as a baseline to measure EV performance. The Joint Tactical Radio System (JTRS) program is developing software- defined radios that are expected to interoperate with existing radios and increase communications and networking capabilities. The JTRS- Handheld, Manpack, Small Form Fit (HMS) product office, within the JTRS Ground Domain program office, is developing handheld, manpack, and small form fit radios. In 2006, the program was restructured to include two concurrent phases of development. Phase I includes select small form fit radios, while Phase II includes small form fit radios with enhanced security as well as handheld and manpack variants. Subsequent to the program’s restructure, the department updated its migration strategy for replacing legacy radios with new tactical radios. As such, the total planned quantity of JTRS-HMS radios was reduced from an original baseline of 328,514—established in May 2004—to 95,551. As a result, the total life- cycle cost of the JTRS-HMS program was reduced from an estimated $19.2 billion to $11.6 billion, a $7.6 billion decrease. JTRS-HMS fully met 10 of the 11 key practices and partially met 1 practice. Specifically, JTRS-HMS implemented most practices for establishing a comprehensive EVM system, such as performing rigorous reviews to validate the baseline; however, the current schedule contained some weaknesses, such as out-of-sequence logic and activities without resources assigned. Program officials were aware of these issues and attributed them to weaknesses in subcontractor schedules that are integrated on a monthly basis. The JTRS-HMS program fully met practices for ensuring that the resulting EV data were appropriately verified and validated for reliability and demonstrated that the program management team was using these data for decision-making purposes. The Warfighter Information Network—Tactical (WIN-T) program is designed to be the Army’s high-speed and high-capacity backbone communications network. The program connects Department of the Army units with higher levels of command and provides the Army’s tactical portion of the Global Information Grid—a Department of Defense initiative aimed at building a secure network and set of information capabilities modeled after the Internet. WIN-T was restructured in June 2007 following a unit cost increase above the critical cost growth threshold (known as a Nunn-McCurdy breach). As a result of the restructuring, it was determined that WIN-T would be fielded in four increments. The third increment is expected to provide the Army with a full networking on-the-move capability and fully support the Army’s Future Combat Systems. In May 2009, the Increment 3 program baseline was approved, and the life-cycle cost for the program was estimated at $38.2 billion. Our assessment of EVM practices and EV data was performed on WIN-T Increment 3. WIN-T fully met 7 of the 11 key practices for implementing EVM, partially met 1 practice, and did not meet 3 practices. Specifically, WIN-T only partially met the practices for establishing a comprehensive EVM system. The schedule contained weaknesses, including fixed completion dates— which prevented the schedule from showing the impact of delays experienced on open or successor tasks or the expected completion dates of key activities. Furthermore, WIN-T has not conducted an integrated baseline review on the current scope of work since rebaselining the prime contract in December 2007. According to program officials, this review has not been conducted because they have not yet finalized the contract. However, as of August 2009, it has been 20 months since work began, which increases the risk that the program has not been measuring progress against a reasonable baseline. Without conducting this review to validate the performance baseline, the baseline cannot be adequately updated as changes occur, and EV data cannot be used effectively for decision-making purposes. The Automated Commercial Environment (ACE) program is the commercial trade processing system being developed by the U.S. Customs and Border Protection to facilitate trade while strengthening border security. The program is to provide trade compliance and border security staff with the right information at the right time, while minimizing administrative burden. Deployed in phases, ACE is expected to be expanded to provide cargo processing capabilities across all modes of transportation and intended to replace existing systems with a single, multimodal manifest system for land, air, rail, and sea cargo. Ultimately, ACE is expected to become the central data collection system for the federal agencies that, by law, require international trade data, and should deliver these capabilities in a secure, paper-free, Web-enabled environment. As a result of poorly managed requirements, the total life- cycle development cost of the ACE program increased from an estimated $1.5 billion to $2.2 billion—a $700 million increase. ACE fully met 9 of the 11 key practices for implementing EVM and partially met the remaining 2 practices. Specifically, ACE fully met 5 of 6 practices for establishing a comprehensive EVM system, such as defining the scope of the work effort and developing the performance baseline, but partially met the practice for scheduling the work, in part, because resources were not assigned to all activities in the master schedule. ACE fully met 2 practices for ensuring that the data resulting from the EVM system were reliable, such as adequately analyzing EV performance data, but could not fully execute the work plan because of the weaknesses found in the schedule. Lastly, ACE demonstrated that the program management team was basing decisions on EVM data. It should be noted that the ACE program is being defined incrementally— whereby the performance baseline is continuously updated as task orders for new work are issued. As such, the use of EVM to determine the true progress made and to project reliable final costs at completion is limited. The Integrated Deepwater System is a 25-year, $24 billion major acquisition program to recapitalize the U.S. Coast Guard’s aging fleet of boats, airplanes, and helicopters, ensuring that all work together through a modern, capable communications system. This initiative is designed to enhance maritime domain awareness and enable the Coast Guard to meet its post-September 11 mission requirements. The program is composed of 15 major acquisition projects, including the Common Operational Picture (COP) program. Deepwater COP is to provide relevant, real-time operational intelligence and surveillance data to human capital managers, allowing them to direct and monitor all assigned forces and first responders. This is expected to allow commanders to distribute critical information to federal, state, and local agencies quickly; reduce duplication; enable earlier alerting; and enhance maritime awareness. Deepwater COP fully met 7 of the 11 key practices and partially met 4 others. Specifically, COP fully met 5 of the 6 practices for establishing a comprehensive EVM system, such as adequately defining all major elements of the work breakdown structure and developing the performance baseline. However, the program’s master schedule contained weaknesses, such as a large number of concurrent tasks and activities without resources assigned. Officials were aware of some, but not all, of the weaknesses in the schedule and had controls in place to mitigate the weakness they were aware of in order to improve the reliability of the resulting EV data. Lastly, COP was unable to fully meet 1 of the practices for using EV data for management decisions because it could not demonstrate that cost and schedule drivers impacting EV performance were linked to its risk management processes. The Western Hemisphere Travel Initiative (WHTI) program made modifications to vehicle processing lanes at ports of entry on the nation’s northern and southern borders. WHTI is designed to allow U.S. Customs and Border Protection to effectively address new requirements imposed by the Intelligence Reform and Terrorism Prevention Act of 2004 (completing these requirements by June 1, 2009). WHTI development was completed and its implementation addressed the 39 highest volume ports of entry, which support 95 percent of land border traffic. The initiative requires travelers to present a passport or other authorized travel document that denotes identity and citizenship when entering the United States. WHTI fully met 6 of the 11 key practices for implementing EVM and partially met the remaining 5 practices. Specifically, weaknesses identified in validating the performance baseline and scheduling the work limited the program’s ability to establish a comprehensive EVM system. Although the program held an integrated baseline review to validate the baseline in March 2008, the review did not cover many key aspects, such as identifying corrective actions needed to mitigate program risks. Furthermore, the master schedule contained deficiencies, such as activities that were out of sequence or lacking dependencies. While program officials described their use of processes for ensuring the reliability of the EVM system’s data, such as capturing significant cost and schedule drivers in the risk register, the provided documentation did not corroborate what we were told. When combined, these weaknesses preclude the program from effectively making decisions about the program based on EV data. The Next Generation Identification (NGI) program is designed to support the Federal Bureau of Investigation’s mission to reduce terrorist and criminal activities by providing timely, relevant criminal justice information to the law enforcement community. Today, the bureau operates and maintains one of the largest repositories of biometric- supported criminal history records in the world. The electronic identification and criminal history services support more than 82,000 criminal justice agencies, authorized civil agencies, and international organizations. NGI is intended to ensure that the bureau’s biometric systems are able to seamlessly share data that are complete, accurate, current, and timely. To accomplish this, the current system will be replaced or upgraded with new functionalities and state-of-the-art equipment. NGI is expected to be scaleable to accommodate five times the current workload volume with no increase in support manpower and will be flexible to respond to changing requirements. NGI fully implemented all 11 key EVM practices. Specifically, the program implemented all practices for establishing a comprehensive EVM system, such as defining the scope of work and scheduling the work. For example, the schedule properly captured key activities, established reasonable durations, and established a sound critical path, all of which contribute to establishing a reliable baseline that performance can be measured against. Furthermore, the NGI team ensured that the resulting EV data were appropriately verified and validated for reliability by, for example, integrating the analysis of cost and schedule variances with the program’s risk register to mitigate emerging and existing risks associated with key drivers causing major variances. In addition, the program’s risk register includes cost and schedule impacts for every risk and links to the management reserve process. Lastly, NGI demonstrated that it is using EV data to make decisions by performing continuous quality checks of the schedule, reviewing open risks and opportunities, and reviewing EV data in weekly management reports. The James Webb Space Telescope (JWST) is designed to be the scientific successor to the Hubble Space Telescope and expected to be the premier observatory of the next decade. It is intended to seek to study and answer fundamental astrophysical questions, ranging from the formation and structure of the Universe to the origin of planetary systems and the origins of life. The telescope is an international collaboration of the National Aeronautics and Space Administration (NASA), the Canadian Space Agency, and the European Space Agency. JWST required the development of several new technologies, including a folding segmented primary mirror that will unfold after launch and a cryocooler for cooling midinfrared detectors to 7 degrees Kelvin. JWST fully met 4 of the 11 key practices and partially met 7 practices. The project only partially met practices for establishing a comprehensive EVM system because of weaknesses in the work breakdown structure, in which the prime contractor has not fully defined the scope of each work element. In addition, the project only partially met the practice for scheduling work because of weaknesses resulting from manual integration of approximately 30 schedules, although officials did explain some mitigations for this risk. We also found deficiencies in the lower-level schedules, such as missing linkages between tasks, resources not being assigned, and excessively high durations. Furthermore, JWST only partially implemented practices to ensure that the data resulting from the EVM system are reliable, due, in part, to variance analysis reports being done quarterly (instead of monthly), which limits the project’s ability to analyze and respond to cost and schedule variances in a timely manner. When combined, these weaknesses preclude the program from effectively making decisions about the program based on EV data. Juno is part of the New Frontiers Program. The overarching scientific goal of the Juno mission is to improve our understanding of the origin and evolution of Jupiter. As the archetype of giant planets, Jupiter may provide knowledge that will improve our understanding of both the origin of our solar system and the planetary systems being discovered around other stars. The Juno project is expected to use a solar-powered spacecraft to make global maps of the gravity, magnetic fields, and atmospheric composition of Jupiter. The spacecraft is to make 33 orbits of Jupiter to sample the planet’s full range of latitudes and longitudes. Juno fully met 8 of the 11 key practices for implementing EVM and partially met 3 practices. Specifically, the project fully met 3 practices for establishing a comprehensive EVM system, but only partially met the practices for scheduling the work, determining the objective measure of earned value, and establishing the performance baseline. Juno was unable to fully meet these practices because the project’s master schedule contained issues with the sequencing of work activities and lacked a comprehensive integrated baseline review. Although an integrated baseline review was conducted for a major contract in February 2009, the program did not validate the baseline, scope of work to be performed, or key risks and mitigation plans for the Juno project as a whole, which increases the risk that the project is measuring performance against an unreasonable baseline. Juno fully implemented all 3 practices associated with data reliability and the 2 practices associated with using EV data for decision-making purposes. The Mars Science Laboratory (MSL) is part of the Mars Exploration Program. The program seeks to understand whether Mars was, is, or can be a habitable world. To answer this question, the MSL project is expected to investigate how geologic, climatic, and other processes have worked to shape Mars and its environment over time, as well as how they interact today. To accomplish this, the MSL project plans to place a mobile science laboratory on the surface of Mars to quantitatively assess a local site as a potential habitat for life, past or present. The project is considered one of NASA’s flagship projects and designed to be the most advanced rover ever sent to explore the surface of Mars. Due to technical issues identified during the development of key components, the MSL launch date has recently slipped 2 years—from September 2009 to October 2011, and the project’s life-cycle cost estimate has increased from about $1.63 billion to $2.29 billion, a $652 million increase. MSL fully met 5 of the 11 key practices and partially met 6 others. Specifically, MSL fully met 3 practices for establishing a comprehensive EVM system, but only partially met 3 others because of weaknesses in the sequencing of all activities in the schedule and the lack of an integrated baseline review to validate the baseline and assess the achievability of the plan. While the project has taken steps to mitigate the latter weakness by requiring work agreements that document, among other things, the objective value of work and related risks for planned work packages, this is not a comprehensive review of the project’s baseline. Furthermore, MSL only partially implemented practices associated with data reliability because its analysis of cost and schedule variances did not include the root causes for variances and corrective actions, which prevents the project from tracking and mitigating related risks. Lastly, without an initial validation of the performance baseline, the baseline cannot be appropriately updated to reflect program changes, thereby limiting the use of EV data for management decisions. The En Route Automation Modernization (ERAM) program is to replace existing software and hardware in the air traffic control automation computer system and its backup system, the Direct Radar Channel, and other associated interfaces, communications, and support infrastructure at en route centers across the country. This is a critical effort because ERAM is expected to upgrade hardware and software for facilities that control high-altitude air traffic. ERAM consists of two major components. One component has been fully deployed and is currently in operation at facilities across the country. The other component is scheduled for deployment through fiscal year 2011. ERAM fully met 7 of the 11 key practices and partially met 4 others. ERAM applies EVM at the contract level and incorporates EV data into its overall management of the program. However, ERAM did not perform a comprehensive review of the baseline when the contract was finalized, or take similar actions to validate the baseline and ensure that the appropriate EV metrics had been applied. While ERAM does perform limited checks of the contractor schedule, our analysis showed some issues with the sequencing of activities and the use of constraints that may undermine the reliability of the schedule as a baseline to measure performance. However, it should be noted that the EV data are not a reflection of the total ERAM program. The government is also responsible for acquisition work—to which EVM is not being applied. Our analysis of the master schedule showed that ERAM would be unable to meet four major upcoming initial operating capability milestones due to issues associated with government work activities. Program officials noted that these milestones have since been pushed out. Since EVM is not applied at the program level, it is unclear whether these delays will impact overall cost. The Surveillance and Broadcast System (SBS) is to provide new surveillance solutions that employ technology using avionics and ground stations for improved accuracy and update rates and to provide shared situational awareness (including visual updates of traffic, weather, and flight notices) between pilots and air traffic control. These technologies are considered critical to achieving the Federal Aviation Administration’s strategic goals of decreasing the rate of accidents and incursions, improving the efficiency of air traffic, and reducing congestion. SBS fully implemented all 11 key EVM practices. Specifically, SBS has institutionalized EVM at the program level—meaning that it collects and manages performance data on the contractor and government work efforts—in order to get a comprehensive view into program status. As part of this initiative, SBS performed detailed validation reviews of the contractor and program baselines; issued various process rules on resource planning, EV metrics, and data analysis; and collected government timecard data in order to ensure consistent EV application. In addition, the program management team conducted rigorous reviews of EV performance with the SBS program manger and the program’s internal management review board on a monthly basis. Our analysis of the SBS master schedule showed that it was developed in accordance with scheduling best practices. For example, the schedule was properly sequenced, and the resources were assigned. Furthermore, SBS briefed the program manager monthly on the quality of the schedule to identify, for example, tasks without predecessors. The Veterans Health Information Systems and Technology Architecture— Foundations Modernization (VistA-FM) program addresses the need to transition the Veterans Affairs electronic medical record system to a new architecture. According to the department, the current system is costly and difficult to maintain and does not integrate well with newer software packages. VistA-FM is designed to provide a new architectural framework as well as additional standardization and common services components. This is intended to eliminate redundancies in coding and support interoperability among applications. Ultimately, the new architecture will lay the foundation for a new generation of computer systems in support of caring for America’s veterans. During the course of our review, the department’s Chief Information Officer suspended multiple components of the VistA-FM program until a new development plan can be put in place. This action was taken as part of a new departmentwide initiative to identify troubled IT projects and improve their execution. VistA-FM partially met 4 key practices and did not meet 7 others, despite reporting compliance with the American National Standards Institute (ANSI) standard in its 2010 business case submission. Specifically, the program is still working to establish a comprehensive EVM system to meet ANSI compliance, among other things. For example, the work breakdown structure is organized around key program milestones instead of product deliverables, and does not fully describe the scope of work to be performed. Although the program’s subprojects maintain their own schedules, VistA-FM does not currently have an integrated master schedule at the program level. This is of concern because it is not possible to establish the program’s critical path and the time-phased budget baseline, a key component of EVM. The reliability of the data is also a potential issue because the program’s EVM reports do not offer adequate detail to provide insight into data reliability issues. Additionally, the performance baseline has not been appropriately updated; program officials stated this update is in progress, but they did not have a completion date. In addition to the contact name above, individuals making contributions to this report included Carol Cha (Assistant Director), Neil Doherty, Kaelin Kuhn, Jason Lee, Lee McCracken, Colleen Phillips, Karen Richey, Teresa Smith, Matthew Snyder, Jonathan Ticehurst, Kevin Walsh, and China Williams. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-09-326SP. Washington, D.C.: March 30, 2009. Discusses the Department of Defense’s Joint Tactical Radio System— Handheld, Manpack, Small Form Fit and Warfighter Information Network—Tactical programs. Information Technology: Census Bureau Testing of 2010 Decennial Systems Can Be Strengthened. GAO-09-262. Washington, D.C.: March 5, 2009. Discusses the Department of Commerce’s Decennial Response Integration System and Field Data Collection Automation programs. NASA: Assessments of Selected Large-Scale Projects. GAO-09-306SP. Washington, D.C.: March 2, 2009. Discusses the National Aeronautics and Space Administration’s James Webb Space Telescope and Mars Science Laboratory programs. Air Traffic Control: FAA Uses Earned Value Techniques to Help Manage Information Technology Acquisitions, but Needs to Clarify Policy and Strengthen Oversight. GAO-08-756. Washington, D.C.: July 18, 2008. Discusses the Department of Transportation’s En Route Automation Modernization and Surveillance and Broadcast System programs. 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. Discusses the U.S. Department of Agriculture’s Farm Program Modernization program. Information Technology: Improvements for Acquisition of Customs Trade Processing System Continue, but Further Efforts Needed to Avoid More Cost and Schedule Shortfalls. GAO-08-46. Washington, D.C.: October 25, 2007. Discusses the Department of Homeland Security’s Automated Commercial Environment program. Defense Acquisitions: The Global Information Grid and Challenges Facing Its Implementation. GAO-04-858. Washington, D.C.: July 28, 2004. Discusses the Department of Defense’s Warfighter Information Network— Tactical program.
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In fiscal year 2009, the federal government planned to spend about $71 billion on information technology (IT) investments. To more effectively manage such investments, in 2005 the Office of Management and Budget (OMB) directed agencies to implement earned value management (EVM). EVM is a project management approach that, if implemented appropriately, provides objective reports of project status, produces early warning signs of impending schedule delays and cost overruns, and provides unbiased estimates of anticipated costs at completion. GAO was asked to assess selected agencies' EVM policies, determine whether they are adequately using earned value techniques to manage key system acquisitions, and eval- uate selected investments' earned value data to determine their cost and schedule performances. To do so, GAO compared agency policies with best practices, performed case studies, and reviewed documenta- tion from eight agencies and 16 major investments with the highest levels of IT development-related spending in fiscal year 2009. While all eight agencies have established policies requiring the use of EVM on major IT investments, these policies are not fully consistent with best practices. In particular, most lack training requirements for all relevant personnel responsible for investment oversight. Most policies also do not have adequately defined criteria for revising program cost and schedule baselines. Until agencies expand and enforce their EVM policies, it will be difficult for them to gain the full benefits of EVM. GAO's analysis of 16 investments shows that agencies are using EVM to manage their system acquisitions; however, the extent of implementation varies. Specifically, for 13 of the 16 investments, key practices necessary for sound EVM execution had not been implemented. For example, the project schedules for these investments contained issues--such as the improper sequencing of key activities--that undermine the quality of their performance baselines. This inconsistent application of EVM exists in part because of the weaknesses contained in agencies' policies, combined with a lack of enforcement of policies already in place. Until key EVM practices are fully implemented, these investments face an increased risk that managers cannot effectively optimize EVM as a management tool. Furthermore, earned value data trends of these investments indicate that most are currently experiencing shortfalls against cost and schedule targets. The total life-cycle costs of these programs have increased by about $2 billion. Based on GAO's analysis of current performance trends, 11 programs will likely incur cost overruns that will total about $1 billion at contract completion--in particular, 2 of these programs account for about 80 percent of this projection. As such, GAO estimates the total cost overrun to be about $3 billion at program completion (see figure). However, with timely and effective management action, it is possible to reverse negative trends so that the projected cost overruns may be reduced.
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An estimated 23.5 million mammograms were performed in the United States in 1992 at a cost of about $2.5 billion. Both the National Cancer Institute (NCI) and the American Cancer Society recommend that all women over the age of 50 have annual screening mammograms, though the two organizations are not in total agreement on the recommended frequency of screening mammography for women under the age of 50. Utilization rates for the technology have continuously increased over the years. According to the Centers for Disease Control and Prevention, the percentage of women aged 50 and above who had received mammograms in the past year increased from 26 percent in 1987 to 54 percent in 1993. The demand for mammography services has resulted in significant growth in the number of mammography facilities, currently numbering over 10,000 nationwide. Mammography is one of the most technically challenging radiological procedures, and ensuring the quality of the radiologic image is difficult. If the image is poor, tumors and abnormalities may go undetected. To illustrate, two images of the same patient who had a cancerous tumor are presented in figure 1. The tumor is visible in the picture on the right, where the image is of higher quality, but it is blurred and indecipherable in the picture on the left. Accurate interpretation of mammograms is equally as important as image quality. According to radiological experts, mammograms are the most difficult radiographic images to read. Misreading mammograms can have considerable consequences. A mammogram that is incorrectly read as showing an abnormality could cause a woman to go through unnecessary and costly follow-up procedures, such as ultrasound or biopsies. A mammogram that is read as normal when an abnormality is actually present could result in missed diagnosis of early lesions and delayed treatment, which could cost a woman’s life. MQSA contains a number of provisions designed to ensure the quality of the image and its interpretation. Among other things, MQSA requires that FDA establish quality standards for mammography equipment, personnel, all mammography facilities be accredited by an FDA-approved accrediting body (either a nonprofit organization or a state agency) and obtain a certificate from FDA in order to legally provide mammography services after October 1, 1994; and all mammography facilities be evaluated annually by a certified medical physicist and be inspected annually by FDA-approved inspectors. FDA issued interim regulations in December 1993 that established requirements for accrediting bodies and quality standards and certification requirements for mammography facilities. Since early 1994, FDA has been working with the National Mammography Quality Assurance Advisory Committee to develop the final regulations. FDA officials estimate that they will publish the proposed final regulations for public comment in October 1995 and issue the final regulations in October 1996. As of October 1, 1994, FDA had approved ACR and the states of California, Arkansas, and Iowa as official accrediting bodies. Because of ACR’s pre-MQSA involvement in establishing a voluntary accreditation program, it serves as the major accrediting body, responsible for over 95 percent of the current MQSA accreditation workload. To minimize duplicate submission of application information to FDA and accrediting bodies, under FDA’s interim rules facilities need only submit application information to the accrediting bodies. On the basis of accrediting bodies’ notification, FDA automatically issues certificates to facilities that pass accreditation review. Early indications point to a general improvement in the quality of mammography services under the act. This improvement is mainly the result of setting national quality assurance standards and establishing enforcement mechanisms to ensure that the standards are met by all mammography providers. Before MQSA, wide variations existed in oversight provided at the state level. To provide an indication of these variations, we asked a panel of experts to develop a list of mammography standards they considered most important. Eighteen quality assurance requirements were selected and then used as a benchmark for evaluating state oversight before MQSA took effect. These requirements, listed in appendix II, include such items as the quality of clinical image evaluations and the use of equipment designed especially for mammography. Before MQSA was implemented, only two states—Michigan and Texas—had enacted legislation and regulations that included all 18 requirements. Nine states—Alabama, Connecticut, Kansas, Louisiana, Montana, Nebraska, North Dakota, West Virginia, and Wyoming—plus the District of Columbia made no mention of any of these requirements in state laws or regulations. See appendix III for state-by-state results. Our interviews with officials from 20 states indicated that the impact of MQSA on quality of mammography services was greatest in states that had no or few pre-MQSA standards. For example, officials from four states that had no pre-MQSA standards told us that they believed MQSA would greatly improve the quality of mammography services in their states. Officials from Michigan, which already had well-developed standards, welcomed the additional authority and resources that MQSA gave them to enforce the standards, but said the act’s effect would not be as significant as it would in states without such standards already in place. Another measure of variation in quality standards before MQSA was the level of voluntary participation in mammography quality assurance activities developed by ACR. ACR has managed a voluntary accreditation program since 1987, but, according to NCI and ACR records, only between 37 and 44 percent of the nation’s mammography units were accredited by ACR as of July 1993. The MQSA standards, as currently prescribed in FDA’s interim regulations, include all 18 requirements chosen by our panel as well as a number of other requirements. Thus, the October 1994 implementation of MQSA had a substantial effect in that all providers, regardless of location or setting, became responsible for complying with a single, minimum standard of care. In all, FDA’s interim regulations contain more than 30 requirements covering such matters as personnel qualification and radiation safety. In implementing these requirements, FDA adopted the standards that had been set by ACR in its voluntary compliance program. These standards have been endorsed by professional organizations as well as industry and government experts. FDA officials chose these standards because they believed the standards were based on sound scientific principles and clinical judgment gained through extensive experience; further, the legislative history of MQSA indicates that the Congress intended to use the ACR program as the model for accreditation. The current standards include specific requirements to control image quality, but the requirement for monitoring the accuracy of image interpretation is less specific. The regulations include a general requirement that each facility have a system to review outcome data, including follow-up on positive mammograms (those identified as showing tumors or abnormalities) and their correlation to biopsy results. However, the regulations do not include standards for evaluating the outcome data. How to develop a quality assurance system to monitor the accuracy of image interpretation is a controversial issue in the medical community. On one hand, several academic studies have shown wide variation in the interpretation of the same films by different radiologists, and some experts suggest that peer reviews of films or proficiency tests of radiologists are needed to ensure accuracy. On the other hand, others, including FDA, believe that those measures are too difficult and costly to implement and that a system of tracking the mammography outcomes is a better approach to achieve the goal of quality interpretation. FDA officials told us that, after consulting with the National Mammography Quality Assurance Advisory Committee, they are considering expanding the outcome data requirement in the proposed final regulations. The option under consideration is for each facility to designate at least one interpreting physician to review the outcome data at least annually, and for the facilities to use the data to evaluate the performance of each interpreting physician and the facility as a whole. FDA officials told us this option would allow facilities discretion in defining outcome standards. They said such discretion was needed because no consensus existed on appropriate outcome measures and because more research was needed before outcome standards could be prescribed. MQSA called for facilities to comply with the new standards through an accreditation process. In adopting ACR standards in its interim regulations, FDA granted automatic certification to any facility that had already demonstrated compliance with ACR requirements by being accredited under ACR’s voluntary program. All other facilities had to apply for accreditation by completing an application package and submitting materials for testing to provide evidence of meeting the standards. Accreditation was performed by one of the FDA-approved accrediting bodies. While the accreditation procedures established by Arkansas, California, and Iowa are somewhat different from ACR’s, the four accrediting bodies enforce the same FDA standards. Because ACR accounts for more than 95 percent of the current MQSA accreditation workload, we focused our review on ACR’s accreditation process. When MQSA initially took effect, many mammography units did not meet its mammography standards. According to ACR records, between October 1, 1994, and August 1, 1995, 7,525 different mammography units from approximately 5,510 facilities went through ACR’s first review for accreditation, and 2,598 units (35 percent) from roughly 1,900 facilities failed to meet the accreditation requirements. After a second review process, ACR found about two-thirds of these units to be in compliance and granted them full accreditation. Of those that were denied accreditation after failing the second review, 277 facilities have since taken sufficient corrective actions to qualify for reinstatement. These data suggest that the accreditation process has resulted in improvement at these facilities. MQSA inspection authority provides FDA with another means to ensure that facilities comply with standards on a day-to-day operating level. While accreditation is a mail-in process that involves the submission and review of application materials, inspections are conducted on site, allowing inspectors to verify information provided during the accreditation process. Actual inspections began somewhat later than initially planned. FDA entered into agreements with states to train state inspectors for annual inspections and reimburse states for their inspection costs. FDA had planned to have 200 inspectors trained by June 1995, but only 159 inspectors were trained by that date. Because of these delays in training, annual inspections did not begin until January 1995, although they had been planned to start in October 1994. Early results from annual inspections indicated that many facilities fell short of full compliance with MQSA requirements. As of June 9, 1995, inspectors had inspected 1,843 facilities and found that 601—or 33 percent—had deficiencies that needed to be corrected. Of these, 119 facilities were considered to be in serious noncompliance with MQSA standards. As table 1 shows, the most common violations noted in the serious noncompliance group involved the facilities’ use of personnel who did not meet FDA’s qualification requirements. Under the current inspection program, FDA issues a warning letter to facilities in serious noncompliance, such as those listed above. Facilities are required to respond in writing within 15 days, listing specific steps they plan to take to correct violations. Failure to promptly correct the deficiencies could result in regulatory action by FDA, such as fines, suspension or revocation of the facility’s certificate, or a court injunction prohibiting the facility from performing mammography. While many facilities had problems meeting FDA’s quality standards and deadlines for compliance, FDA and the accrediting bodies made significant efforts to work with facilities to avoid large-scale facility closures or discontinuance of services. As a result, although some facilities have discontinued services, so far the number of closures is relatively small and access to services has not been significantly affected. To prevent widespread facility closures, FDA has been working with facilities to bring them into compliance with MQSA. From the start, FDA was concerned that many facilities would need time to upgrade their practices. To provide facilities lead time for preparation, FDA issued its interim regulations in December 1993, more than 10 months before the certification deadline of October 1, 1994, and began to send quarterly newsletters to facilities informing them about MQSA requirements. Even with advance notice, however, almost 4,700 of the more than 10,000 mammography facilities nationwide failed to complete the accreditation process in time to receive full certification by the October 1 deadline. The two main reasons for this outcome, according to ACR officials, were the failure of facilities to submit materials in a timely manner and the submission of applications that did not meet the accreditation requirements. Using the maximum time allowed by MQSA, FDA issued provisional certificates to these facilities, giving them 6-month extensions. FDA also granted 90-day extensions for facilities whose provisional certificates expired before accreditation requirements could be met. In April, more than 1,500 90-day extensions were granted. On July 17, 1995, 242 facilities were still in the 90-day extension status, indicating that they still had problems satisfying all accreditation requirements (see table 2). To minimize the need for shutting down facilities permanently, in February 1995, FDA established a reinstatement process. This process allows a facility that has had to stop performing mammography because it has failed to meet accreditation requirements to apply for reinstatement by submitting a corrective action plan and applying for accreditation as a new facility. As of July 17, 1995, 279 facilities have been granted such reinstatement, which has allowed them to resume mammography services while pursuing accreditation under a new provisional certificate. As a result of FDA’s approach, although some facilities did have to cease performing mammography for some period of time, many of them have been able to reopen. According to ACR records, between October 1, 1994, and August 1, 1995, a total of 488 facilities were denied accreditation (for failing to pass the second review or to complete submission requirements) and had to suspend mammography services. As of August 1, 1995, 301 of these had either passed accreditation on appeal or had been reinstated. For these facilities, the average time from notification of denial until reinstatement was about 15 days. Only six of these denied facilities had notified ACR that they did not intend to resume providing mammography services. ACR officials said that most of the remaining facilities are in the process of evaluating the causes of their deficiencies and assessing the costs of correcting them. ACR officials expected that a substantial majority would apply for reinstatement within 30 days. FDA has adopted a similarly gradual approach to resolving deficiencies identified in annual inspections. As a result, as of July 26, 1995, FDA had not closed any facilities for noncompliance found during inspections. Facility closures, both in anticipation of the act and since the act took effect, appear to have had a limited effect on access to mammography services. Of the 10,000-plus facilities that were providing mammography services before MQSA, FDA identified 404 facilities, or about 4 percent, that had ceased to provide mammography services between October 1993 and October 1994, when MQSA became effective. FDA contracted with a private research firm to study the impact of these closures on access to mammography services. The study found that about 97 percent of the closed facilities were within 25 miles of a certified facility; 62 percent were within 1 mile of such a facility. In May 1995, FDA asked the contractor to update the study by adding into the closure population those facilities that had been denied accreditation or had voluntarily withdrawn from the process since the act took effect. The update, which covered about 350 such facilities, showed almost identical results. In addition, officials in the eight states (plus Puerto Rico) that had at least 10 percent of their facilities identified as closed consistently told us that the closures did not adversely affect access to quality mammography services in their states. This lack of negative impact may be related to the fact that most of the closed facilities were low-volume operations in independent doctors’ offices: we have previously documented that quality assurance is more difficult to maintain in low-volume facilities. Several of these state officials also told us that the main reason that many low-volume providers in their states ceased to perform mammography was that their volume could not support the costs for system upgrades necessary to meet MQSA standards. The costs associated with a system upgrade vary depending on the type and the extent of changes that are required. For example, FDA estimated that, for facilities that have to upgrade or replace equipment, the average cost would be about $50,000. FDA does not have reliable data on costs and has not been able to assess the economic impact of its interim regulations on facilities. It has contracted with a private research group to develop an industry profile and a cost model. FDA officials told us that they plan to assess the total cost impact of MQSA when the final regulations are issued. Besides the cost of upgrades, facilities also have to pay accreditation fees and annual inspection fees. To obtain ACR accreditation, a facility has to pay a fee of $700 for the first mammography unit and $600 for each additional unit. In addition, facilities must pay inspection fees, and MQSA requires that such fees entirely cover inspection costs. For fiscal year 1995, FDA established a fee schedule of $1,178 for the first unit and $152 for each additional unit for annual inspection; follow-up inspections cost $670 each. The inspection fee assessment is based on FDA’s calculation of the amount needed to cover the costs of inspections. See appendix IV for more information on total and per-inspection costs. To provide an additional perspective on how regulations might affect access, we examined whether any studies had been conducted in states where mammography standards had been strengthened before MQSA. One unpublished study by NCI staff had looked at Michigan, which enacted stringent quality standards almost 5 years before the implementation of MQSA. According to the principal researcher, access to mammography services in Michigan was not adversely affected by the tighter standards. NCI staff analyzed the number of mammography facilities and machines in Michigan between 1989 and 1994 and found that while the stringent standards had caused some facilities to discontinue mammography, there were still sufficient facilities in the state to provide services. In addition, longitudinal mammography utilization data examined through 1994 indicated that Michigan was outperforming most of the country in mammography usage and was among the very few states with the best rates of mammography screening compliance. NCI staff also concluded that, after the implementation of the Michigan standards, the technical quality of mammograms in Michigan improved in comparison with that of other states. To date, MQSA’s effects appear generally positive. Mammography quality standards are now in place in all states, and these standards do not appear to have had a negative effect on access to services. However, to avoid large-scale closures of facilities, FDA settled on an approach that allowed some delay in meeting the certification requirements. For this and other reasons, such as the availability of outcome data, more time will be needed before MQSA’s full impact can be determined. MQSA mandates that we assess the effects of MQSA again in 2 years and issue a report in 1997. We provided FDA and ACR officials with a draft copy of the report for review and comment. FDA responded that the draft was accurate and reflective of the program. While ACR did not provide formal comments, officials provided some technical comments, which we incorporated as appropriate. Appendix V contains FDA’s written response. We will send copies of this report to the Secretary of Health and Human Services, the Commissioner of FDA, the Director of NCI, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others on request. Please contact me at (202) 512-7119 if you or your staff have any questions. Major contributors to this report are listed in appendix VI. To develop general information about how FDA has implemented MQSA, we analyzed data from FDA’s certification and annual inspection programs and from ACR’s accreditation program. To specifically address our objective of assessing the initial effect of MQSA on the quality of mammography services, we relied on two analyses: a comparison of MQSA standards with existing state standards and an outcome analysis of ACR’s accreditation and FDA’s inspection results. Because FDA’s inspection program was just getting under way at the time of our review, our analysis of FDA inspection results was limited to summary data provided by FDA from its first 4 months of inspection. The analysis of state standards was primarily based on data from an NCI study of state mammography legislation. Although we did not directly measure the quality of mammography images, the accreditation process does involve an evaluation of a facility’s quality assurance system, including a review of clinical images. To address our objective of assessing MQSA’s effect on accessibility, we examined an FDA contractor’s study on facility closures and an unpublished study by NCI staff of Michigan’s experience in implementing stringent quality standards prior to MQSA. We supplemented this work by interviewing 6 members of FDA’s National Quality Assurance Advisory Committee and 32 officials from 20 states and Puerto Rico to obtain their views on the initial impact of MQSA on quality and accessibility of mammography services. We did our work from November 1994 through August 1995 in accordance with generally accepted government auditing standards. Develop. Pers. Breakdown of MQSA inspection fee costs Contracts with states to conduct inspections FDA personnel to conduct inspections Equipment, development of calibration procedures, and instrument calibration Design, programming, and maintenance of data systems necessary to schedule inspections and track results Training and certification of inspectors (FDA and state) In addition to those named above, the following individuals made important contributions to this report: Stan Stenersen, Evaluator; Susan Lawes, Technical Advisor; Helene Toiv, Advisor; Julie Rachiele, Technical Information Specialist; and Jennifer Vieten, Intern. 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.
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Pursuant to a legislative requirement, GAO examined whether the Food and Drug Administration's (FDA) implementation of the Mammography Quality Standards Act has had any effect on the: (1) quality of mammography services; and (2) access to such services. GAO found that: (1) the act has had a positive effect on the quality of mammography services; (2) a uniformed set of standards for mammography services is required in all states; (3) many facilities have had to improve their services in order to become fully certified; (4) annual inspections of mammography facilities help ensure that these facilities are in compliance with the standards set by the American College of Radiology; (5) the number of facilities ceasing mammography services rather than complying with the quality standards is relatively small; and (6) FDA has not closed many of the facilities unable to meet the new certification requirements, but it has given them time to comply with the new quality assurance requirements and to correct the problems found during inspection.
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A system’s life-cycle costs include the costs for research and development, procurement, sustainment, and disposal. O&S costs include the direct and indirect costs of sustaining a fielded system, such as costs for spare parts, fuel, maintenance, personnel, support facilities, and training equipment. According to DOD, the O&S costs incurred after a system has been acquired account for at least 70 percent of a system’s life-cycle costs and depend on how long a system remains in the inventory. Many of the key decisions affecting O&S costs are made during the acquisition process, and a weapon system’s O&S costs depend to a great extent on its expected readiness level and overall reliability. In general, readiness can be achieved either by building a highly reliable weapon system or supporting it with a more extensive logistics system that can ensure spare parts and other support are available when needed. If a weapon system has a very high expected readiness rate but its design is not reliable, O&S costs may be high and more difficult to predict. Conversely, if the weapon system design has been thoroughly tested for reliability and is robust, O&S costs may be more predictable. DOD’s acquisition process includes a series of decision milestones as the systems enter different stages of development and production. As part of the process, the DOD component or joint program office responsible for the acquisition program is required to prepare life-cycle cost estimates, which include O&S costs, to support these decision milestones and other reviews. Under the current acquisition process, decision makers at milestone A determine whether to approve a program to enter into technology development. Although very little may be known about the system design, performance, physical characteristics, or operational and support concepts, DOD guidance states that rough O&S cost estimates are expected to primarily support plans that guide refinement of the weapon system concept. At milestone B, a decision is made whether to approve the program to enter into engineering and manufacturing development. At this point, according to the guidance, O&S cost estimates and comparisons should show increased fidelity, consistent with more fully developed design and support concepts. At this stage, O&S costs are important because the long-term affordability of the program is assessed, program alternatives are compared, and O&S cost objectives are established. The program must pass through milestone C before entering production and deployment. DOD’s guidance states that at milestone C and at the full-rate production decision review, O&S cost estimates should be updated and refined, based on the system’s current design characteristics, the latest deployment schedule, and current logistics and training support plans. Further, the guidance states that O&S experience obtained from system test and evaluation should be used to verify progress in meeting supportability goals or to identify problem areas. Lastly, O&S cost objectives should be validated, and any O&S-associated funding issues should be resolved, according to the guidance. OSD’s Cost Assessment and Program Evaluation office has established guidance regarding life-cycle O&S cost estimates that are developed at acquisition milestone reviews and has defined standards for preparing and presenting these estimates. Current guidance issued in October 2007 identifies O&S cost elements and groups them into several major areas. This 2007 guidance—which went into effect after the systems selected for our review passed through the production milestone—updated and refined the guidance issued in May 1992. The cost element structure in the 2007 guidance is similar to that of the 1992 guidance, with some key differences. For example, separate cost elements for intermediate-level and depot-level maintenance under the 1992 structure were combined into one maintenance cost element area in 2007. Cost elements for continuing system improvements were included under sustaining support in 1992 but separately identified in the 2007 structure. Also, cost elements for contractor support are no longer separately identified as a single cost area in the 2007 structure but are spread over other areas. Table 1 summarizes the 2007 and 1992 cost element structure for O&S cost estimating and provides a description of DOD’s cost elements. Each of the services has developed a system for collecting, maintaining, and providing visibility over historical information on actual weapon system O&S costs. Collectively referred to as VAMOSC systems, the Army’s system is the Operating and Support Management Information System; the Navy’s system is the Naval Visibility and Management of Operating and Support Cost system; and the Air Force’s system is the Air Force Total Ownership Cost system. These systems were developed in response to long-standing concerns that the services lacked sufficient data on the actual costs of operating and supporting their weapon systems. For example, according to a Naval Audit Service report, in 1975 the Deputy Secretary of Defense directed the military departments to collect actual O&S costs of defense weapon systems. In 1987, the Senate Committee on Appropriations requested that each service establish a capability within 4 years to report accurate and verifiable O&S costs for major weapon systems. In 1992, DOD required that the O&S costs incurred by each defense program be maintained in a historical O&S data-collection system. Related guidance tasked the services with establishing historical O&S data-collection systems and maintaining a record of data that facilitates the development of a well-defined, standard presentation of O&S costs by major defense acquisition program. According to DOD’s guidance, the services’ VAMOSC systems are supposed to be the authoritative source for the collection of reliable and consistent historical O&S cost data about major defense programs, and it is incumbent upon the services to make the data as accurate as possible. DOD’s stated objectives for the systems include the provision of visibility of O&S costs so they may be managed to reduce and control program life- cycle costs and the improvement of the validity and credibility of O&S cost estimates by establishing a widely accepted database. According to the guidance, the O&S cost element structure provides a well-defined standard presentation format for the services’ VAMOSC systems. Our work in the late 1990s and in 2003 identified several factors negatively affecting DOD’s ability to manage O&S costs. First, DOD used immature technologies and components in designing its weapon systems, which contributed to reliability problems and acted as a barrier to using manufacturing techniques that typically help reduce a system’s maintenance costs. In contrast, commercial companies ensure they understand their operating costs by analyzing data they have collected on equipment they are currently using. Second, DOD’s acquisition processes did not consider O&S costs and readiness as key performance requirements for new weapon systems and placed higher priority on technical performance features. Further, DOD continued to place higher priority on enhanced safety, readiness, or combat capability than on O&S cost management after system fielding. Third, DOD’s division of responsibility among its requirements-setting, acquisition, and maintenance communities made it difficult to control O&S costs, since no one individual or office had responsibility and authority to manage all O&S cost elements throughout a weapon system’s life cycle. Fourth, the services’ VAMOSC systems for accumulating data to analyze operations and support actions on fielded systems did not provide adequate or reliable information, thus making it difficult for DOD to understand total O&S costs. We have also reported on the effect of DOD weapon system sustainment strategies on O&S costs. For example, we reported in 2008 that although DOD expected that the use of performance-based logistics arrangements would reduce O&S costs, it was unclear whether these arrangements were meeting this goal. The services were not consistent in their use of business case analyses to support decisions to enter into performance-based logistics arrangements. Also, DOD program offices that implemented these arrangements had not obtained detailed cost data from contractors and could not provide evidence of cost reductions attributable to the use of a performance-based logistics arrangement. Finally, we have reported on O&S cost issues associated with individual weapon systems, including the Marine Corps’ V-22 aircraft in 2009 and the Navy’s Littoral Combat Ship in 2010. The services did not have the life-cycle O&S cost estimates that were prepared at the production milestone for most of the aviation weapon systems in our sample. Specifically, production milestone O&S cost estimates were available for two of the seven systems we reviewed—the Air Force’s F-22A and the Navy’s F/A-18E/F. We requested cost estimates from a variety of sources, including service and OSD offices that were identified as likely repositories of these estimates. However, service acquisition, program management, and cost analysis officials we contacted could not provide these estimates for the Army’s CH-47D, AH-64D, and UH-60L or the Air Force’s F-15E or B-1B. OSD offices we contacted, including the OSD Deputy Director for Cost Assessment and offices within the Under Secretary of Defense for Acquisition, Technology and Logistics, also could not provide the cost estimates for these five systems. Without the production milestone cost estimates, DOD officials do not have important information necessary for analyzing the rate of O&S cost growth, identifying cost drivers, and developing plans for managing and controlling these costs. In addition, at a time when the nation faces fiscal challenges and defense budgets may become tighter, the lack of this key information hinders sound weapon-system program management and decision making in an area of high costs to the federal government. In a recent speech, the Secretary of Defense stated that given the nation’s difficult economic circumstances and parlous fiscal condition, DOD will need to reduce overhead costs and transfer those savings to force structure and modernization within the programmed budget. DOD officials we interviewed noted that the department has not placed emphasis on assessing and managing weapon system O&S costs compared with other priorities. Moreover, our prior work has shown that rather than limit the number and size of weapon system programs or adjust requirements, DOD’s funding process attempts to accommodate programs. This creates an unhealthy competition for funds that encourages sponsors of weapon system programs to pursue overambitious capabilities and to underestimate costs. DOD acquisition guidance has required the development of life-cycle cost estimates for acquisition milestone reviews since at least 1980. Based on the historical acquisition milestones for the five systems with missing estimates, the approximate dates that the production milestone life-cycle O&S cost estimates should have been prepared were 1980 for the Army’s CH-47D, 1985 for the Air Force’s F-15E, 1989 for the Army’s UH-60L and the Air Force’s B-1B, and 1995 for the Army’s AH-64D. Additionally, DOD has been required to obtain independent cost assessments since the 1980s. We requested any independent estimates that had been prepared for the systems we reviewed from the OSD Cost Assessment and Program Evaluation office, but the office could not provide them. The service estimates were prepared in 2000 for the F/A-18E/F and in 2005 for the F- 22A. While DOD officials could not explain why life-cycle O&S cost estimates for the other five systems were not available, they said that likely reasons were loss due to office moves, computer failures, and purging of older files. Further, prior DOD and service guidance may not have addressed the retention of cost estimates. The two systems for which cost estimates were available had the most recent production milestones of the systems in our sample. Under GAO’s guidance for cost-estimating best practices, issued in 2009, thorough documentation and retention of cost estimates are essential in order to analyze changes that can aid preparation of future cost estimates. However, with the exception of the Army, current DOD and service acquisition and cost estimation guidance do not specifically address requirements for retaining O&S cost estimates and the support documentation used to develop the estimates. For example, although DOD’s cost-estimation guidance emphasizes the need for formal, complete documentation of source data, methods, and results, neither it nor DOD’s acquisition policy specifically addresses retention of cost estimate documentation. Naval Air Systems Command officials said they retained the production milestone O&S cost estimates for the F/A-18E/F because this was a good practice; however, they were not aware of any Navy guidance that required such retention. While the Navy’s current acquisition and cost analysis instructions state that records created under the instructions should be retained in accordance with the Navy’s records management guidance, the records management manual does not clearly identify any requirements for retaining acquisition cost estimates for aircraft. In addition, we found that although the estimate for the F/A-18E/F was retained, some of the supporting documentation was incorrect or incomplete. The Air Force’s acquisition and cost estimation guidance is also unclear with regard to retention of cost estimates. An Air Force acquisition instruction states that the program manager is responsible for developing appropriate program documentation and for maintaining this documentation throughout the life cycle of the system, as well as maintaining a realistic cost estimate and ensuring it is well documented to firmly support budget requests. However, we did not find any references to retaining cost estimates specifically related to acquisition milestones in either this instruction or other Air Force acquisition and cost estimation guidance. Only the Army’s current acquisition regulation states that all documentation required by the milestone decision authority for each milestone review must be retained on file in the program office for the life of the program, although the regulation does not make specific reference to retaining the O&S cost estimate. The production milestones for the three Army systems we reviewed predate the Army’s current regulation, which was issued in 2003. The services’ VAMOSC systems did not collect complete data on actual O&S costs. The Air Force’s and Navy’s systems did not collect actual cost data for some cost elements that DOD guidance recommends be collected, and the Army’s system was the most limited. Additionally, we found that data for some cost elements were not accurate. DOD guidance recommends—but does not require—that the cost element structure used for life-cycle O&S cost estimating also be used by the services to collect and present actual cost data. Such guidance, if followed, could enable comparisons between estimated and actual costs. Some O&S cost data that are not collected in the VAMOSC systems may be found in other of the services’ information systems or from other sources. However, these data may not be readily available for the purpose of analyzing weapon system O&S costs. Without complete data on actual O&S costs, DOD officials do not have important information necessary for analyzing the rate of O&S cost growth, identifying cost drivers, and developing plans for managing and controlling these costs. While the Air Force’s VAMOSC system collected actual cost data on many of DOD’s recommended cost elements, it did not collect data on some cost elements for the weapon systems we reviewed. For example, the Air Force’s VAMOSC system did not collect actual O&S costs for support equipment replacement, modifications, or interim contractor support. According to service officials, the F-22A, the F-15E, and the B-1B incurred support equipment replacement and O&S modification costs, and the F- 22A incurred interim contractor support costs. Air Force officials responsible for the VAMOSC system told us that actual cost data on these three cost elements are contained in another information system, the Air Force General Accounting and Finance System–Reengineered, but the data are not identifiable because procurement officials often do not apply the established accounting and budgeting structure when they entered into procurement contracts. Further, the Air Force lacks a standard structure for capturing contractor logistics support costs that could provide additional visibility over both procurement and O&S costs. For example, although program officials said the F-22A was supported under interim contractor support in 2006 and 2007, no F-22A interim support costs were included in the VAMOSC system. Further, according to officials, a recent change in the way the Air Force funds repair parts also introduced inaccuracies into that service’s VAMOSC system. Starting in fiscal year 2008, the Air Force centralized the funding of its flying operations at higher-level commands that support a number of aircraft and bases. For example, the Air Force Material Command now funds flying operations for most active units. Prior to that time, the Air Force provided funding for repair parts directly to lower-level organizational units that paid for each part when ordered. Under the new process, the higher-level commands provide funding for repair parts to the Air Force Working Capital Fund based on the anticipated number of flying hours and an estimated rate necessary to purchase repair parts per hour of use. Since repair parts funding is now based on such estimates, there have been differences between the amounts provided and the actual costs incurred. For example, officials indicated that in fiscal year 2008 overpayments of $430 million were provided for repair parts, and in fiscal year 2009 the overpayment amount was $188 million. Although the total overpayment amount can be identified, the Air Force cannot identify which specific programs overpaid, so the entire overpayment amount was recorded against the B-1B’s O&S costs in the Air Force accounting system. VAMOSC system officials were aware of this inaccuracy and removed the amount from the B-1B’s O&S costs within the VAMOSC system. However, because these officials said they do not have the information necessary to apply the appropriate amount of the refund to the appropriate programs, they placed the funds into an account not associated with a particular weapon system. Therefore, the actual O&S costs for repair parts reported by VAMOSC system could be inaccurate for one or more weapon systems for at least the past 2 years. For the F/A-18E/F, the Navy’s VAMOSC system collected data on many of DOD’s recommended cost elements but did not collect actual O&S costs for interim contractor support costs, civilian personnel, and indirect infrastructure costs by weapon system. Navy officials responsible for the VAMOSC system told us it did not collect interim contactor support costs because the Navy considers these to be procurement rather than O&S costs. According to Navy officials, the F/A-18E/F incurred interim contractor support costs prior to fiscal year 2003. Navy officials are currently attempting to add direct civilian personnel costs from the Navy’s Standard Accounting and Reporting System. However, since it is difficult to identify these costs by weapon system, aggregated civilian personnel costs are currently captured within a separate section of the VAMOSC system. In addition, Navy officials said indirect infrastructure costs are captured in the aggregate within a separate section of the VAMOSC system and are not reported within the O&S costs of each weapon system. According to Navy officials, these indirect infrastructure costs are not available by weapon system because of the time and resources that would be necessary to match real property records—indicating the use of the facility—to command installation records that contain the costs to operate the facility. Further, we found that some of the cost elements in the Navy’s VAMOSC systems were not accurate. For example, the Navy’s VAMOSC system did not separately report F/A-18E/F costs for intermediate-level repair parts and materials and supplies. According to Navy officials, intermediate-level costs were included as unit-level repair parts and materials and supplies due to the way the Navy’s accounting system captures these costs. Also, officials noted that support equipment maintenance costs were inaccurate because some of these costs were subsumed under other cost elements. Further, Navy officials said that the VAMOSC system reported costs for all F/A-18E/F modifications, including those that added capabilities and those that improved safety, reliability, maintainability, or the performance characteristics necessary to meet basic operational requirements. According to OSD guidance, modifications to add capabilities are considered a procurement cost and therefore should not be reported as an O&S cost in the VAMOSC system. According to Navy officials, they are unable to separate the different types of modification costs in order to provide visibility for the O&S modification costs. Compared with the Navy’s and Air Force’s systems, the Army’s VAMOSC system is the most limited in terms of actual O&S cost data collected. For the three types of Army aircraft we reviewed, the VAMOSC system consistently collected data for unit-level consumption cost elements: fuel, materials and supplies, repair parts, and training munitions. Costs for depot maintenance, while collected in the system, are not presented in the OSD-recommended cost element structure. The system does not include personnel cost data and instead provides a link to another database. In addition, Army officials said the VAMOSC system generally collected costs for only government-provided logistics support and currently contained costs for two weapon systems supported under contractor logistics support arrangements (the Stryker armored combat vehicle and UH-72A Light Utility Helicopter). Further, Army officials said that the costs for materials and supplies and for repair parts were added to the VAMOSC system when the items were transferred to the unit instead of when they were actually used. Also, many of the costs were allocated based on demand, quantity, and price assumptions. That is, if more than one weapon system used a repair part, the costs for this part were allocated to each weapon system based on the number of aircraft. While this may be a reasonable allocation method, the VAMOSC system may not reflect the actual O&S costs for the weapon systems that used the part. We reported on deficiencies of the Army’s VAMOSC system in 2000. Our prior work found that the Army did not have complete and reliable data on actual O&S costs of weapon systems. Specifically, the Army’s VAMOSC system did not collect data on O&S cost elements such as contractor logistics support, supply depot support, and software support. Further, we reported that the VAMOSC system did not contain cost data on individual maintenance events, such as removal and assessment of failed parts. We concluded that without complete O&S cost data, Army program managers could not assess cost drivers and trends in order to identify cost-reduction initiatives. Although we recommended that the Army improve its VAMOSC system by collecting data on additional O&S cost elements, the Army has not made significant improvements. According to Army officials responsible for the VAMOSC system, it was designed to collect information from other information systems. Therefore, it cannot collect data on other cost elements unless another information system captures these costs. According to Army officials, two information systems that the Army is developing—the General Fund Enterprise Business System and the Global Combat Support System—may enable the service to collect additional O&S cost data in the future. Even with these planned information systems, it is unclear what additional O&S cost data will be collected, how quickly the Army will be able to incorporate the data into its VAMOSC system, what resources may be needed, or what additional limitations the service may face in improving its VAMOSC system. Army officials, for example, do not expect the General Fund Enterprise Business System to become fully operational until the end of fiscal year 2012, and full operation of the Global Combat Support System will occur later, in fiscal year 2015. Army officials also said while they have requested that additional O&S cost data be collected by weapon system, it is too early to tell whether these data will be collected. For six of the seven systems selected for our review, the services did not periodically update life-cycle O&S cost estimates after the systems were fielded, even though most of the systems have been in DOD’s inventory for over a decade. Only the program office for the F-22A had updated its production milestone cost estimate. According to Office of Management and Budget guidance on benefit-cost analysis, agencies should have a plan for periodic, results-oriented evaluation of the effectiveness of federal programs. The guidance also notes that retrospective studies can be valuable in determining if any corrections need to be made to existing programs and to improve future estimates of other federal programs. In addition, cost-estimating best practices call for such estimates to be regularly updated. The purpose of updating the cost estimates is to determine whether the preliminary information and assumptions remain relevant and accurate, record reasons for variances so that the accuracy of the estimate can be tracked, and archive cost and technical data for use in future estimates. Despite the benefit-cost analysis guidance and cost- estimating best practices, service officials for six of the seven aviation weapon systems we reviewed could not provide current, updated O&S cost estimates that incorporated actual historical costs or analysis of actual costs compared to the estimate prepared at the production milestone. While cost estimates were prepared for major modifications to some of the systems in our review, these estimates were limited in scope and did not incorporate actual cost data. The Air Force’s updated life-cycle O&S cost estimate for the F-22A illustrates the potential magnitude of changes in O&S costs that a weapon system may experience over its life cycle. When the F-22A program office updated the 2005 cost estimate in 2009, it found a 47-percent increase in life-cycle O&S costs. The 2009 estimate of about $59 billion to operate and support the F-22A is $19 billion more than was estimated in 2005. The increase in life-cycle O&S costs occurred despite a 34-percent reduction in fleet size from 277 aircraft projected in the 2005 estimate to 184 aircraft projected in the 2009 estimate. The program office also compared the two estimates to identify areas of cost growth. According to the program office, the projected O&S cost growth was due to rising aircraft repair costs, unrealized savings from using a performance-based logistics arrangement to support the aircraft, an increased number of maintenance personnel needed to maintain the F-22A’s specialized stealth exterior, military pay raises that were greater than forecast, and personnel costs of Air National Guard and Air Force Reserve units assigned to F-22A units that were not included in the production milestone estimate. A 2007 independent review by the Air Force Cost Analysis Agency also projected future O&S cost growth for the F-22A. According to Air Force Cost Analysis Agency officials, the review was initiated because cost data showed the F-22A’s cost per flying hour was higher than projected in the 2007 President’s Budget, prompting concerns that the future O&S costs of the aircraft were underestimated. Specifically, the fiscal year 2007 actual cost per flight hour was $55,783, about 65 percent higher than the $33,762 projected in the 2007 President’s Budget. The Air Force Cost Analysis Agency estimated that in 2015 (when the system would be fully mature), the F-22A’s projected cost per flight hour would be $48,236, or 113 percent higher than the $22,665 cost per flight hour in 2015 that had been estimated in 2005. The estimated cost per flight hour increased $8,174 because fixed O&S costs did not decrease in proportion to the reductions in the number of planned aircraft (277 to 183) and annual flight hours per aircraft (366 to 277); $4,005 because the formula used in the 2005 estimate to calculate the cost to refurbish broken repair parts understated the potential costs; $2,414 for engine depot maintenance costs due to higher-than- previously-projected engine cycles per flying hour; $2,118 for higher costs for purchasing repair parts not in production or with diminishing manufacturing sources; $2,008 because of unrealized economies of scale for repair parts due to smaller quantity purchases (based on reduced aircraft and flying hours); $1,670 for additional costs for munitions maintainers, training munitions, and fuel consumption associated with a new capability—an air-to-ground mission; and $1,641 for additional maintenance due to lower levels of weapon system reliability than projected in the production milestone O&S cost estimate. The remaining $3,542 cost per flight hour increase identified by the Air Force Cost Analysis Agency’s review was due to changes in personnel requirements, a new requirement to remove and replace the stealth coating mid-way through the aircraft’s life, labor rate increases, immature engine repair procedures, and the administrative cost of Air National Guard units assigned to active duty units or active duty units assigned to Air Force Reserve or Air National Guard units. For the two aviation systems where both estimated and actual O&S cost data were available, we found that although there were some areas of cost growth, direct comparisons between estimated and actual costs were complicated in part because of program changes that occurred after the estimates were developed at the production milestone. For example, the Air Force and Navy had fewer F-22A and F/A-18E/F aircraft, respectively, in their inventories and flew fewer hours than planned when the estimates were developed. In addition, a recent, OSD-sponsored study of the Air Force’s C-17 aircraft identified various changes that can occur over a weapon system’s life-cycle and lead to O&S cost growth. For the C-17, these changes included factors internal to the program, factors external to the program, and changes in accounting methods. (The findings from that study are summarized in app. II.) Our analysis showed that actual O&S costs for the Air Force’s F-22A totaled $3.6 billion from fiscal years 2005 to 2009, excluding amounts for interim contractor support. This amount compared to $3.8 billion projected for these years in the 2005 production milestone O&S cost estimate. (Fig. 1 shows estimated and actual costs for each year.) However, the Air Force had 125 aircraft in its inventory in fiscal year 2009 rather than the 143 aircraft projected in the 2005 cost estimate. Also, the aircraft fleet actually flew 68,261 hours over this time period rather than the 134,618 hours projected in the 2005 cost estimate. On a per flight hour basis, the fiscal year 2009 actual O&S costs were $51,829, or 88 percent higher than the $27,559 forecast in 2005 after accounting for inflation. The use of contractor logistics support for the F-22A further complicated comparisons of actual costs to the estimated costs developed in 2005. Although the F-22A has been supported under contractor logistics support arrangements since before 2005, the estimates included the costs for government-provided logistics support of the aircraft. For example, for fiscal years 2005 through 2009, the O&S cost estimate projected that contractor logistics support would cost $736 million. However, actual contractor logistics support costs for the F-22A were $2.1 billion. For fiscal years 2005 through 2009, F-22A contractor logistics support costs were 60 percent of the total actual O&S costs reported in the Air Force’s VAMOSC system. Due to the use of this support arrangement, however, the Air Force’s VAMOSC system reports all of the amounts paid to the F-22A contractor under a single cost element instead of under multiple individual cost elements. In contrast, program officials confirmed that various contractor-provided cost elements—such as repair parts, materials and supplies, depot maintenance, and sustaining support—were included in the production milestone O&S cost estimate as separate items. Further, according to officials, prior to 2008 the program office did not obtain from the contractor cost reports that provide details of how the amounts paid to the contractor were spent in terms of DOD’s recommended O&S cost elements by fiscal year. Therefore, it is not possible to compare a significant amount of the actual O&S costs for the F-22A to the production milestone estimate at the cost element level. Of the remaining F-22A O&S costs not covered by contractor logistics support, mission personnel costs constituted the largest proportion— approximately 22 percent—of the total actual O&S costs reported for fiscal years 2005 through 2009. Compared with the estimates developed in 2005, actual mission personnel costs were $34 million (20 percent) higher for fiscal year 2008 and $113 million (62 percent) higher for fiscal year 2009. The 2005 estimate provided for 1,335 maintenance personnel for each F-22A wing (which was projected to number 72 aircraft), but according to Air Force officials the current authorized personnel for an F- 22A wing (now numbering 36 aircraft) is 1,051 maintenance personnel. While the number of aircraft per wing was reduced by half, the number of personnel was reduced by about 21 percent. According to officials, although the change in wing composition from three squadrons of 24 aircraft to two squadrons of 18 aircraft reduced personnel requirements, additional personnel who were not included in the 2005 estimate are now required to support the aircraft’s added air-to-ground mission, an increased maintenance requirement for the aircraft’s stealth exterior, and other maintenance requirements that were determined through a 2007 staffing study. In addition, Air National Guard and Air Force Reserve units were not included in the 2005 estimate, so the personnel costs of these units resulted in higher actual costs. Finally, as noted in the F-22A program office’s 2009 update to the life-cycle O&S cost estimate, military pay raises given to service members were greater than forecast in the production milestone estimate. Our analysis for the Navy’s F/A-18E/F showed that total actual O&S costs for fiscal years 1999 through 2009 were about $8.7 billion. This amount compares to the $8.8 billion projected for these years in the 1999 production milestone O&S cost estimate. However, program changes complicate direct comparisons between estimated and actual costs, as they do for the F-22A. For example, the Navy estimated that it would have 428 aircraft in fiscal year 2009, but the actual number of aircraft was 358, about 16 percent less. Similarly, the Navy estimated that the aircraft fleet as a whole would fly 780,628 hours from fiscal year 1999 through 2009, but the aircraft fleet actually flew 625,067 hours, or 20 percent less. On a per flight hour basis, the fiscal year 2009 O&S costs were $15,346, 40 percent higher than the $10,979 forecast in 1999. Although total actual costs were less than estimated for the 11-year period, actual annual costs for fiscal years 2005 through 2009 have exceeded the annual estimates by an average of 10 percent after accounting for inflation (see fig. 2). With regard to individual cost elements, our comparison of actual O&S costs for fiscal years 1999 through 2009 to those projected in the 1999 estimate found that actual costs for fuel, modifications, depot maintenance, and intermediate maintenance were higher than originally estimated while training costs were much lower. (App. III presents a more detailed comparison of actual and estimated O&S costs for the F/A-18E/F.) In discussing findings from this comparison with cost analysts at the Naval Air Systems Command, they provided the following explanations for key changes we identified: Fuel costs were higher than estimated because the price of fuel has increased overall since the estimate was developed in 1999. Further, when the estimate was developed, it was assumed the F/A-18E/F aircraft’s fuel consumption would be similar to that of the F/A-18C/D. However, this did not prove to be an accurate analogy, and the F/A- 18E/F’s fuel consumption has been higher than that of the earlier model aircraft. The analysts also said that some of the increased fuel costs for fiscal year 2005 through 2009 may also be attributed to increased refueling activity of the F/A-18E/F after the retirement of the S-3B aircraft. Depot maintenance costs were higher than estimated, in part because the engine was repaired by a contractor under a performance-based logistics arrangement, but the estimate projected costs for government-provided support. The government repair estimate included a large initial investment of procurement funds—which are not considered O&S costs—for spare parts. The Navy subsequently changed the engine repair concept to a performance-based logistics arrangement with less expensive spare parts and reduced the initial investment by about 15 percent. However, as a result of the new arrangement, depot maintenance costs increased. Further, the 1999 estimate purposefully excluded some engine depot-maintenance costs in order to keep a consistent comparison with similar costs for the F/A-18A-D models. (These costs were instead included in the estimate as costs for repair parts.) However, after adjusting for these issues, actual engine depot maintenance costs in fiscal years 2007 and 2009 were higher by a total of approximately $64 million, and Navy officials could not explain this variance. Additionally, the production milestone estimate developed in 1999 included costs for support equipment replacement, which are not captured in the Navy’s VAMOSC system. Actual costs for aviation repair parts were higher than estimated after removing the costs that should have been included as engine depot- maintenance costs from the estimate. Intermediate-level maintenance costs were higher than projected because the estimate did not include personnel costs for shore-based, intermediate-level maintenance. Modification costs were higher than projected because the Navy’s VAMOSC system collected costs for all procurement-funded modifications, including those that added capabilities, while the estimate only projected costs for flight-safety modifications. Training costs were lower than estimated because the Navy’s VAMOSC system did not include actual nonmaintenance training costs such as initial pilot and naval flight officer training and installation support costs. These costs were included in the cost estimate. Although we did not have production milestone estimates of life-cycle O&S costs for the Air Force’s F-15E and B-1B or for the Army’s AH-64D, CH-47D, and UH-60L, we reviewed changes in actual O&S costs for each system and found that costs increased over time for a variety of reasons. As noted earlier, some cost elements are not maintained in the services’ VAMOSC systems or are not accurate, and our analysis was subject to these limitations. Furthermore, we could not determine the extent to which the cost growth was planned since the services could not provide us with the O&S cost estimates developed for the production milestone. According to service cost analysis officials, actual O&S costs for these systems were likely higher than estimated because such estimates are typically based on peacetime usage rather than wartime usage assumptions. Further, service cost analysts said that since the late 1990’s actual costs for repair parts have grown faster than the OSD inflation rates that are used to develop O&S cost estimates. Total actual O&S costs for the Air Force’s F-15E increased 82 percent from $944 million in fiscal year 1996 to $1.7 billion in fiscal year 2009 (see fig. 3). The number of F-15E aircraft increased 8 percent from 200 to 215 during this time period, and the number of flight hours increased 7 percent from 60,726 to 65,054. Per aircraft, O&S costs increased 69 percent from $5 million to $8 million over this period, and the cost per flight hour increased 70 percent from $15,538 to $26,408. Our analysis found that personnel, fuel, repair parts, and depot maintenance accounted for about 95 percent of the overall increase in F- 15E O&S costs from fiscal years 1996 to 2009. For example, actual personnel costs grew by $73 million (19 percent) over the period. Most of the growth was due to wage increases rather than increases in the number of personnel. Also, fuel costs increased $142 million (18 percent) during these years. According to program officials, this increase was mainly due to higher fuel prices rather than increased consumption. Cost for repair parts grew $398 million (51 percent), and program officials attributed some of this growth to higher costs for materials used during depot repair, as well as higher prices paid for labor, storage, and handling. Further, officials said that several avionics systems on the F-15E have been replaced and the costs to repair some of the new components are higher. Depot maintenance costs increased $124 million (16 percent) and program officials said this increase was due to increasing rates for depot work, noting that the Air Logistics Centers increased their rates because of higher material costs. Also, officials said that as aircraft age the number of subsystems that require repair increases, which results in additional tasks being required during planned depot maintenance. For example, the F-15C/Ds that are expected to fly until 2025 will be completely rewired in planned depot maintenance because the original wiring is deteriorating. A similar program is planned in the future for the F-15Es and is expected to significantly increase the cost of planned depot maintenance for that aircraft. Annual actual O&S costs for the Air Force’s B-1B increased 21 percent from $1.1 billion in fiscal year 1999 to $1.3 billion in fiscal year 2009 (see fig. 4). This cost growth occurred despite a 29 percent reduction in the aircraft fleet from 93 to 66 during the same period. Per aircraft, O&S costs increased 71 percent from $11 million to $19 million, and the cost per flight hour increased 23 percent from $46,224 to $56,982. Our analysis showed that fuel, repair parts, and depot maintenance accounted for 97 percent of the overall increase in B-1B O&S costs from fiscal years 1999 through 2009. Fuel costs increased $89.4 million (40 percent), which program officials attributed mainly to higher fuel costs and increased utilization of the aircraft in recent years. Program officials reported that in each of the last 3 full fiscal years (2007, 2008, and 2009), the hourly utilization rate per aircraft was 46 percent, 51 percent, and 54 percent higher, respectively, than in fiscal year 1999. According to the program office, the increased cost for repair parts, which grew $51.9 million (23 percent), was due to the increased cost of materials consumed in the refurbishment of repair parts. Depot maintenance costs increased $77.1 million (34 percent), and program officials said this increase was due to higher utilization of aircraft, increased labor and material costs, and changes in cost accounting. The Army’s O&S data on unit-level consumption costs for the AH-64D, CH- 47D, and UH-60L showed that all three experienced significant cost growth from fiscal years 1998 through 2007. However, as table 2 shows, the size of the fleets and numbers of flying hours also increased, with the AH-64D experiencing the greatest growth. According to Army officials, fiscal year 1998 costs reflected peacetime training only, whereas data for fiscal year 2007 also includes costs for units deployed in Afghanistan and Iraq. O&S costs for deployed units constituted more than half of the total O&S dollars for these aircraft in fiscal year 2007. Measured by flight hour, Army unit-level consumption costs increased 51 percent per flight hour for the CH-47D and 111 percent per flight hour for the UH-60L, and decreased 3 percent per flight hour for the AH-64D, from fiscal year 1998 to 2007. As discussed earlier in the report, unit-level consumption costs reported in the Army’s VAMOSC system include fuel, materials and supplies, repair parts, and training munitions. As shown in table 3, fuel costs increased by more than 140 percent for all three systems, the costs of materials and supplies and repair parts also increased for each system, and the cost of training munitions decreased. The decreased cost of training munitions drove the overall decrease in unit-level consumption costs for the AH-64D, and a program official stated this was likely due to the significant amount of training conducted during the initial fielding of the AH-64D in 1998. Even though periodic updates to life-cycle O&S cost estimates could quantify any cost growth in major weapon systems and help identify cost drivers, DOD acquisition and cost-estimating guidance do not require that O&S cost estimates be updated after a program has completed production. Service guidance that we reviewed does not consistently and clearly require the updating of O&S cost estimates after a program has completed production. Additionally, although our review showed program changes can have a large effect on actual O&S costs after cost estimates are developed at the production milestone, DOD and service acquisition guidance do not require program offices to maintain documentation of such changes for use in cost analysis. Federal law requires that a full life-cycle cost analysis for each major defense acquisition program be included in the programs’ annual Selected Acquisition Reports to Congress. Requirements related to Selected Acquisition Reports, however, end when a weapon system has reached 90 percent of production. In addition, we found that for the systems we reviewed, the estimated O&S costs included in the Selected Acquisition Reports were sometimes not updated. For our sample, the estimated O&S costs included in the annual reports for the F-22A remained unchanged from 2005 through 2007, and the services did not have current updated life- cycle O&S cost estimates for the other six weapon systems we reviewed. Further, while life-cycle costs are required to be reported in the Selected Acquisition Reports, OSD officials noted that the calculation of the estimate may be inconsistent. For example, cost analysts at the Naval Air Systems Command maintain a cost-estimating model for the F/A-18E/F that is regularly updated and used to develop O&S cost estimates for the Selected Acquisition Reports and other analyses to improve cost effectiveness. However, the methodology used to develop the Navy’s cost estimates for the Selected Acquisition Reports differs from the methodology used to develop life-cycle cost estimates for acquisition milestone decisions and includes significantly more infrastructure costs. According to the Naval Air System Command guidance, the estimates for the Selected Acquisition Reports are not comparable to the acquisition milestone life-cycle cost estimates without adjusting for the different ground rules and assumptions used. The estimates for the Selected Acquisition Reports also are not comparable to the costs reported in the Navy’s VAMOSC system. DOD acquisition policy requires the services to provide life-cycle O&S cost estimates for decisions made during specific points in the acquisition process, including the production decision, but neither this policy nor DOD’s cost-estimating guidance require O&S cost estimates for systems that have been fielded. In a December 2008 memorandum, DOD also required that several metrics, including an ownership cost metric, be reported quarterly for all major weapon defense acquisition programs. However, this quarterly reporting policy does not currently apply to weapon systems that have completed production and are no longer reporting information in the Selected Acquisition Reports to Congress. Of the weapon systems we reviewed, program offices for the AH-64D, F-22A, and F/A-18E/F currently provide Selected Acquisition Reports to Congress. The Army regulation and Navy instructions we reviewed do not address updating life-cycle O&S cost estimates for systems that have been fielded. Although the Air Force has a directive requiring annual updates to program cost estimates, it does not specifically mention life-cycle O&S cost estimates. An Air Force directive issued in August 2008 includes the requirement that major acquisition program cost estimates be updated annually and used for acquisition purposes, such as milestone decisions, and other planning, programming, budgeting, and execution decisions. The directive also states that it is applicable to organizations that manage both acquisition and sustainment programs. However, as mentioned earlier, service and OSD officials were unable to locate O&S cost estimates for the F-15E and the B-1B aircraft. According to Air Force cost analysis and policy officials, the requirement for annual cost estimate updates is applicable to programs no longer in acquisition, but they are still developing the Air Force instruction that will contain more specific guidance for implementing the 2008 directive. The officials expect that, once issued, the Air Force instruction will clarify the requirement to update O&S cost estimates annually. In addition, changes in weapon system programs affected the assumptions used in production-milestone life-cycle O&S cost estimates, but DOD and service acquisition guidance that we reviewed do not explicitly require the services to maintain documentation of program changes affecting O&S costs. According to federal standards for internal control, information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Also, managers need to compare actual performance to planned or expected results and analyze significant differences. DOD has several departmentwide initiatives to address weapon system O&S costs. The DOD-wide Reduction in Total Ownership Costs–Special Interest Program, initiated in 2005, is aimed at reducing weapon system O&S costs by improving reliability and maintainability and reducing total ownership costs in weapon systems that are already fielded. Program funding totaled about $25 million in fiscal year 2009. For its 15 funded projects, DOD forecasts total ownership cost savings for fiscal years 2006 through 2011 to be $9.5 billion, with an average 60 to 1 return on investment. For example, according to officials, the program is funding an effort to develop trend analysis software to diagnose and resolve problems with the F/A-18 aircraft. Other departmentwide initiatives seek to better manage O&S costs of major weapon systems during the acquisition process. Some of these initiatives address factors we previously identified as negatively affecting DOD’s ability to manage O&S costs. In 2003, we reported that DOD did not consider O&S costs and readiness as key performance requirements for new weapon systems and placed higher priority on technical performance features. In 2007, DOD began requiring the services to establish an ownership cost metric during the requirements determination and acquisition processes for weapon systems in order to ensure that O&S costs are considered early in decision making. According to current Joint Staff guidance, the ownership cost metric and reliability metric are key system attributes of the sustainment (or materiel availability) key performance parameter. While the ownership cost metric includes many of OSD’s recommended O&S cost elements, such as energy (fuel, oil, petroleum, electricity, etc.), maintenance, sustaining support, and continuous system improvements, it does not include personnel and system-specific training costs. In 2008, OSD expanded the use of the ownership cost and materiel reliability metrics, along with the materiel availability key performance parameter, to all major defense acquisition programs that provide information to Congress in Selected Acquisition Reports. In a July 2008 memorandum intended to reinforce the use of the life-cycle metrics, OSD requested that these programs develop target goals for each metric within 60 days. In a December 2008 memorandum, OSD asked the services to begin reporting against the target goals on a quarterly basis. According to OSD officials, they are working with the services to improve the accuracy and submission of the reported cost information. We also previously noted that DOD used immature technologies in designing its weapon systems, which contributed to reliability problems and acted as a barrier to using manufacturing techniques that typically help reduce a system’s maintenance costs. DOD has identified insufficient reliability designed in the system during acquisition as one of the key reasons for increases in O&S costs. Based on the recommendation of the DOD Reliability Improvement Working Group, DOD’s primary acquisition instruction was updated in 2008 to include guidance directing program mangers to develop reliability, availability, and maintainability strategies that include reliability growth as an integral part of design and development. Further, the instruction states that reliability, availability, and maintainability shall be integrated within systems engineering processes; documented in system plans; and assessed during programmatic reviews. DOD has also taken steps to improve the information available for cost estimating and monitoring of actual O&S costs. In 2008, we reported that for the performance-based logistics arrangements we reviewed, program offices often did not have detailed cost data that would provide insights regarding what the program office was spending for various aspects of the support program. That same year, DOD’s primary acquisition instruction was updated to include a requirement that sustainment contracts provide for detailed contractor cost reporting for certain major programs to improve future cost estimating and price analysis. However, the instruction does not provide details as to the timing or content of such cost reporting. Officials in OSD Cost Assessment and Program Evaluation are currently drafting additional guidance to clarify the cost-reporting requirement. Additionally, OSD Cost Assessment and Program Evaluation initiated an effort in 2008 to collect actual operational testing and evaluation information and make it available to cost analysts for use in developing weapon system cost estimates. According to OSD officials, actual test data could improve these estimates by providing cost analysts more accurate information. In support of the initiative, the services have collected over 150 test data reports from their operational testing agencies. Although cost analysis officials indicated that they have not yet used the test data in preparing cost estimates, there is a high level of interest in the information contained in the test reports as evidenced by the number of times the data have been accessed. Officials noted that research is ongoing, particularly within the Army, to develop quantitative tools that link operational test results with O&S cost estimates. The services also identified initiatives to help them better manage aviation system O&S costs. Although one Army command had an O&S cost- reduction program, none of the services had cost-reduction programs implemented servicewide. According to Army officials, the most direct aviation O&S cost-reduction initiative within that service is the Aviation and Missile Life Cycle Management Command’s O&S Cost Reduction program. Under the program, the command investigates fielded aviation systems with high failure rates and high costs and attempts to reduce costs by funding projects aimed at reliability improvements, life-cycle extensions, and acquisition cost reductions. According to Army officials, the annual budget for this program is $10 million to $12 million per year, and most projects predict at least a 2.5 to 1 return on investment. Examples of funded projects include developing a fuel additive and reducing corrosion in CH-47 aircraft blades. Officials also noted that other Army initiatives during the last several years include a renewed emphasis on the importance of estimating total life-cycle costs during the weapon system acquisition process and the establishment of draft guidance for the inclusion of Operations and Maintenance funding projections within acquisition program affordability charts used during certain weapon system acquisition reviews. In addition, the Army conducts annual weapon systems reviews at which program managers present current and emerging life-cycle weapon system funding requirements based on the latest Army or program office cost estimate developed for the system. Army officials said these initiatives can help the Army in better managing O&S costs. While the Navy could not identify initiatives designed specifically to reduce O&S costs for its aviation systems, Navy officials said the Naval Aviation Enterprise, a working group of naval aviation stakeholders, was established in 2004 to meet multiple goals, including exchanging information to reduce O&S costs. Through cross-functional teams, subject- matter experts collaborate to resolve problems and improve operations. The Navy stated that, as a result of this initiative, it achieved O&S cost savings of $50 million from its flying-hour program in fiscal year 2005. Additionally, Navy officials cited the establishment of Fleet Readiness Centers as an initiative that could lead to O&S cost reduction in aviation systems. Created as part of the Base Realignment and Closure process in 2005, the Fleet Readiness Centers aim to improve maintenance efficiency and reduce costs by combining intermediate- and depot-level maintenance personnel. As a result, the Navy expects avoidance of unwarranted maintenance procedures, reduced turnaround times, an increase in completed repairs, and reduced maintenance costs. Although the Navy is expected to achieve cost savings from the Fleet Readiness Centers, we reported in 2007 that the projected savings are likely to be overstated. The Air Force also lacks initiatives specifically designed to reduce O&S costs of aviation systems. Air Force officials noted, however, that improved management of O&S costs could result from its Expeditionary Logistics for the 21st Century program. The program is a logistics process- improvement effort that was started in 2005 under a larger program called Air Force Smart Operations for the 21st Century, which is the guiding program for all transformation efforts within the Air Force. Although one goal of the program is to reduce O&S costs by 10 percent, Air Force officials said program initiatives to date do not focus on specific weapon systems. A DOD Product Support Assessment Team led by the Office the Under Secretary of Defense for Acquisition, Technology and Logistics recently concluded a year-long study of weapon system product support, and in November 2009 issued a report with recommendations to improve weapon system life-cycle sustainment. With regard to O&S costs, the report cited inadequate visibility of O&S costs as one of several problems that hinder weapon system life-cycle support management. According to the report, DOD does not have adequate visibility of O&S costs; lacks a process to systematically track and assess O&S costs; and lacks valid, measurable sustainment metrics to accurately assess how programmatic decisions will affect life-cycle costs. Further, the report states that DOD cannot identify, manage, and mitigate major weapon system cost drivers. To address identified deficiencies in O&S cost management, the Product Support Assessment Team recommended (1) establishing an O&S affordability requirement, including linking O&S budgets to readiness, (2) developing and implementing an affordability process with all DOD stakeholders (such as the financial and program management communities), and (3) increasing the visibility of O&S costs and their drivers across the supply chain. In addition to the deficiencies identified with regard to O&S cost management, the Product Support Assessment Team also found deficiencies in DOD’s sustainment governance. Governance is defined by the Product Support Assessment Team as the consistent and cohesive oversight across the management, policies, processes, and decision making for sustainment to ensure that sustainment information is a critical component of weapon system acquisition and throughout the life cycle. The report noted that every programmatic decision made during the life cycle of a weapon system should be made with the knowledge of how that decision will affect the life-cycle support of that system. However, the report stated that this has been difficult within DOD due to the lack of perceived relative importance of long-term costs and lack of valid, measurable support metrics, especially cost projections. To address identified deficiencies in sustainment governance, the Product Support Assessment Team recommended (1) strengthening guidance so that sustainment factors are sufficiently addressed and governed at key life- cycle decision points, (2) issuing DOD policy to require the services to conduct independent logistics assessments prior to acquisition milestones, and (3) creating a post-initial-operating-capability review that includes an assessment of known support issues and potential solutions. OSD has formed three Integrated Product Teams to further develop and lead the implementation of the Product Support Assessment Team recommendations over a 3-year period. While the report highlighted some of the limitations on assessing and managing O&S costs, the current recommendations do not identify specific actions or enforcement measures. One of the first changes resulting from the Product Support Assessment Team recommendations was a new DOD effort in April 2010 to begin reviews of sustainment costs for all acquisition category ID weapon system programs and address sustainment factors at milestone decision and other review points during the acquisition process. Under new DOD guidance, program managers for these programs are to use a sustainment chart to facilitate the reviews and provide information on support strategy, metrics, and costs in a standardized format. Specifically, the chart should include the original O&S cost baseline, as reported in the initial Selected Acquisition Report for the system, as well as current program costs according to the most recent projections. Further, the current estimated total O&S costs for the life cycle of the system should also be included, along with the antecedent system’s cost for comparison. A related factor that has historically challenged DOD’s ability to reduce weapon system O&S costs is that no single individual or entity within the department is empowered to control these costs. A variety of offices within the services and DOD are involved in the decision making that affects sustainment. Though DOD has designated the program manager as responsible for many aspects of weapon system life-cycle sustainment planning, many decisions and processes are outside of the program manager’s control. Using aviation systems as an example, these decisions and processes include budget determination, funding processes, the number and pay of personnel assigned to support aircraft, the number of aircraft procured, the number of hours flown, the aircraft basing locations, and the rates charged by depot maintenance facilities. After the aircraft are produced, program managers have only a limited ability to directly affect O&S costs. Army aviation officials, for example, indicated that during the sustainment phase, program managers control only the budgets for program-related logistics and engineering support, retrofit modifications, and technical manuals, which account for only a small percentage of total O&S costs. In addition, it is likely that multiple individuals will serve as the weapon system’s program manager over its life-cycle. For example, the average tenure for a program manager is roughly 17 months, whereas the average life of a major weapon system often exceeds 20 years. This turnover results in program managers bearing responsibility for the decisions of their predecessors, making it difficult to hold the program manager accountable for growth in the system’s O&S costs. Finally, a weapon system’s long life-cycle also affects cost-reduction initiatives, as it may take many years for some of the initiatives to produce returns on investment. In the absence of key information on O&S costs for its major weapon systems, DOD may not be well-equipped to analyze, manage, and reduce these costs. While the military services are required to develop life-cycle O&S cost estimates to support production decisions, DOD cannot fully benefit from these estimates if they are not retained. If cost-estimating best practices are followed, the estimates, among other things, can provide a benchmark for subsequent cost analysis of that system, enable the identification of major cost drivers, and aid in improving cost estimating for future systems. Similarly, in the absence of more complete historical data on a weapon system’s actual O&S costs in their VAMOSC systems, the services are not in a good position to track cost trends over time, compare these actual costs with previous estimates, and determine whether and why cost growth is occurring. While all the services’ VAMOSC systems have deficiencies, the Army’s system has the greatest limitations. We reported on these limitations 10 years ago and recommended improvements, but the Army has not made significant improvements since then. Moreover, without periodically updating life-cycle O&S cost estimates and documenting program changes affecting O&S costs after a system is fielded, DOD managers lack information necessary to compare actual performance to planned or expected results, as stated in federal standards for internal control. DOD has begun to recognize that greater management emphasis should be placed on better managing weapon system O&S costs, as indicated by several current and planned initiatives. The department furthermore has acknowledged deficiencies in O&S cost visibility and noted that every programmatic decision made during the entire life cycle of a DOD weapon system should be made with the knowledge of how that decision will affect the life-cycle sustainment of that system. Finally, citing the economic and fiscal challenges the nation faces along with the prospects for greatly reduced defense budgets, the Secretary of Defense highlighted the need for DOD to take a more aggressive approach to reducing its spending and finding efficiencies where possible in order to better afford its force structure and weapon system modernization priorities. These competing budget priorities provide additional impetus for DOD to manage and reduce weapon system O&S costs. To improve DOD’s ability to manage and reduce O&S costs of weapon systems over their life cycle, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics and the Director of OSD Cost Assessment and Program Evaluation to take the following five actions: Revise DOD guidance to require the services to retain life-cycle O&S cost estimates and support documentation used to develop the cost estimates for major weapon systems. This requirement should apply to cost estimates developed by weapon system program offices and other service offices, including cost analysis organizations. Furthermore, this requirement should include cost estimates prepared during the acquisition process as well as those prepared after a system is fielded. Identify the cost elements needed to track and assess major weapon systems’ actual O&S costs for effective cost analysis and program management, and require the services to collect and maintain these elements in their VAMOSC systems. To the extent possible, data collected on actual O&S costs should be comparable to data presented in life-cycle cost estimates. To oversee compliance with this new requirement, DOD should require the services to identify any gaps where actual cost data are not being collected and maintained and to identify efforts, along with timelines and resources, for filling these gaps. Direct the Army to develop and implement a strategy for improving its VAMOSC system. This strategy should include plans for incorporating additional cost elements from other information systems, time frames for expanding on existing cost elements, and resources required to improve the VAMOSC system. Require the services to periodically update their life-cycle O&S cost estimates for major weapon systems throughout their life cycle. These updates should provide an assessment of cost growth since the prior estimate was developed and account for any significant cost and program changes. Develop guidance for documenting and retaining historical information on weapon system program changes to aid in effective analysis of O&S costs. DOD should determine, in conjunction with service acquisition and cost analysis officials, the types of information needed and the level of detail that should be retained. We also recommend that the Secretary of Defense require that the Director of OSD Cost Assessment and Program Evaluation retain any independent life-cycle O&S cost estimates prepared by that office along with support documentation used to develop these cost estimates for major weapon systems. In its written comments on a draft of this report, DOD generally concurred with our recommendations, noting that the department is committed to strengthening its O&S data availability as well as its use of O&S estimates in the governance process for major defense acquisition programs. DOD also stated that it will take steps to update its policy to ensure that O&S cost estimates are retained, along with supporting documentation. Specifically, the department fully concurred with four recommendations and partially concurred with two. The department’s written comments are reprinted in appendix IV. DOD also provided technical comments that we have incorporated into this report where applicable. DOD concurred with our four recommendations to revise guidance to require the services to retain life-cycle O&S cost estimates and support documentation used to develop the cost estimates; develop guidance for documenting and retaining historical information on weapon system program changes to aid in effective analysis of O&S costs; require that the Director of the Cost Assessment and Program Evaluation retain any independent life-cycle O&S cost estimates prepared by that office, along with support documentation used to develop these cost estimates for major weapon systems; and revise DOD guidance to require the services to periodically update life-cycle O&S cost estimates for major weapon systems throughout their life cycle and assess program changes and cost growth. While DOD concurred with our recommendation to periodically update life-cycle O&S cost estimates for major weapon systems, the department noted that the Navy is concerned about the additional cost and personnel related to this requirement. We maintain that periodic estimates that quantify and assess changes in weapon systems O&S costs will assist with the identification of prospective areas for cost reduction and improve DOD’s ability to estimate O&S costs in the future. Therefore, the resulting benefits from periodic analysis of O&S costs will likely be greater than the incremental costs associated with the additional resources. DOD partially concurred with our recommendation to identify the cost elements needed to track and assess major weapon systems’ actual O&S costs for effective cost analysis and program management, require the services to collect and maintain these elements in their VAMOSC systems, and require the services to identify elements where actual cost data are not being collected and maintained, along with efforts for filling these data gaps. However, the department noted that while DOD will coordinate internally to address this issue, the Director of the Cost Assessment and Program Evaluation office should be directed to take this action in lieu of the Under Secretary of Defense for Acquisition, Technology and Logistics. DOD’s comments further noted that these two OSD offices would coordinate with one another to implement other recommendations we made. We have modified our recommendations to reflect that both the Under Secretary of Defense for Acquisition, Technology and Logistics and the Director of the Cost Assessment and Program Evaluation office will need to play key roles in implementing these recommendations. DOD also partially concurred with our recommendation that the Army develop and implement a strategy for improving its VAMOSC system. DOD stated that while the Army will develop such a strategy, the Army maintains that its military personnel costs are collected by a separate database, the Army Military-Civilian Cost System, and although the costs are not captured by weapon system fleet, the data are sufficient for O&S cost -estimating purposes. The Army also pointed out that it has made progress in collecting contractor logistics support cost data. Specifically, the Army stated that guidance issued in 2008 has led to cost-reporting requirements (that is, requirements that the contractor provide details regarding support costs by cost element) being included in new support contracts. Further, the Army noted that a future information system should be able to capture contractor support cost data. As we stated in our report, new Army systems may improve the availability of actual O&S cost data. However, these systems are still being developed. Even with these planned information systems, it is unclear what additional O&S cost data will be collected, how quickly the Army will be able to incorporate the data into its VAMOSC system, what resources may be needed, or what additional limitations the service may face in improving its VAMOSC system. We based our recommendation on DOD guidance regarding the VAMOSC systems. As we state in our report, DOD required that the O&S costs incurred by each defense program be maintained in a historical O&S data-collection system and designated the services’ VAMOSC systems as the authoritative source for these cost data. Therefore, we continue to believe the Army needs a strategy for improving the cost data available in its VAMOSC system. While generally concurring with our recommendations, DOD’s response noted that there are over 150 major defense acquisition programs across the departments and agencies, ranging from missile defense systems to combat vehicles, with each program having unique challenges in data reporting. Although DOD agreed that our report was reasonable in its analysis of the seven programs reviewed, it emphasized that the problems encountered with our sample may not be found across the entire department. While we solicited DOD’s and the services’ inputs to try to avoid selecting weapon systems with known data limitations, we agree with DOD and our report clearly states that we selected a nonprobability sample for our review and, therefore, the results cannot be used to make inferences about all major weapon systems. DOD’s response also noted that while our report recognizes the recent initiatives the department has established to track and prevent future O&S cost growth, the effects of these initiatives are generally not reflected in the systems we analyzed. According to DOD’s comments, a review of at least one pre–major defense acquisition program would have allowed us to assess the potential long- term effect of these initiatives with respect to controlling O&S cost growth. While we agree that a review of the effectiveness of recent initiatives would be beneficial in the future, many of the initiatives were only implemented in the last several years and are likely too new to demonstrate improvements. Further, the scope of our work was limited to a comparison of the original O&S cost estimates developed for selected major weapon systems to the actual O&S costs incurred in order to assess the rate of cost growth. Therefore, we selected systems that had previously passed through DOD’s acquisition process, achieved initial operating capability, and been fielded for at least several years. These systems were not affected by DOD’s recent initiatives. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; the Under Secretary of Defense for Acquisition, Technology and Logistics; and the Director, Office of Management and Budget. 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 on (202) 512-8246 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 are listed in appendix V. To conduct our review of growth in operating and support (O&S) costs for major weapon systems, we collected and analyzed data on seven major aviation systems: the Navy’s F/A-18E/F; the Air Force’s F-22A, B-1B, and F- 15E; and the Army’s AH-64D, CH-47D, and UH-60L. We focused on aviation systems to enable comparisons of cost growth, where possible, across the selected systems. For example, some factors driving cost growth in an aviation system may be more applicable to other types of aircraft than to maritime or land systems. We selected aviation systems that had reached initial operating capability after 1980 and had incurred several years of actual O&S costs, indicating a level of maturity in the program. The newest system in our sample—the F-22A—has been fielded for about 4 years, and the oldest system—the CH-47D—has been fielded about 17 years. We limited our selection to aviation systems that had relatively large fleets, avoiding low-density systems for which cost data may have been anomalous. We also selected the systems to reflect varied characteristics in terms of military service, mission, and support strategy. However, we did not include a Marine Corps aviation system in our sample because the Naval Air Systems Command manages and supports all Marine Corps aircraft. We also did not select systems with known limitations of available data on actual O&S costs. For example, we have previously reported that some systems supported under performance-based logistics arrangements may not have detailed cost data available because the Department of Defense (DOD) has not required the contractor to provide these data. In considering which systems to select for our review, we also obtained input from DOD and service officials. The results from this nonprobability sample cannot be used to make inferences about all aviation systems or about all major weapon systems because the sample may not reflect all characteristics of the population. The following is an overview of each system selected for our review: The F/A-18E/F Super Hornet is an all-weather attack aircraft as well as a fighter. It performs a variety of missions including air superiority, fighter escort, reconnaissance, aerial refueling, close air support, air defense suppression, and day/night precision strike. The F/A-18E/F entered full rate production in January 2000 and established initial operational capability in September 2001. As of the end of fiscal year 2009, the Navy had 358 F/A-18E/F aircraft. The F-22A Raptor is the Air Force’s newest fighter aircraft and performs both air-to-air and air-to-ground missions. Officials stated that the program received approval to enter into full rate production in April 2005 and established initial operating capability in December 2005. Currently, the Air Force plans to buy 187 F-22A aircraft. The F-15E Strike Eagle is a dual-role fighter designed to perform air-to- air and air-to-ground missions. Officials indicated that the program received approval to enter into full rate production in early 1986 and established initial operating capability in September 1989. As of the end of fiscal year 2009, the Air Force had 223 F-15E aircraft. The B-1B Lancer is a multimission long-range bomber designed to deliver massive quantities (74,000 pounds) of precision and nonprecision weapons. The Air Force received the first B-1B in April 1985 and established initial operating capability in September 1986. As of the end of fiscal year 2009, the Air Force had 66 B-1B aircraft. The AH-64D Apache Longbow is the Army’s heavy division/corps attack helicopter. It is designed to conduct rear, close, and shaping missions, as well as distributed operations and precision strikes. In addition, the AH-64D is designed to provide armed reconnaissance during day or night, in obscured battlefields, and in adverse weather conditions. The original Apache entered Army service in 1984, and the AH-64D followed in 1998. As of the end of fiscal year 2009, the Army had 535 AH-64D aircraft. The UH-60L Black Hawk is a twin-engine helicopter that is used in the performance of the air assault, air cavalry, and aeromedical evacuation missions. The UH-60L is an update to the original UH-60A, which entered Army service in 1979. As of the end of fiscal year 2009, the Army had 564 UH-60L aircraft. The CH-47D Chinook is a twin-engine, tandem-rotor transport helicopter that carries troops, supplies, ammunition, and other battle- related cargo. Between 1982 and 1994, the Army upgraded all early models—the CH-47A, B, and C models—to the CH-47D, which features composite rotor blades, an improved electrical system, modularized hydraulics, triple cargo hooks, and more powerful engines. As of the end of fiscal year 2009, the Army had 325 CH-47D aircraft. To determine the extent to which (1) life-cycle O&S cost estimates developed during acquisition and data on actual O&S costs are available for program management and decision making and (2) DOD uses life-cycle O&S cost estimates for major weapon systems after they are fielded to quantify cost growth and identify its causes, we identified available cost estimates, compared the estimates with actual cost data, and obtained additional information on how O&S costs are tracked, assessed, managed, and controlled. We requested documentation from the services and the Office of the Secretary of Defense (OSD) on life-cycle O&S cost estimates that the services prepared during acquisition to support the decision to proceed with production of the aircraft in our sample. We also requested documentation of O&S cost estimates that OSD may have independently prepared for this milestone decision. We focused on the production milestone because, while life-cycle cost estimates may be developed during earlier stages of the acquisition process, DOD cost-estimating guidance states that cost estimates for the production milestone should be based on the current design characteristics of the weapon system, the latest deployment schedule, and the latest operation and maintenance concept. In addition, we requested documentation from the services for any current updates to life-cycle O&S cost estimates that may have been developed after the systems were fielded. We also obtained information from weapon system program offices on their practices for retaining information regarding program changes affecting O&S costs. To identify requirements for conducting, updating, and retaining cost estimates, we reviewed Office of Management and Budget guidance, DOD and service acquisition and cost estimation guidance, and federal guidance on cost - estimating best practices. For actual historical data on weapon system O&S costs, we obtained access to the services’ Visibility and Management of Operating and Support Costs (VAMOSC) systems that have been designated as the authoritative sources of these data. We worked with service cost analysis officials to understand how data in these systems are organized and how to query them for data on our selected aviation systems. To assess the reliability of the data, we surveyed cost analysis officials. For example, we obtained information on specific cost elements that were collected, data sources, and efforts to improve the completeness and accuracy of collected data. We also reviewed DOD and service guidance on the VAMOSC systems and cost element structure, and we reviewed prior GAO and DOD assessments of the availability of actual O&S cost data for DOD weapon systems. We identified limitations in the data and discuss these in our report. Taking these limitations into account, we determined that the available data were sufficiently reliable to compare estimated to actual costs for the F-22A and F/A-18E/F, the two systems in our sample for which we were able to obtain the production milestone life-cycle O&S cost estimate, and also to present an analysis of changes in actual costs over time for the other five systems. In comparing estimated to actual costs for the F-22A and the F/A-18E/F, we analyzed differences that occurred each year, determined which cost elements experienced the greatest changes over time, and reviewed how actual program conditions compared to the assumptions used to develop the production milestone cost estimate. In addition, we met with cost analysis experts from the Center for Naval Analyses and the Institute for Defense Analyses and obtained the results of an Institute for Defense Analysis study on O&S costs for the Air Force’s C-17 aircraft that had been prepared at the request of the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. For the five weapon systems in our sample where production milestone life-cycle O&S cost estimates were unavailable, we obtained and analyzed data on actual O&S costs from the services’ VAMOSC systems. This analysis was subject to the limitations in the data that we identified for each of the services’ VAMOSC systems, as discussed in the report. We met with officials responsible for each selected weapon system to discuss issues related to the management of the program and cost trends. In our analysis of O&S costs, we have adjusted DOD data to reflect constant fiscal year 2010 dollars, unless otherwise noted. Throughout this report, all percentage calculations are based on unrounded numbers. To identify efforts taken by DOD to reduce O&S costs, we interviewed cognizant OSD and service officials involved in weapon system acquisition, logistics, and program management. For specific initiatives, we obtained documents that described their objectives, time frames, and other information. In addition, we obtained and reviewed pertinent guidance on performance management and internal control practices in the federal government. We also reviewed a report issued in November 2009 by the DOD Product Support Assessment Team. Finally, we also consulted prior O&S studies performed by DOD, the services’ audit entities, and GAO. During our review, we conducted work at the DOD and service offices as shown in table 4 (located in the Washington, D.C., area unless indicated otherwise). We conducted this performance audit from June 2009 through July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix provides further information on an Office of the Secretary of Defense–sponsored study of operating and support (O&S) cost growth for the Air Force’s C-17 aircraft. The Institute for Defense Analyses (IDA) conducted the study for the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. According to an IDA analyst, the study began in 2007 and was completed in April 2009. We did not evaluate the study’s methodology, results, or conclusions. The intent of the study was to demonstrate various analytic methods for monitoring major weapon system reliability, maintainability, availability, and O&S costs against baseline targets throughout the life cycle. IDA obtained O&S cost estimates developed by the Air Force during the acquisition of the C-17, compared them to actual fiscal year 2009 O&S costs (estimated using DOD’s recommended cost element structure), and developed an updated life-cycle cost estimate using actual O&S cost data. In its report, IDA showed that the C-17’s estimated life-cycle O&S costs increased from $91.6 billion to $118.1 billion (29 percent) from 1985 through 2009. The estimated cost growth occurred despite a decrease in the total aircraft inventory from a projected 210 down to an actual total of 190. Further, the study reported that the C-17’s cost per flight hour increased 43 percent from an estimated $13,989 in 1985 to an estimated $19,995 in 2009. According to the study, major cost drivers were fuel consumption, materials and supplies, repair parts, airframe overhaul, engine overhaul, and sustaining engineering/program management. According to IDA’s report, the C-17 program experienced changes during and after acquisition that affected the comparison of the updated O&S cost estimates—developed using actual O&S costs—to the originally estimated O&S costs. The report grouped the factors that caused O&S cost growth into three categories: internal program factors, external program factors, and accounting factors. According to an IDA analyst involved with the study, variances due to internal program factors are defined as those that were influenced by the aircraft’s program managers. Such factors identified in the study included system design, reliability, and maintenance support concepts. For example, the report noted that the C-17 transitioned from planned government-provided support to contractor logistics support, and this change greatly complicated the analysis and became a major aspect of the study. IDA attributed cost increases for sustaining engineering/program management, contractor field service representatives, contractor training support, and engine depot- maintenance costs to this change in support concept. Further, the C- 17’s airframe weight increased during development, which led to increased fuel consumption and higher fuel costs. Finally, system modifications increased in scope, which led to additional cost increases. Changes in costs due to external program factors are defined as those that were generally beyond the control of program managers, according to the IDA analyst. These factors included changes to system quantities or delivery schedules, basing and deployment plan changes, and higher system-operating tempos due to contingencies. For example, the change from 210 to 190 aircraft reduced total costs; a change to the mix of active and reserve units from 73 percent active to 90 percent active increased costs; and personnel costs increased due to growth in incentive pay, housing, and medical care costs. Finally, according to the IDA analyst, variances from accounting factors are defined as those that resulted from differences in the way costs were categorized over time. Accounting factor changes that affected C-17 O&S costs included a change in the scope of DOD’s indirect costs; changes in personnel accounting; and changes to the timing of the weapon system’s phase-in, steady state, and phase-out periods. On the basis of its C-17 analysis, IDA concluded that any mechanism to track and assess weapon system O&S costs against baseline estimates would require a systematic and institutional methodology that does not currently exist within DOD. According to the report, the methodological approach that was used in the study was ad hoc, labor intensive, and dependent on analyst judgment. The study suggested that, in the absence a more systematic, institutional methodology, DOD could instead track major O&S cost drivers—such as reliability, fuel consumption, maintenance manning per aircraft, and dollars per airframe overhaul. However, the exact metrics DOD used would depend on how the department plans to use the data in managing the O&S costs of its weapon systems and how the data would be used in decision making. This appendix provides a detailed breakdown, by cost element, of total estimated and actual operating and support (O&S) costs for the Navy’s F/A-8E/F for the period of fiscal years 1999 through 2009 (see table 5). The estimated costs were obtained from the Navy’s O&S life-cycle cost estimates prepared for the 1999 production milestone. Data on actual O&S costs were obtained from the Navy’s Visibility and Management of Operating and Support Costs (VAMOSC) system. In addition to the contact name above, the following staff members made key contributions to this report: Tom Gosling, Assistant Director; Tracy Burney; Sandra Enser; Kevin Keith; James Lackey; Charles Perdue; Richard Powelson, Janine Prybyla; Jennifer Spence; and Alyssa Weir. Joint Strike Fighter: Additional Costs and Delays Risk Not Meeting Warfighter Requirements on Time. GAO-10-382. Washington, D.C.: March 19, 2010. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-10-388SP. Washington, D.C.: March 30, 2010. Littoral Combat Ship: Actions Needed to Improve Operating Cost Estimates and Mitigate Risks in Implementing New Concepts. GAO-10-257. Washington, D.C.: February 2, 2010. Defense Acquisitions: Army Aviation Modernization Has Benefited from Increased Funding but Several Challenges Need to be Addressed. GAO-09-978R. Washington, D.C.: September 28, 2009. Defense Acquisitions: Assessments Needed to Address V-22 Aircraft Operational and Cost Concerns to Define Future Investments. GAO-09-482. Washington, D.C.: May 11, 2009. GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs. GAO-09-3SP. Washington, D.C.: March 2009. Defense Logistics: Improved Analysis and Cost Data Needed to Evaluate the Cost-effectiveness of Performance Based Logistics. GAO-09-41. Washington, D.C.: December 19, 2008. Missile Defense: Actions Needed to Improve Planning and Cost Estimates for Long-Term Support of Ballistic Missile Defense. GAO-08-1068. Washington, D.C.: September 25, 2008. Defense Acquisitions: Fundamental Changes Are Needed to Improve Weapon Program Outcomes. GAO-08-1159T. Washington, D.C.: September 25, 2008. Military Base Closures: Projected Savings from Fleet Readiness Centers Likely Overstated and Actions Needed to Track Actual Savings and Overcome Certain Challenges. GAO-07-304. Washington, D.C.: June 29, 2007. Air Force Depot Maintenance: Improved Pricing and Cost Reduction Practices Needed. GAO-04-498. Washington, D.C.: June 17, 2004. Military Personnel: Navy Actions Needed to Optimize Ship Crew Size and Reduce Total Ownership Costs. GAO-03-520. Washington, D.C.: June 9, 2003. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems’ Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Defense Logistics: Opportunities to Improve the Army’s and the Navy’s Decision-making Process for Weapons System Support. GAO-02-306. Washington, D.C.: February 28, 2002. Defense Acquisitions: Navy and Marine Corps Pilot Program Initiatives to Reduce Total Ownership Costs. GAO-01-675R. Washington, D.C.: May 22, 2001. Defense Acquisitions: Higher Priority Needed for Army Operating and Support Cost Reduction Efforts. GAO/NSIAD-00-197. Washington, D.C.: September 29, 2000. Defense Acquisitions: Air Force Operating and Support Cost Reductions Need Higher Priority. GAO/NSIAD-00-165. Washington, D.C.: August 29, 2000. Financial Systems: Weaknesses Impede Initiatives to Reduce Air Force Operations and Support Costs. GAO/NSIAD-93-70. Washington, D.C.: December 1, 1992. Navy Fielded Systems: Operating and Support Costs Not Tracked. GAO/NSIAD-90-246. Washington, D.C.: September 28, 1990.
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The Department of Defense (DOD) spends billions of dollars each year to sustain its weapon systems. These operating and support (O&S) costs can account for a significant portion of a system's total life-cycle costs and include costs for repair parts, maintenance, and personnel. The Weapon Systems Acquisition Reform Act of 2009 directs GAO to review the growth in O&S costs of major systems. GAO's report addresses (1) the extent to which life-cycle O&S cost estimates developed during acquisition and actual O&S costs are available for program management and decision making; (2) the extent to which DOD uses life-cycle O&S cost estimates after systems are fielded to quantify cost growth and identify its causes; and (3) the efforts taken by DOD to reduce O&S costs for major systems. GAO selected seven aviation systems that reflected varied characteristics and have been fielded at least several years. These systems were the F/A-18E/F, F-22A, B-1B, F-15E, AH-64D, CH-47D, and UH-60L. DOD lacks key information needed to effectively manage and reduce O&S costs for most of the weapon systems GAO reviewed--including life-cycle O&S cost estimates and complete historical data on actual O&S costs. The services did not have life-cycle O&S cost estimates developed at the production milestone for five of the seven aviation systems GAO reviewed, and current DOD acquisition and cost-estimating guidance does not specifically address retaining these estimates. Also, the services' information systems designated for collecting data on actual O&S costs were incomplete, with the Army's system having the greatest limitations on available cost data. without historic cost estimates and complete data on actual O&S costs, DOD officials do not have important information necessary for analyzing the rate of O&S cost growth for major systems, identifying cost drivers, and developing plans for managing and controlling these costs. At a time when the nation faces fiscal challenges, and defense budgets may become tighter, the lack of this key information hinders sound weapon system program management and decision making in an area of high costs to the federal government. DOD generally does not use updated life-cycle O&S cost estimates to quantify cost growth and identify cost drivers for the systems GAO reviewed. The services did not periodically update life-cycle O&S cost estimates after production was completed for six of the seven systems. The F-22A program office had developed an updated life-cycle O&S cost estimate in 2009 and found a 47-percent ($19 billion) increase in life-cycle O&S costs from what had been previously estimated in 2005. GAO's comparisons of estimated to actual O&S costs for two of the seven systems found some areas of cost growth. However, notable changes such as decreases in the numbers of aircraft and flying hours occurred in both programs after the production milestone estimates were developed, complicating direct comparisons of estimated to actual costs. According to federal guidance, agencies should have a plan to periodically evaluate program results as these may be used to determine whether corrections need to be made and to improve future cost estimates. However, DOD acquisition and cost estimation guidance does not require that O&S cost estimates be updated throughout a system's life cycle or that information on program changes affecting the system's life-cycle O&S costs be retained. The services' acquisition and cost-estimation guidance that GAO reviewed does not consistently and clearly require the updating of O&S cost estimates after a program has ended production. DOD has several departmentwide and service-specific initiatives to address O&S costs of major systems. One DOD program funds projects aimed at improving reliability and reducing O&S costs for existing systems. Other initiatives are aimed at focusing attention on O&S cost requirements and reliability during the acquisition process. In a recent assessment, DOD identified weaknesses in O&S cost management, found deficiencies in sustainment governance, and recommended a number of corrective actions. Many of DOD's initiatives are recent or are not yet implemented. GAO recommends that DOD take steps to retain life-cycle O&S cost estimates for major systems, collect additional O&S cost elements in its visibility systems, update life-cycle O&S cost estimates periodically after systems are fielded, and retain documentation of program changes affecting O&S costs for use in cost analysis. DOD concurred with GAO's recommendations.
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Intellectual property is an important component of the U.S. economy, and the United States is an acknowledged global leader in its creation. However, the legal protection of intellectual property varies greatly around the world, and several countries are havens for the production of counterfeit and pirated goods. Technology has facilitated the manufacture and distribution of counterfeit and pirated products, resulting in a global illicit market that competes with genuine products and complicates detection and actions against violations. High profits and low risk have drawn in organized criminal networks, with possible links to terrorist financing. The public is often not aware of the issues and consequences surrounding IP theft. Industry groups suggest that counterfeiting and piracy are on the rise and that a broader range of products, from auto parts to razor blades, and from vital medicines to infant formula, are subject to counterfeit production. Counterfeit products raise serious public health and safety concerns, and the annual losses that companies face from IP violations are substantial. Given the increasing threats to America’s economy, health, and safety, U.S. government agencies have undertaken numerous efforts to protect and enforce intellectual property rights, and a structure to coordinate these IP enforcement efforts evolved. In 1999, Congress created the interagency National Intellectual Property Law Enforcement Coordination Council (NIPLECC) as a mechanism to coordinate U.S. efforts to protect and enforce IP rights in the United States and overseas. In October 2004, the Bush Administration announced the Strategy Targeting Organized Piracy (STOP) to “smash criminal networks that traffic in fakes, stop trade in pirated and counterfeit goods at America’s borders, block bogus goods around the world, and help small businesses secure and enforce their rights in overseas markets.” Although both NIPLECC and STOP were created to improve the United States’ IP enforcement and protection efforts, they were established under different authorities – NIPLECC as a congressional mandate and STOP as a presidential initiative led by the White House under the auspices of the National Security Council. Table 1 compares NIPLECC and STOP. STOP and NIPLECC share similar goals, including coordination of IP protection and enforcement, and involve nearly the same agencies. NIPLECC’s membership is designated by statute and includes specific positions by agencies, whereas agencies that participate in STOP overlap with NIPLECC members, but do not designate any specific positions. (See figure 1.) The U.S. government has a coordinating structure for IP enforcement, but the structure’s effectiveness is hampered by a lack of clear leadership and permanence, and despite some progress, it has not been developed in a manner that makes it effective and viable for the long term. NIPLECC and STOP form the central coordinating structure for IP enforcement across federal agencies. However, NIPLECC continues to have problems in providing leadership despite enhancements made by Congress, and STOP’s authority and influence, which result from its status as a presidential initiative, could disappear after the current administration leaves office. While the current IP enforcement coordinating structure has contributed to some progress – particularly in increasing attention to IP enforcement domestically and abroad through STOP – NIPLECC’s commitment to implementing STOP as a strategy remains unclear, creating a challenge for effective accountability and the long-term viability of IP enforcement. In 1999, Congress created NIPLECC to coordinate domestic and international intellectual property law enforcement among U.S. federal and foreign entities. The council’s membership is designated by statute and includes six federal agencies. The Commissioner of Patents and Trademarks (USPTO) and Assistant Attorney General, Criminal Division from the Department of Justice serve as NIPLECC’s co-chairs. NIPLECC’s authorizing legislation included no specific dollar amount for funding or staff. Congress also required NIPLECC to report its coordination efforts annually to the President and various Congressional committees. Our September 2004 report noted that NIPLECC had struggled to define its purpose, had little discernible impact, and had not undertaken any independent activities, according to interviews with both industry officials and officials from its member agencies, and as evidenced by NIPLECC’s own annual reports. From 1999 through the end of 2004, NIPLECC produced three annual reports that did little more than provide a compilation of individual agency activities. We also concluded in our 2004 report that if Congress wished to maintain NIPLECC and take action to increase its effectiveness, it should consider reviewing the council’s authority, operating structure, membership, and mission. Congress addressed NIPLECC’s lack of activity and unclear mission in the 2005 Consolidated Appropriations Act in December 2004. The act called for NIPLECC to (1) establish policies, objectives, and priorities concerning international IP protection and enforcement; (2) promulgate a strategy for protecting American IP overseas; and (3) coordinate and oversee implementation of the policies, objectives, and priorities and overall strategy for protecting American IP overseas by agencies with IP responsibilities. It also created the position of the Coordinator for International Intellectual Property Enforcement, also known as the “IP Coordinator,” to head NIPLECC. The IP Coordinator is appointed by the President and may not serve in any other position in the federal government. The co-chairs for NIPLECC are required to report to the IP Coordinator. Unlike NIPLECC, STOP from its beginning has been characterized by a high level of active coordination and visibility. In October 2004, the President launched STOP, an initiative led by the White House under the auspices of the National Security Council, to target cross-border trade in tangible goods and strengthen U.S. government and industry IP enforcement actions. STOP members are the same agencies that house NIPLECC members, except that STOP includes the Food and Drug Administration. According to a high-level official who participated in the formation of STOP, the initiative was intended to protect American innovation, competitiveness, and economic growth. It stemmed from the recognition that U.S. companies needed protection from increasingly complex and sophisticated criminal counterfeiting and piracy. As part of STOP, agencies began holding meetings, both at working levels and higher, to coordinate agency efforts to tackle the problem. STOP is viewed as energizing U.S. IP protection and enforcement efforts and is generally praised by agency officials and industry representatives. The IP Coordinator stated in congressional testimony that STOP has built an expansive interagency process that provides the foundation for U.S. government efforts to fight global piracy. Several agency officials participating in STOP said that it gave them the opportunity to share ideas and support common goals. Many agency officials with whom we spoke said that STOP had brought increased attention to IP issues within their agencies and the private sector, as well as abroad, and attributed that to the fact that STOP came out of the White House, thereby lending it more authority and influence. One agency official pointed out that IP was now on the President’s agenda at major summits such as the G8 and European Union summits. In addition, most private sector representatives with whom we spoke agreed that STOP was an effective communication mechanism between business and U.S. agencies on IP issues, particularly through the Coalition Against Counterfeiting and Piracy (CACP), a cross- industry group created by a joint initiative of the Chamber of Commerce and the National Association of Manufacturers. The structure that has evolved to coordinate U.S. efforts to protect and enforce IP rights, NIPLECC and STOP, lacks clear leadership and permanence. Our November 2006 report noted that, despite the re- energized focus on IP enforcement as a result of STOP, the ambiguities surrounding NIPLECC’s implementation of STOP as a strategy create challenges for the long-term viability of a coordinated federal IP enforcement approach. While NIPLECC adopted STOP as its strategy for protecting IP overseas in February 2006, its commitment to implementing STOP as a successful strategy remains unclear. For instance, it is not clear how NIPLECC will provide a leadership role in implementing STOP. While NIPLECC’s most recent annual report describes many STOP activities and the IP Coordinator’s direct involvement in them, it does not explain how the NIPLECC principals and the IP Coordinator plan to carry out their oversight responsibilities mandated by Congress to help ensure successful implementation of the strategy. In addition, while the current STOP strategy document (March 2007) states that the NIPLECC annual report provides details on interagency collaboration to achieve STOP goals, STOP does not mention NIPLECC’s oversight role or articulate a framework for oversight and accountability among the STOP agencies carrying out the strategy. Although Congress enhanced NIPLECC’s powers through the Consolidated Appropriations Act of 2005, we found that NIPLECC retains an image of inactivity within some of the private sector. For example, representatives of almost half of the 16 private sector groups with whom we spoke expressed the opinion that NIPLECC was inactive or a nonplayer. In addition, representatives from 10 of these groups were unclear about NIPLEC’s role, and many said that they were unclear about the difference between NIPLECC and STOP. In July 2006, Senate appropriators expressed concern about the lack of information provided to Congress by NIPLECC on its progress. In contrast with NIPLECC, agency officials and members of the private sector attribute STOP’s effectiveness to its status as a White House initiative and its resulting authority and influence. However, it lacks permanence since it is a presidential initiative and may disappear after the current administration leaves office. Furthermore, while agency officials we interviewed generally considered STOP to be the U.S. government’s IP strategy, NIPLECC officials have sent mixed signals about effectively implementing STOP. One official representing NIPLECC said that the STOP strategy should have goals and objectives, including metrics to measure progress about which the IP Coordinator should report. However, a NIPLECC representative from another agency told us that this document was a fact sheet that accounted for administration efforts rather than a strategy. Similarly, a NIPLECC representative from a third agency was skeptical about whether STOP should be assessed as NIPLECC’s strategy. Finally, the IP Coordinator stated in March 2006 congressional testimony that STOP is NIPLECC’s strategy; however, he also told us that STOP was never meant to be an institutional method for reporting priorities and metrics to the President or Congress, or to manage resources. STOP is a first step toward an integrated national strategy for IP protection and enforcement and has energized agency efforts. However, we found that STOP’s potential as a national strategy is limited because it does not fully address important characteristics that we believe would improve the likelihood of its long-term effectiveness and ensure accountability. We found that some strategy documents belonging to individual STOP agencies supplemented some of the characteristics not fully addressed in STOP; however, the fact that they have not been systematically incorporated into STOP limits its usefulness as an integrated strategy to guide policy and decision makers in allocating resources and balancing priorities, and does not inform the private sector and consumers that it aims to protect. While national strategies are not required by executive or legislative mandate to address a single, consistent set of characteristics, GAO has identified six desirable characteristics of an effective national strategy. It is important that a national strategy contain these characteristics because they enable implementers of the strategy to effectively shape policies, programs, priorities, resource allocations, and standards so that federal departments and other stakeholders can achieve the desired results. National strategies provide policymakers and implementing agencies with a planning tool that can help ensure accountability and effectiveness. We found that STOP partially addresses five of the six characteristics and their key elements. Figure 2 provides the results of our analysis and indicates the extent to which STOP addresses the desirable characteristics of an effective national strategy. STOP addresses goals and activities but lacks important elements for assessing performance. Although STOP identifies five main goals, it does not consistently articulate their objectives and is missing key elements related to assessing performance such as priorities, milestones, and a process for monitoring and reporting on progress. For example, under its goal of pursuing criminal enterprises, STOP clearly lists objectives such as increasing criminal prosecutions, improving international enforcement, and strengthening laws. Whereas STOP does not articulate clear objectives for its goal of working closely and creatively with U.S. industry. Also, STOP activities include implementing a new risk model to target high-risk cargo but do not specify time frames for its completion. Although STOP cites output-related performance measures—such as the USPTO STOP hotline receiving over 950 calls during fiscal year 2005 and a 45 percent increase in the number of copyright and trademark cases filed from fiscal year 2004 to fiscal year 2005—these figures are presented without any baselines or targets to facilitate the assessment of how well the program is being carried out. In addition, STOP cites outcome-related performance measures for only few of many activities included in the strategy. STOP does not address elements relevant to resources, investments, or risk management, limiting the ability of decision makers to determine necessary resources, manage them, and shift them with changing conditions. STOP does not identify current or future costs of implementing the strategy, such as those related to investigating and prosecuting IP-related crime or conducting IP training and technical assistance, nor does it identify the sources or types of resources required. While the strategy states that “American businesses lose $200 to $250 billion a year to pirated and counterfeit goods,” it does not provide a detailed discussion of the economic threat to U.S. businesses. Further it does not discuss other risks such as potential threats to consumer health and safety from counterfeited products or discuss how resources will be allocated given these risks. STOP partially addresses organizational roles, responsibilities, and coordination but lacks a framework for oversight or integration. STOP does identify lead, support, and partner roles for specific activities. For example, it identifies the White House as leading STOP and indicates partnering roles among agencies, such as the joint role of the Department of Homeland Security’s Immigration and Customs Enforcement (ICE) and the Department of Justice’s FBI in running the National Intellectual Property Rights (IPR) Center. However, STOP does not discuss a process or framework for oversight and accountability among the agencies carrying out the strategy. Although STOP discusses specific instances of coordination among member agencies, it lacks a clear and detailed discussion of how overall coordination occurs. For instance, there is no mention of STOP meetings, objectives, or agendas. We found that the STOP strategy does not consistently articulate how, as a national strategy, it relates to the strategies, goals, and objectives of federal agencies that participate in STOP. For example, under its goal of pursuing criminal enterprises, STOP does not discuss how the objectives of the Department of Justice’s task force might be linked to the goals and objectives found in other agency IP enforcement strategies such as the Department of Homeland Security’s ICE and CBP. It is important that STOP not only reflect individual agencies’ priorities and objectives but also integrate them in a comprehensive manner, enhancing collaboration among the agencies and providing a more complete picture to policy makers with oversight responsibilities. While some of these elements of a national strategy are addressed in individual agency documents, the absence of clear linkages and the need to consult multiple agency documents underscores the strategy’s lack of integration and limits the usefulness of STOP as a management tool for long-term effective oversight and accountability. In our November 2006 report on this subject, we made two recommendations to clarify NIPLECC’s oversight role with regard to STOP and improve STOP’s effectiveness as a planning tool and its usefulness to Congress. We recommended that the IP Coordinator, in consultation with the National Security Council and the six STOP agencies, clarify in the STOP strategy how NIPLECC will carry out its oversight and accountability responsibilities in implementing STOP as its strategy. In addition, we recommended that the IP Coordinator, in consultation with the National Security Council and the six STOP agencies, take steps to ensure that STOP fully addresses the six characteristics of a national strategy. We provided the agencies that participate in STOP and NIPLECC with a draft of the report for their review and comment and received written comments from the U.S. Coordinator for International Property Enforcement (IP Coordinator). In his comments, the IP Coordinator concurred with our recommendations, stating that his office planned to identify opportunities for improvement based on those recommendations. Our discussions with the IP Coordinator, in preparation for this testimony, indicated that the Office of the U.S. Coordinator for International Property Enforcement has taken some steps to address GAO’s recommendations. For example, the IP Coordinator has been working with the Office of Management and Budget (OMB) to understand agencies’ priorities and resources related to IP enforcement. In addition, the council has been coordinating with the Department of State and USPTO to examine the U.S.’s training portfolio and identify areas where capacity building and more training is needed overseas. The IP Coordinator stated that no steps have been taken with regard to changing the accountability framework under NIPLECC since, he believes, this is addressed through regular reporting to Congress via annual reports and testifying at hearings, and meetings with federal agencies involved in IP enforcement and the private sector. The Intellectual Property Rights Enforcement Act under discussion today proposed by Senators Bayh and Voinovich recommends changes that may help address weaknesses we found in the current coordinating structure and the national IP enforcement strategy as well as improve coordination with private sector and international counterparts. The legislation eliminates NIPLECC and creates a new entity called the Intellectual Property Enforcement Network (IPEN), to coordinate domestic and international IP enforcement efforts among U.S. agencies. The membership of IPEN involves most of the same agencies that are currently members for NIPLECC, and like NIPLECC, has an Intellectual Property Enforcement Coordinate appointed by the President. A clear difference between IPEN and NIPLECC, however, is that the leadership emanates from the White House. Under IPEN, the Deputy Director for Management of the Office of Management and Budget would serve as the chairperson for the network. While GAO does not have an opinion on whether OMB is the appropriate agency to coordinate IP enforcement and protection, we believe it is important to note that IPEN retains the authority and leadership most valued under STOP— the role of the White House in providing leadership and authority. The legislation addresses weaknesses we identified in the current national strategy by requiring the development of a strategic plan within 6 months from the date the bill is enacted, and updated every 2 years following. The requirements of the strategic plan, as laid out in the bill, include performance measures and risk analysis along with other key elements for oversight and accountability that we have identified as important to an effective national strategic plan. The challenges of IP piracy are enormous and will require the sustained and coordinated efforts of U.S. agencies, their foreign counterparts, and industry representatives to be successful. As we pointed out Mr. Chairman, NIPLECC’s persistent difficulties create doubts about its ability to carry out its mandate – that of bringing together multiple agencies to successfully implement an integrated strategy for IP protection and enforcement that represents the coordinated efforts of all relevant parties. STOP has brought attention and energy to IP efforts within the U.S. government, however, as a presidential initiative, STOP lacks permanence beyond the current administration. This poses challenges to its long-term effectiveness because STOP depends upon White House support. In addition, STOP does not fully address the desirable characteristics of an effective national strategy that we believe would improve the likelihood of its long-term viability and ensure accountability. This limits its usefulness as a management tool for effective oversight and accountability by Congress as well as the private sector and consumers who STOP aims to protect. As we have pointed out, the Intellectual Property Rights Enforcement Act under discussion today addresses key shortcomings of the current IP coordinating structure that we have identified, including establishing a clearer leadership and framework for accountability. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other members of the subcommittee may have at this time. Should you have any questions about this testimony, please contact Loren Yager at (202) 512-4347 or [email protected]. Other major contributors to this testimony were Christine Broderick, Adrienne Spahr, Nina Pfieffer, Shirley Brothwell, and Jasminee Persaud. 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.
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U.S. government efforts to protect and enforce intellectual property (IP) rights domestically and overseas are crucial to preventing billions of dollars in losses to U.S. industry and IP rights owners and to avoiding health and safety risks resulting from the trade in counterfeit and pirated goods. IP protection and enforcement cut across a wide range of U.S. agencies and a coordinating structure has evolved to address coordination issues. First, Congress created the interagency National Intellectual Property Rights Law Enforcement Coordination Council (NIPLECC) in 1999. Later, in October 2004, the Bush administration initiated the Strategy Targeting Organized Piracy (STOP). GAO's testimony focuses on (1) the effectiveness of NIPLECC and STOP as a coordinating structure to guide and manage U.S. government efforts; and (2) the extent to which STOP meets the criteria for an effective national strategy. This statement is based on GAO's November 2006 report (GAO-07-74), which included an assessment of STOP using criteria previously developed by GAO. In this report, we recommended that head of NIPLECC, called the IP Coordinator, in consultation with the National Security Council and relevant agencies (1) clarify in the STOP strategy how NIPLECC will carry out its oversight and accountability roles and (2) take steps to ensure that STOP fully addresses the characteristics of a national strategy. The IP Coordinator concurred with our recommendations. The current coordinating structure that has evolved for protecting and enforcing U.S. intellectual property rights lacks leadership and permanence, presenting challenges for effective and viable coordination for the long term. NIPLECC has struggled to define its purpose and retains an image of inactivity among the private sector. It continues to have leadership problems despite enhancements made by Congress in December 2004 to strengthen its role. In contrast, the presidential initiative called STOP, which is led by the National Security Council, has a positive image compared to NIPLECC, but lacks permanence since its authority and influence could disappear after the current administration leaves office. While NIPLECC adopted STOP in February 2006 as its strategy for protecting IP overseas, its commitment to implementing STOP as an effective national strategy remains unclear, creating challenges for accountability and long-term viability. While STOP has energized agency efforts for protecting and enforcing intellectual property, its potential as a national strategy is limited since it does not fully address the desirable characteristics of an effective national strategy. For example, its performance measures lack baselines and targets to assess how well the activities are being implemented. In addition, STOP is missing key elements such as a discussion of risk management and designation of oversight responsibility. For instance, the strategy lacks a discussion of current or future costs, the types or sources of investments needed to target organized piracy, and processes to effectively balance the threats from counterfeit products with the resources available. While STOP partially addresses organizational roles and responsibilities, it does not discuss a framework for accountability among the STOP agencies, such as designating responsibility for oversight. Agency documents clarify some of the key elements of an effective national strategy that were not incorporated into STOP directly; however, the need to consult multiple documents underscores the strategy's lack of integration and limited usefulness as a management tool for effective oversight and accountability.
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According to DOD policy, the core objectives of armaments cooperation are to increase military effectiveness through standardization and interoperability and to reduce weapons acquisition costs by avoiding duplication of development efforts with U.S. allies. According to DOD and the program office, through its cooperative agreements, the JSF program contributes to armaments cooperation policy in the following four areas: Political/military–expanded foreign relations. Economic–decreased JSF program costs from partner contributions. Technical–increased access to the best technologies of foreign partners. Operational–improved mission capabilities through interoperability with allied systems. The Arms Export Control Act (AECA) provides DOD the authority to enter into cooperative programs with U.S. allies. In March 1997, the Secretary of Defense directed that DOD engage allies in discussions as early as possible to determine the parameters of potential collaboration to meet coalition needs and ensure interoperability between allied systems. DOD guidance states that the department will give favorable consideration to transfers of defense articles, services, and technology consistent with national security interests to support these international programs. Finally, the AECA further provides that when the United States enters into a cooperative agreement, there should be no requirement for industrial or commercial compensation that is not specifically stated in the agreement. The DOD Arms Transfer Policy Review Group (ATPRG) approved the JSF international plan and established guidelines for the JSF system development and demonstration negotiations based on the AECA requirement that participants contribute an equitable share of the costs and receive an equitable share of the results of a project. In October 2001, DOD awarded Lockheed Martin Aeronautics Company a contract for the system development and demonstration phase. Pratt and Whitney and General Electric were awarded contracts to develop engines for the JSF aircraft. Currently, this phase will last about 10 years; cost about $33 billion; and involve large, fixed investments in human capital, facilities, and materials. The next significant program milestone will be the final critical design review, currently planned for July 2005. At that time, the final aircraft design should be mature and technical problems should be resolved so that the production of aircraft can begin with minimal changes expected. Unlike other cooperative programs, the JSF program will not guarantee foreign or domestic suppliers a predetermined level of work based on a country’s financial contribution to the program. Instead, foreign and domestic suppliers will generally compete for JSF work. DOD and the JSF Program Office use the term “best value” to describe this competitive approach. By doing this, the program moved away from the industrial policies of other cooperative programs that have used work share arrangements for participation in the development of military items. An example of a work share arrangement would be guaranteeing that contract awards for suppliers in a participant country are tied directly to that country’s level of investment in the program. The recipient benefits not only from the value of the contracts placed in country but also the technology transferred as part of those contracts. However, this approach does not always result in the most cost-effective program. International participation in the JSF program adds complexity to an already challenging acquisition process. However, participation agreements negotiated between DOD and equivalent partner ministries or departments do provide potential benefits to all partners. The United States benefits from financial contributions, increased potential for international sales of JSF aircraft, and access to partner industry. Foreign partners benefit from participating in JSF Program Office activities, accessing JSF technical data, and receiving waivers of nonrecurring aircraft costs and levies from potential sales of JSF aircraft. JSF partners also enjoy greater access to program information than traditional cooperative programs because the JSF program allowed countries to participate at an earlier stage of the acquisition process. The JSF program is made up of a complex set of relationships involving both government and industry from the United States and eight other countries—the United Kingdom, Italy, the Netherlands, Turkey, Denmark, Norway, Canada, and Australia (see fig. 1). The JSF program structure was established through a framework memorandum of understanding (MOU) and individual supplemental MOUs between each of the partner country’s defense department or ministry and DOD, negotiating on behalf of the U.S. government. These agreements identify the roles, responsibilities, and expected benefits for all participants and are negotiated for each acquisition phase (concept demonstration, system development and demonstration, and production). Only the concept demonstration phase and the system development and demonstration phase agreements have been negotiated to date, and participation in one phase does not guarantee participation in future phases. According to DOD officials, the department also contributes to the implementation of MOUs by acting as a “court of appeals” to address partner concerns, including industrial participation issues. Additional documents provide greater detail and clarity: Financial management procedures document–describes the financial management procedures for the MOU supplements, as well as funding streams, auditing procedures, and other topics. Program position description–describes the position title, duties, qualifications, and other information related to all foreign personnel located in the JSF Program Office. Exchange of letters–series of formal, signed letters, which emphasize issues of importance to the United States and JSF partners but are not specifically mentioned or described in the MOU agreements. Representatives from partner ministries or departments of defense participate in senior-level management meetings, including chief executive officer meetings (chaired by the Under Secretary for Acquisition, Technology, and Logistics); system acquisition executive meetings; the senior warfighters group; and the configuration steering board with DOD, JSF Program Office, and contractor officials. These meetings offer opportunities for partner representatives to gain insight into and, in some cases, influence over the progress of the JSF program, in addition to that available from partner staff located in the program office, in areas such as program management, requirements, and aircraft configuration. Finally, the system development and demonstration framework MOU establishes the JSF executive committee, which includes one representative from the United States and each partner country. This committee provides executive level oversight for the program, such as reviewing progress toward program objectives, ensuring compliance with MOU financial provisions, and resolving program-related issues identified by the JSF international director. National deputies act as partner representatives in the JSF Program Office. They serve as the principal interface between the program office and the ministries or departments of defense to ensure proper execution of the system development and demonstration phase MOU and provide support and guidance on all country-specific program execution and integration issues. They provide program information to their ministries or departments of defense and, in some cases, act as an advocate for industry in their respective countries. National deputies and other partner staff also serve functional roles on integrated product teams—multidisciplinary teams that represent a variety of areas, including systems engineering; logistics; and command, control, communications, computers, and intelligence. At an industry level, the prime contractors interact with the JSF Program Office through activities in support of their system development and demonstration contracts and participation on both program office and contractor integrated product teams and work groups. In addition, the prime contractors interact with partner government ministries or departments (including defense, industry, and trade) and JSF partner personnel in the program office to discuss opportunities for industrial participation and the results of subcontracting competitions. For example, prior to the negotiation of the MOUs for the current phase, Lockheed Martin visited many of the partner countries to provide information on the aircraft and assess potential interest. In addition, for those countries expected to participate in the system development and demonstration phase, Lockheed conducted industry assessments and provided feedback on what areas suppliers might expect to compete for JSF contracts. The JSF program allows foreign countries to become program partners at one of three participation levels, based on financial contribution. As shown in table 1, the foreign partners have contributed over $4.5 billion, or about 14 percent, for the system development and demonstration phase and are expected to purchase about 722 aircraft beginning in the 2012-2015 time frame. Israel and Singapore have recently indicated their intention to participate in the program as security cooperation participants, a nonpartner arrangement, which offers limited access to program information, without a program office presence. According to DOD, foreign military sales to these and other nonpartner countries could include an additional 1,500 to 3,000 aircraft. Contributions can be financial or nonfinancial. For example, Turkey’s system development and demonstration contribution was all cash, whereas $15 million of Denmark’s $125 million contribution represented the use of an F-16 aircraft and related support equipment for future JSF flight tests and the use of other North Atlantic Treaty Organization (NATO) command and control assets for a JSF interoperability study. (See app. II for details on partner contributions and benefits.) For the agreements negotiated for the system development and demonstration phase, none of the partner country contribution levels met the financial targets established in the ATPRG guidelines. In the case of the United Kingdom, funding was not available to meet the expected 10 percent contribution. The Under Secretary of Defense for Acquisition, Technology, and Logistics determined that the lower contribution amount was justified and, in fact, the United States was able to negotiate concessions concerning rights for the disposal of project equipment and third-party transfer and sales. Since the United Kingdom was the first partner to sign, and the only Level I partner, contribution targets for other partner negotiations were revised proportionately. Lockheed Martin’s contracts with aerospace suppliers from partner countries are expected to improve the program because of those companies’ specific advanced design and manufacturing capabilities. For example, British industry has a significant presence in the program with BAE Systems as a teammate to Lockheed Martin and Rolls Royce as a major engine subcontractor. In addition, Fokker Aerostructures in the Netherlands is under contract to develop composite flight doors for the JSF airframe. In return for their contributions, partner countries have representatives in the program office with access to program data and technology; membership on the management decision-making bodies; aircraft delivery priority over future foreign military sales participants; guaranteed or potential waiver of nonrecurring aircraft costs; potential levies on future foreign military sales aircraft sold; and improved relationships for their industry with U.S. aerospace companies through JSF subcontracting opportunities. For example, the United Kingdom – which is committed to contribute just over $2 billion in the system development and demonstration phase – is a Level I full collaborative partner, with benefits such as 10 staff positions within the JSF Program Office, including senior positions on integrated product teams; participation in cost versus performance trade-off and requirement setting processes, resulting in British military needs being included in the JSF operational requirements document; and involvement in final source selection process for the system development and demonstration contract award. Conversely, the five Level III partners, which are committed to contribute between $125 million and $175 million, each have one program office staff member and no direct vote with regard to requirement decisions. All partners have benefited from increased access to program and contractor information by virtue of their early involvement in the program. Specifically, this participation provided partners with information on the development of aircraft requirements and program costs and schedules, as well as on design, manufacturing, and logistics. According to some partner personnel, access to program information often did not meet their expectations early in the program, but it has improved. During the concept demonstration phase, data were available to partner staff based on country-specific projects. In addition, data were only formally provided through a rigorous, paper-driven document release process and required authority from JSF senior management. For the system development and demonstration phase, partner representatives located in the program office now have access to the database of unclassified program information, referred to as the JSF Virtual Environment, which contains the majority of program documents. Partner program office personnel, regardless of participation level, have equal access to most information. Some information in the database is available only to U.S. personnel or through integrated product team participation. Partner staff can request information from integrated product teams on which they have no membership, as long as the information is not restricted from being released to their countries. Lockheed Martin has a separate document database called the Joint Data Library that includes information on contractor activities, but partner access is limited by existing technical assistance agreements and National Disclosure Policy. Along with the traditional functions of balancing the requirements for JSF performance against its established cost and schedule targets, the program office is tasked with integrating partner government and industry participants into the program. While initial partner contributions are beneficial, and critical for political support for the program, there is no guarantee that additional funding will be available to support future cost increases should they arise. In addition, even when cost sharing may be justified, funding may not be available through respective partner budgetary processes. DOD’s typical response to increased program costs often results in requesting additional funding, delaying production schedules, and reducing procurement quantities or system capabilities, but such actions may negatively affect partner countries. DOD expects that specific provisions in partner MOUs will maximize partner cost sharing when appropriate and that the use of competitive contracting will minimize cost increases to the program. Our past reviews have shown that weapons acquisition programs frequently encounter increased cost due to questionable requirements, unrealistic cost estimates, funding instability, and high-risk acquisition strategies. We reported in October 2001 that the JSF program entered the system development and demonstration phase with increased cost risk due to low maturity of critical technologies. Future cost increases, should they arise in the program, may fall almost entirely on the United States because there are no provisions in the negotiated agreements requiring partners to share these increases. Once established, the contributions for the partners cannot be revised or increased by the United States without the consent of the partner government as stated in these agreements. DOD and program office officials told us there could be instances where the partners would not be expected to share cost increases. For example, cost estimates for the system development and demonstration phase have increased on multiple occasions since the program started in 1996. During that time, the expected cost for this phase went from $21.2 billion to $33.1 billion as a result of scope changes and increased knowledge about cost. According to program officials and documents, partners have not been required to share any of these costs because the changes were DOD directed and unrelated to partner actions or requirements. The MOU framework does require partners to pay for all development costs related to meeting unique national requirements. For example, some partners expect to use weapons that may not be included in the current JSF operational requirements document and fully expect to bear the cost associated with integrating them into the aircraft’s design. In such a case, the United States and other partners are not required to share costs associated with meeting unique country requirements, unless they agree to make these requirements part of the baseline aircraft configuration and an adjustment is made to the baseline aircraft price. Historically, DOD has responded to cost increases by requesting more funding, extending program schedules, reducing overall program quantities and aircraft capability, or some combination of these. While such actions can negatively affect the U.S. military services, the impact may be more substantial for partners because they have less control over program decisions and less ability to adjust to these changes. In the case of the United Kingdom, the Ministry of Defence is developing a new aircraft carrier, expected for delivery in 2012, which is planned to carry JSF aircraft. According to United Kingdom officials, if the aircraft are not delivered as expected, the carrier might not be able to support mission scenarios. Further, most of the remaining partners also expect to receive their JSF aircraft beginning in about the 2012 to 2015 time frame. Potential program delays would affect the availability of the aircraft for partner governments. Finally, if the unit cost increases as a result of DOD’s actions, the sales price could be higher than expected, and all partners would be required to pay that additional amount. Current cost estimates for the program assume that the United States will purchase 2,443 and the United Kingdom 150 JSF aircraft. DOD and Lockheed Martin are working with partner countries to determine aircraft needs for all participants, and they will incorporate this information into formal production phase planning. To encourage partners to share costs where appropriate, the United States can consider past cost-sharing behavior when negotiating MOUs for future phases of the program. If a partner refuses to share legitimate costs during the system development and demonstration phase, the United States can use future phase negotiations to recoup all or part of those costs. In these instances, the United States could reduce levies from future sales, refuse to waive portions of the nonrecurring cost charges for Level III partners, or in a worst case, choose not to allow further participation in the program. Partner representatives indicated that they intend to cooperate with the JSF Program Office and Lockheed Martin in terms of sharing increased program costs when justified. However, the continued affordability of the development program and the final purchase price are important for partners, and there is no guarantee that they would automatically contribute to cost overruns, especially if the increase is attributable to factors outside their control. Some partner representatives specifically expressed concern over the tendency of U.S. weapon system requirements to increase over time, which results in greater risk and higher costs. Several partner representatives also emphasized that it is important for the JSF Program Office to continue to use practices such as Cost as an Independent Variable and iterative requirements definition to address these concerns. While some partners could fund portions of cost overruns from military budgets if requested, others told us that even if they were willing to support such increases, these decisions would have to be made through their parliamentary process, which could affect their overall support for the program. DOD and the JSF Program Office expect that using a competitive contracting approach, without prescribed work share for partner countries, will also assist in controlling JSF costs. DOD officials stated, and our past work has shown, that cooperative programs, such as the Army’s Medium Extended Air Defense System, have experienced cost and schedule problems because such programs focused on meeting industrial work share requirements rather than pursuing a cost-effective acquisition strategy. Coproduction programs, such as the F-16 Multinational Fighter Program, that employ traditional work share approaches often experience cost premiums to the program in terms of increased manufacturing costs associated with use of foreign suppliers. In contrast, the JSF approach is expected to award contracts to the most competitive suppliers, and therefore Lockheed Martin does not believe there will be cost premiums. However, Lockheed Martin officials told us that due to limited aerospace capabilities in some of the partner countries, traditional industrial arrangements might be used in the JSF production phase. The transfer of technology on the JSF program presents a number of challenges related to program execution, international suppliers, and disclosure policy. The volume of JSF export authorizations has taxed Lockheed Martin’s licensing resources, and any delays in the disposition of future export authorizations could affect the execution of key contracts and the ability of partner suppliers to bid for subcontracts. Further, the transfer of technologies necessary to achieve aircraft commonality goals is expected to far exceed past transfers of advanced military technology and will push the boundaries of U.S. disclosure policy. The JSF Program Office and the prime contractor have taken various steps to mitigate these challenges. The JSF Program Office and Lockheed Martin told us that there were over 400 export authorizations and amendments granted during the JSF concept demonstration phase, and they expect that the number of export authorizations required for the current phase could exceed 1,000. Lockheed Martin licensing officials have indicated that this volume has strained its JSF program resources. Export authorizations for critical suppliers need to be planned for, prepared, and resolved in a timely fashion, to help avoid schedule delays in the program. Without proper planning, there could be pressure to expedite reviews and approvals of export authorizations to support program goals and schedules. This could lead to unintended consequences, such as inadequate reviews of license content or broad interpretations of disclosure authority. Lockheed Martin’s ability to forecast its export authorization workload extends out only 3 months because most licensing resources are already devoted to keeping up with time critical authorizations. Further, JSF Program Office officials told us that Lockheed Martin has not yet fulfilled a requirement to complete a long-term plan that could anticipate the export authorizations and technology release reviews that will be necessary to execute the program using international suppliers to design and manufacture key parts of the aircraft. This plan could also be used to identify problems suppliers face in executing contracts as a result of licensing or releasability concerns and develop strategies to overcome those problems, such as finding other qualified suppliers to do the work. Timely export authorizations are also necessary to avoid excluding partner industries from competitions. While Lockheed Martin has stated that no foreign supplier has been excluded from any of its competitions or denied a contract because of fear of export authorization processing times or the conditions that might be placed on an authorization, the company is concerned this could happen. Further, one partner told us that export license delays have had a negative effect on the participation of its companies because some U.S. companies have been reluctant to undertake the bureaucratic burden to allow the participation of a foreign company and some partner companies have been unable to bid due to the time constraints involved in securing an export license. DOD, the JSF Program Office, and Lockheed Martin have taken several actions to mitigate the challenges presented by export authorization delays: The JSF Program Office and Lockheed Martin have established a process to coordinate export authorization applications before they are submitted to the Department of State for review. This process is intended to reduce review times by ensuring that the export request clearly describes the data or technology that would be transferred and by addressing potentially contentious issues related to sensitive transfers. In addition, Lockheed Martin has added resources to its licensing organization to respond to the volume and schedule demands of JSF export authorizations. Lockheed Martin received a global project authorization (GPA)—an “umbrella” export authorization that allows Lockheed Martin and other U.S. suppliers on the program to enter into agreements with over 200 partner suppliers to transfer certain unclassified technical data—from the Department of State. The GPA is expected to lessen the administrative burden and improve the consistency of and processing times for routine export authorizations. The Departments of State and Defense and Lockheed Martin agreed to the scope of the information that could be exported using this authorization and the conditions for those exports up front. The Department of State expects to process GPA implementing agreements in 5 days, provided there is no need to refer them to other agencies or offices for review. Approved in October 2002, implementation of the GPA was delayed until March 2003 because of supplier concerns related to liability and compliance requirements. In March 2003, the first implementing agreement between Lockheed Martin and a company in a partner country was reviewed and approved in 4 business days. Prior to the GPA, Lockheed Martin and 13 other U.S. suppliers were granted an exemption by the U.S. Air Force from the export authorization requirements that govern the release of unclassified technical data to suppliers from NATO and certain other countries, including Australia, for bid and proposal purposes. This exemption expires in March 2004. Lockheed Martin also uses a country-specific exemption to transfer technical data to Canada. Finally, as a NATO Defense Capabilities Initiative program, partner countries and companies participating in the program, including Australia, can take advantage of expedited review processes for certain types of export licenses. Under these expedited procedures, the Department of State promises to complete its reviews of license applications in 10 days, and if it requests comments on a license from DOD or other government agencies, those reviews should be completed in 10 days as well. The United States has committed to design, develop, and qualify aircraft for partners that fulfill the JSF operational requirements document and are as common to the U.S. JSF configuration as possible within National Disclosure Policy. In some cases, according to DOD, the program has requested exceptions from National Disclosure Policy to achieve interoperability and aircraft commonality goals and to avoid additional development costs. Some DOD officials confirmed that technology transfer decisions have been influenced by JSF program goals, rather than adjusting program goals to meet current disclosure policy. DOD, JSF Program Office, and Lockheed Martin officials agreed that technology transfer issues should be resolved as early as possible in order to meet program schedules without placing undue pressure on the release process. However, there have been some initial problems executing this strategy. An official at the Defense Technology Security Administration, one of the offices responsible for technical assessments of disclosure and export authorization requests, stated that even though the JSF program has a plan to manage releasability issues and the National Disclosure Policy process, the office does not always receive information related to these issues in a timely manner. In addition, one partner has expressed concern about the pace of information sharing and decision making related to the JSF support concept. According to several partners, access to technical data is needed so that they can plan for and develop a sovereign support infrastructure as expressed in their formal exchange of letters with the United States. The program office anticipates that in-country support of JSF aircraft will be an issue for all partners and will involve both technology transfer and industrial considerations. The JSF support concept is currently being developed, with input from the U.S. military services and international partners. DOD, the JSF Program Office, and Lockheed Martin have taken a number of actions designed to mitigate the challenges presented by the transfer of technologies on the program. In February 2002, the program office modified Lockheed Martin’s system development and demonstration contract to include a study on the expected commonality between U.S. and partner JSF aircraft. The objective of this study is to develop a partner JSF aircraft specification that is as common to the U.S. specification as possible under National Disclosure Policy. This effort allows the program to pursue early releasability decisions, which mitigates the risk of putting undue schedule pressure on the process. Lockheed Martin did not deliver the partner specification to the program office as planned in March 2003, and it now expects to deliver the specification in August 2003. To identify and resolve expected technical, security, and policy issues for the overseas sale and cooperative development of JSF aircraft, the program chartered an international development work group. The core of this group consists of program office and contractor personnel, as well as individuals from the Air Force’s Office of International Affairs and Special Programs, Marine Corps Requirements, and Navy International Programs. The group was chartered to review how past export decisions apply to the JSF program; identify contentious items in advance; and provide workable resolutions that minimize the impact to the program cost, schedule, or performance. In February 2003, the JSF Program Office received direction from the Low Observables/Counter Low Observables Executive Committee to appoint a JSF export compliance officer. The purpose of this position is to ensure that releasability decisions and export licensing provisos or conditions are fully implemented and adhered to by the program and applied to JSF configurations as required. As required by DOD acquisition regulations, the JSF program has identified critical program information, and Lockheed Martin is developing a plan to prevent unauthorized disclosure or inadvertent transfer of leading-edge technologies and sensitive data or systems. To reduce cost and integrate appropriate measures into the JSF design, this effort is being undertaken as a systems engineering activity. During this phase of the program, technology protection measures have to be demonstrated, operationally tested, and made ready for production. DOD officials have stated that the program’s progress on this plan has been slow. Given that releasability decisions should consider the measures mentioned above, timely completion of this plan is important for long-term program planning. Finally, the JSF Program Office established an exchange of letters work group with participation from selected program office and Lockheed Martin integrated product teams, and partner representatives when appropriate. The current focus of this group is to address partner goals related to in-country support of the aircraft. In addition, the JSF autonomic logistics integrated product team is conducting trade studies to further define a global support solution for worldwide support to start to address these issues. According to program officials, this strategy will identify the best approach for maintaining JSF aircraft, and may include logistics centers in partner countries. Follow- on trade studies would determine the cost of developing additional maintenance locations. The implementation of the global support solution and the options identified in follow-on trade studies will have to be in full compliance with the National Disclosure Policy, or the program will need to request exceptions. In the JSF program, the prime contractor is responsible for managing industrial participation. Lockheed Martin provides partners with return-on-investment expectations, opportunities for qualified bidders to compete for JSF contracts, and visibility into the subcontracting process for the program. Partners have identified industrial return as one of the primary reasons for their participation in the program. If partners do not realize their expectations, they can choose to leave the program and/or not purchase the aircraft—both negative consequences for DOD. But, if Lockheed Martin’s efforts to meet partner return-on-investment expectations come into conflict with program cost, schedule, and performance goals, this could have a negative effect as well. Therefore, the JSF Program Office will ultimately have to make decisions to balance partner expectations and program execution. Partner representatives generally agreed with the JSF competitive approach to contracting, but cautioned that while it is too early to assess results, their industries’ ability to win JSF contracts and participate in design and development is vital to their continued involvement in the program. In addition, some partners stated that retaining political support for the program in their countries will depend, in large part, on winning contracts whose total value approaches or exceeds their financial contributions for the JSF system development and demonstration phase. In addition to the amount of work placed in a partner country, partners have expectations about the timing of contracts and/or which companies in their countries win contracts. If return-on-investment and other expectations are not met, partners could decide to leave the program and not purchase the aircraft. If a partner decided to leave the program, DOD would be deprived of anticipated development funding and an opportunity to improve interoperability among U.S. allies, while Lockheed Martin could be faced with lower than projected international sales. Other cooperative programs provide for industrial participation commensurate with the financial contributions of the partners. In contrast, the JSF MOU provides that, to achieve “best value for money,” DOD will require contractors to select subcontractors on a competitive basis to the maximum practical extent. To support this approach, Lockheed Martin has taken the following steps to manage partner return-on-investment expectations, identify opportunities for qualified bidders to compete for JSF contracts, and provide visibility into the subcontracting process for the program: To manage partner return-on-investment expectations, Lockheed Martin sent teams of engineers and business development personnel to partner countries and assessed suppliers’ ability to compete for JSF contracts. In some cases, Lockheed Martin signed agreements with partner governments and suppliers to document the opportunities they would have to bid for JSF contracts, as well as the potential value of those contracts. DOD and program office officials told us that these agreements were necessary to secure political support in certain countries because the U.S. government does not guarantee that the partners will recoup their investment in the program through contracts with their industry. In at least one case, Lockheed Martin has promised an international contractor predetermined work that satisfies a major portion of that country’s expected return-on-investment. While disavowing knowledge of the specific contents of these agreements, DOD was supportive of their use during partner negotiations. DOD officials conceded that the agreements contained in these documents departed from the competitive approach, but expressed the hope that the use of these agreements would not be widespread. In response to partner concerns about the slow pace of contract awards, Lockheed Martin has stated that the bulk of the remaining subcontracting with partner industry will come later in the current phase or during the production phase, especially in countries where the aerospace industry is less developed and contracts are more likely to be awarded for build-to-print or second-source manufacturing. To provide visibility into the subcontracting process, Lockheed Martin, the JSF program manager, DOD, or a combination of the three have provided explanations of how sourcing decisions were made after partner governments raised concerns on behalf of suppliers about the results of competitions. These governments were told that suppliers submitted bids far above the competitive range and thus were not selected. In addition, DOD, JSF Program Office, and Lockheed Martin personnel provided feedback to the partners concerning how to approach future competitions. The award fee structure of Lockheed Martin’s contract permits the JSF Program Office to establish focus criteria applicable to specific evaluation periods. To help ensure partner industries are provided opportunities to compete for JSF subcontracts, the program office established focus criteria concerning subcontract competition for the evaluation period between November 1, 2002, and April 30, 2003. Lockheed Martin was judged on its ability to (1) provide partners regular insight into subcontracting opportunities, (2) encourage its major suppliers to consider partner suppliers on a competitive basis, and (3) acquire needed export authorizations in a timely manner to support competitions. In response, Lockheed Martin has developed a database to track contract opportunities, especially for international suppliers and U.S. small businesses, and provides monthly summaries of industrial participation to partner personnel in the program office. These summaries include the names of suppliers, contracts for which they will be eligible to bid, bid and proposal dates, status of contracts awarded, and the status of supplier export authorizations. This database will assist DOD in meeting MOU requirements to provide visibility into JSF subcontracting efforts. Further, some partners have concerns about some aspects of the competition, including delays in getting U.S. export licenses and reluctance by a major supplier to provide opportunities to industry in a partner country. If competition for contracts is not implemented in a manner consistent with partner expectations, partners’ continued support for the program could be jeopardized. JSF industrial relationships are solely developed between U.S. contractors and partner country industry. After deciding to award work to foreign and domestic companies based on competition, instead of the share of program costs contributed, DOD and the JSF Program Office have left implementation of this competitive approach to Lockheed Martin under the standard Federal Acquisition Regulation clause related to competition in subcontracting. Lockheed Martin officials told us their approach for supplier selection is based on factors such as a supplier’s ability to incorporate a management approach that is responsive to maintaining JSF schedules, reducing design and production cost within acceptable risk levels, developing a solid technical approach with opportunities for technology improvements, reducing aircraft size and weight, and increasing aircraft performance. They further told us that this approach is being implemented without regard to a supplier’s country of origin, with U.S. and international suppliers competing equally. Lockheed Martin concluded that awarding subcontracts in this manner would help achieve program affordability goals and avoid pressure from partners to guarantee contract awards consistent with their monetary contributions to the program. Program officials told us that since the award fee emphasizes overall affordability, program management, technical progress, and development cost control, it should incentivize Lockheed Martin to perform subcontracting activities on a competitive basis. If, during its regular monitoring of contract execution, the program office identifies the need for more emphasis in a certain area—such as reducing aircraft weight or providing opportunities to international suppliers—it can address this concern through the contract’s award fee process. While the program office has used an award fee focus letter to encourage Lockheed Martin to provide a competitive environment, it has not evaluated whether competitive results have been achieved. The JSF program is not immune to unpredictable cost growth, schedule delays, and other management challenges that have historically plagued DOD’s systems acquisition programs. International participation in the program, while providing benefits, makes managing these challenges more difficult and places additional risk on DOD and the prime contractor. While DOD expects international cooperation in systems acquisition to benefit future military coalition engagements, this may come at the expense of U.S. technological and industrial advantages or the overall affordability of the JSF aircraft. Over the next 2 years, DOD will make decisions that will critically affect the cost, schedule, and performance of the program. Because Lockheed Martin bears the responsibility for managing partner industrial expectations, it will be forced to balance its ability to meet program milestones and collect program award fees against meeting these expectations, which could be the key in securing future sales of the JSF for the company. In turn, DOD must be prepared to assess and mitigate any risks resulting from these contractor decisions as it fulfills national obligations set forth in agreements with partner governments. While steps have been taken to position the program for success, given the size and importance of the program, additional attention on the part of DOD and the program office would help minimize the risks associated with implementing the international program. Toward this end, DOD and the JSF Program Office need to maintain a significant knowledge base to enable adequate oversight and control over an acquisition strategy that effectively designs, develops, and produces the aircraft while ensuring that the strategy is carried out to the satisfaction of the U.S. services and the international partners. Tools are in place to provide this oversight and management, but they must be fully utilized to achieve program goals. To provide greater knowledge, which anticipates decisions needed as the JSF program matures, we recommend that the Secretary of Defense direct the JSF Program Office to ensure that the Lockheed Martin international industrial plan identifies current and potential contracts involving the transfer of sensitive data and technology to partner suppliers; evaluates the risks that unfavorable export decisions could pose for the develops alternatives to mitigate those risks, such as using U.S. suppliers. We also recommend that the Secretary direct the JSF Program Office to ensure that information concerning the prime contractor’s selection and management of suppliers be collected, closely monitored, and used for program oversight. This oversight should include identifying potential conflicts between partner expectations and program goals, developing focus letters that encourage Lockheed Martin to resolve these conflicts, and making award fee determinations accordingly. DOD provided us with written comments on a draft of this report. These comments are reprinted in appendix III. DOD provided separate technical comments, which we incorporated as appropriate. DOD concurred with our recommendation that the Secretary of Defense direct the JSF Program Office to ensure that the Lockheed Martin international industrial plan identifies current and potential contracts involving the transfer of sensitive data and technology to partner suppliers, evaluates the risks that unfavorable export decisions could pose for the program, and develops alternatives to mitigate those risks. DOD did raise a concern about our suggestion that using U.S. suppliers was one way to avoid the risks that unfavorable export decisions could pose for the program. In particular, DOD stated it could undermine the program’s affordability goals. However, we believe that due to the level of advanced technology on the JSF program, affordability goals must be considered in the context of protecting some of the most sensitive U.S. technologies— those vital to maintaining U.S. technical superiority. This means that technology transfer considerations must be part of the sourcing process. If contracts are awarded without identifying and addressing technology transfer issues, the protection of sensitive technology or the execution of those contracts could be compromised. For example, if a contract is awarded to a partner supplier, an export decision that subsequently prohibits or places conditions on the transfer of controlled data or technology to that company could adversely affect its ability to execute the contract. If mitigation options have not been identified, the likely outcome is pressure on the export control system to approve broader export authorizations in support of program goals. In other cases where technology transfer concerns have not been anticipated or addressed, JSF contractors could be forced to re-source work, which could also undermine not only affordability but other goals, such as meeting program schedule. The international industrial plan referenced in our recommendation can help alleviate these potential pressures by identifying alternatives, one of which would be identifying potential U.S. suppliers in cases where technology transfer is a concern. In its comments, DOD states that mitigating risk in this manner could require the dual sourcing of specific JSF contracts. This is not necessarily the case. Again, ideally, these technology transfer issues would be anticipated before a development or production contract is competed or awarded. With this knowledge, the JSF Program Office and Lockheed Martin could suggest adjustments to work packages or bidders’ lists if the technology or companies in question are likely to raise export control concerns. Regardless, the end result could still be the selection of a single source—one that advances affordability and protects sensitive U.S. technology. DOD also concurred with our recommendation that the Secretary of Defense direct the JSF Program Office to ensure that information concerning the prime contractors’ selection and management of suppliers is collected, closely monitored, and used for program oversight. In its comments, DOD stated that the JSF Program Office would work closely with Lockheed Martin to achieve effective program oversight with regard to partner expectations and program goals. However, DOD did not specify how it plans to collect and monitor this information or elaborate on other steps the JSF Program Office would take to identify and resolve potential conflicts between partner expectations and program goals. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Navy and the Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. 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 regarding this report, please contact me at (202) 512-4841. Key contributors to this report are listed in appendix IV. Our objective was to review how the Department of Defense (DOD) is managing the integration of partner countries and suppliers into the Joint Strike Fighter (JSF) program. Specifically, we identified international relationships and the benefits they are expected to provide and assessed how DOD is managing cost sharing, technology transfer, and partner expectations for industrial return. To conduct our work, we reviewed various guidance and agreements related to the JSF program. We also interviewed cognizant government officials and industry experts, including those in several JSF partner countries. To determine what relationships are necessary to integrate international partners into the program, we identified and examined documents related to JSF international arrangements and agreements, including information from DOD; the JSF Program Office in Arlington, Virginia; and the Lockheed Martin Aeronautics Company in Fort Worth, Texas. Specifically, we obtained documents from the Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics), the Department of State (Office of Defense Trade Controls), the Secretary of the Air Force (International Affairs), the Navy International Programs Office, and the Department of Commerce (Bureau of Industry and Security). We discussed the guidance and processes for developing and negotiating agreements for international participation with officials from each of these offices. We also obtained and reviewed signed copies of the memoranda of understanding (MOU) and other documents that outline the agreed upon conditions between the United States and each partner nation. To understand the JSF international program structure in the context of other DOD cooperative development programs, we reviewed reports and documentation on programs such as the F-16 Multinational Fighter Program, the Medium Extended Air Defense System, and the Multiple Launch Rocket System and discussed this information with DOD, contractor, and international personnel with experience on those programs. For specific information on cost sharing within the program, we reviewed MOUs and related documents and discussed this issue with the Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics) – International Cooperation, JSF Program Office international directorate and contracts; and Lockheed Martin international program officials. To determine how the program is responding to technology transfer concerns, we reviewed documentation on U.S. National Disclosure Policy and related guidance. In addition, we spoke to officials in DOD, the Departments of State and Commerce, the JSF Program Office, and Lockheed Martin. Within DOD, we collected data on sensitive technology areas and spoke to representatives from the Defense Technology Security Administration, the Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics) Directorate of Special Programs, and the Office of the Air Force Under Secretary for International Affairs (Foreign Disclosure and Technology Transfer Division) to determine the extent to which the JSF program considered these concerns in its approach. We reviewed the JSF program protection plan and spoke with Lockheed Martin and program office security personnel to determine how the program implements this plan and other mechanisms related to foreign disclosure and technology transfer. To assess the JSF approach to managing international partner expectations, we reviewed various sources of information on other U.S. cooperative development programs, including our past reports, to determine potential challenges for the international program and discussed these challenges with officials from the Office of the Secretary of Defense, the JSF Program Office, Lockheed Martin, and other personnel as necessary. We reviewed program documentation and procedures for addressing these challenges and spoke with key staff from the Office of the Secretary of Defense, the JSF Program Office International Directorate, and Lockheed Martin JSF International Programs on issues regarding implementation of their management approach. To determine and assess the position of international participants in the program, we obtained the direct views of officials from the partner countries. First, we conducted structured interviews with the National Deputies from the partner countries represented in the JSF Program Office. These officials were both civilian and military personnel and provided information in areas related to their countries’ involvement in the program, including expected benefits, experience with other cooperative programs, presence in the JSF Program Office and contractor locations, industry participation in the program, cost sharing, experience with the U.S. export licensing process, and technology transfer. The results of interviews were documented and verified with each of the national deputies and their respective governments for accuracy. One country elected to provide written responses to the interview questions we submitted. In addition, we visited government and industry representatives in London and Bristol, United Kingdom; Rome, Italy; and The Hague, Netherlands. We discussed JSF program participation with senior defense officials in each of these three countries to assess their views on the overall progress and success of the program to date. Finally, we visited and discussed our review objectives with officials from BAE Systems and Rolls Royce in the United Kingdom, who are major suppliers to the JSF prime contractors. We performed our work from February 2002 to May 2003 in accordance with generally accepted government auditing standards. Tom Denomme, Brian Mullins, Ron Schwenn, Anne Howe, Delores Cohen, Karen Sloan, and Robert Ackley made key contributions to this report.
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The Joint Strike Fighter (JSF) is a cooperative program between the Department of Defense (DOD) and U.S. allies for developing and producing next generation fighter aircraft to replace aging inventories. As currently planned, the JSF program is DOD's most expensive aircraft program to date, costing an estimated $200 billion to procure about 2,600 aircraft and related support equipment. Many in DOD consider JSF to be a model for future cooperative programs. To determine the implications of the JSF international program structure, GAO identified JSF program relationships and expected benefits and assessed how DOD is managing cost sharing, technology transfer, and partner expectations for industrial return. The JSF international program structure is based on a complex set of relationships involving both government and industry from the United States and eight partner countries. The program is expected to benefit the United States by reducing its share of program costs, giving it access to foreign industrial capabilities, and improving interoperability with allied militaries. Partner governments expect to benefit from defined influence over aircraft requirements, improved relationships with U.S. aerospace companies, and access to JSF program data. Yet international participation also presents a number of challenges. For example, while international partners can choose to share any future program cost increases, they are not required to do so under the terms of negotiated agreements. Therefore, the burden of any future increases may fall almost entirely on the United States. Technology transfer also presents challenges. The large number of export authorizations needed to share project information, solicit bids from partner suppliers, and execute contracts must be submitted and resolved in a timely manner to ensure that partner industry has the opportunity to compete for subcontracts and key contracts can be executed on schedule. Transfers of sensitive U.S. military technologies--which are needed to achieve aircraft commonality goals--will push the boundaries of U.S. disclosure policy. While actions have been taken in an attempt to address these challenges, additional actions are needed to control costs and manage technology transfer. Finally, if partners' return-on-investment expectations are not met, support within their countries could deteriorate. To realize this return-on-investment, partners expect their industry to win JSF contracts through competition--a departure from other cooperative programs, which directly link contract awards to financial contributions. If the prime contractor's efforts to meet these expectations come into conflict with program cost, schedule, and performance goals, the program office will have to make decisions that balance these potentially competing interests.
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HUD’s mission to create strong, sustainable, and inclusive communities and quality and affordable homes for all has significantly evolved due to the current economic and housing crisis. Accordingly, the department has increased its reliance on IT. In particular, legislation enacted over the past several years has given the department new responsibilities for, among other things, strengthening the housing market. For example, the Housing and Economic Recovery Act of 2008 established a program intended to help families avoid home foreclosure by refinancing them into mortgages insured by FHA. As a result, the number of mortgage loans insured by FHA more than tripled between 2006 and 2010, from almost half a million loans to 1.7 million loans. This in turn resulted in the need for much greater system processing capabilities to accommodate the increased demand. IT plays a critical role in the department’s ability to carry out its growing mission by supporting data collection and dissemination throughout the department and to external parties. For instance, the department reports that its business areas rely on IT to process over 50,000 loan requests per week, over 12,000 service calls per month, and more than 7,000 grant requests annually for each of its major grant programs. Despite its growing mission, HUD’s IT environment has not effectively supported its business operations. In 2009, we reported that the department’s IT had consisted of: over 200 information systems, many of which performed the same manual processing for key business processes; and functions and, thus, were duplicative; stove-piped, nonintegrated systems that could not share related data; systems that were nearly 15 years old (on average), including several different operating systems and using 35 different programming languages. A factor that had contributed to the state of HUD’s IT environment was the department’s focus, primarily, on the maintenance of its existing systems and infrastructure, rather than on the modernization needed to meet its expanding mission needs. For example, in fiscal year 2008, about 2 percent of the department’s IT obligations were for new development, whereas the remaining 98 percent were obligated for operating and maintaining legacy systems. HUD’s Office of the Chief Information Officer (OCIO) is responsible for supporting the department’s programs, services, and management processes by providing IT solutions and services. Additionally, the OCIO is responsible for developing, modernizing, and enhancing the IT environment. To this end, in 2010, the OCIO established four management goals, which aligned with the department’s 2010-2015 Strategic Plan: (1) enhance the quality, availability, and delivery of HUD information to citizens, business partners, and government; (2) promote an enterprise approach to IT that will foster innovation and collaboration; (3) achieve excellence in IT management practice; and (4) transform the OCIO to a culture of operational excellence that can achieve current and future departmental goals. To assist HUD in its modernization efforts, Congress has authorized and appropriated funding for the department in multiple statutes. For example, in recognizing the need to modernize the department’s IT environment, the Housing and Economic Recovery Act of 2008 authorized $25 million for each fiscal year, from 2009 through 2013, for improvements to FHA’s IT, among other things. In addition, according to department officials, HUD used approximately $1.5 million of the funding provided in the American Recovery and Reinvestment Act of 2009 for improving IT capabilities across a range of programs. More recently, the appropriations acts for fiscal years 2010 and 2011 made available to HUD for expenditure $180 million and $71 million, respectively, for IT modernization to support its Transformation Initiative. While HUD has been working to modernize its IT systems, we reported in 2009 that the department lacked sound management controls that are essential to achieving successful outcomes. These controls included IT strategic planning, investment management, enterprise architecture, and human capital planning. We recommended that the department make improvements in these areas, and while it has taken a number of important steps, additional actions are still needed by the department to respond to remaining concerns. Strategic planning and performance management: Effective IT strategic planning and performance management are intended to ensure that an organization’s IT strategic goals are aligned with its overall mission goals and outcomes and that these goals are supported by clearly defined (1) activities aimed at accomplishing the goals and (2) measures for determining performance in accomplishing the activities and goals. In 2009, we found that although HUD had established an IT strategic plan that outlined goals and performance measures, it had not assessed its IT performance against established goals since fiscal year 2007. By not regularly assessing and reporting progress against its strategic IT performance measures and activities, HUD did not know how well it was achieving its strategic goals and where it needed to improve. We recommended that HUD establish a plan for developing and implementing the department’s performance management framework, including an implementation schedule of key activities and related resource needs, and ensure that this plan provides for annually reporting progress in achieving IT strategic goals. In September 2011, we reported that HUD had fully implemented this recommendation by issuing a new department-wide strategic plan with associated goals that aligned with new IT strategic goals that the OCIO developed. IT investment management: Investment management is aimed at selecting, controlling, and evaluating IT investments in a manner that better ensures that they produce business value, reduce investment- related risks, and increase accountability and transparency in the investment decision-making process. As we have previously reported, moving away from project-centric investment management and toward a portfolio-based approach, is considered a best practice. By managing investments as a portfolio, an organization can consider new investment proposals, along with previously funded investments, and identify the appropriate mix and synergies of these investments to best meet mission needs, technology needs, and priorities for improvement. In 2009, we reported that while HUD had established a range of policies and procedures for developing a complete investment portfolio, it had not established policies and procedures for evaluating the portfolio.evaluating the performance of its portfolios, HUD was limited in its ability to control the risks and achieve the benefits associated with the mix of legacy system and modernization investments selected. Accordingly, we recommended that HUD develop a plan for instituting policies and procedures for reviewing, evaluating, and improving the performance of the department’s portfolio of investments; developing criteria for assessing portfolio performance and reviewing and Without having defined and implemented practices for modifying them at regular intervals; defining and collecting IT portfolio performance measurement data consistent with the portfolio performance criteria; and executing adjustments to the IT investment portfolio in reaction to actual portfolio performance. In September 2011, we reported that, in response to our recommendations, the department had begun establishing a new investment management governance structure and had applied it to its portfolio for IT modernization projects. However, HUD had not yet developed criteria for assessing portfolio performance, or defined and collected data consistent with the criteria. In the absence of taking these key steps, the department has continued to be challenged in implementing proper investment management practices. Human capital: As we have previously reported, IT human capital management is intended to ensure that an organization has the employees with the appropriate knowledge and skills to effectively execute critical IT functions. Human capital management involves assessing IT workforce needs, inventorying existing staff’s knowledge and skills and identifying any gaps between needs and existing capabilities, and developing strategies and plans to fill any gaps. In 2009, we reported that HUD’s OCIO had not adequately performed most of these activities. For example, while the office had analyzed skill gaps in its IT workforce and had developed a strategy for closing those skills gaps, OCIO officials did not know when implementation of this strategy would begin or be completed. Additionally, the gap analysis was based on an incomplete and outdated inventory of human capital skill levels, thus rendering its strategy unreliable. We noted that without effective human capital management, HUD’s ability to have the right people to effectively operate and maintain existing systems was impaired. Therefore, we recommended that HUD establish and execute IT human capital gap closure strategies that are based on a complete and current inventory of its existing IT workforce skills. In September 2011, we reported that HUD had made progress in this area. Specifically, HUD began working to establish a human capital plan that included tasks such as identifying challenges, developing performance metrics and strategies, and addressing the identified IT skill gaps. HUD anticipated finalizing this plan by December 2011; however, as of this month, the plan has not yet been completed. Until HUD finalizes its IT human capital management plan, implementation of this management control will continue to be a challenge. Enterprise architecture: EA development and use is aimed at establishing a corporate blueprint for investing that connects strategic plans with individual programs and system solutions. As such, this blueprint provides the information needed to guide and constrain investments in a consistent, coordinated, and integrated fashion— thereby improving interoperability, reducing duplicative efforts, and optimizing mission operations. Developing an enterprise architecture with associated system solutions for portions, or segments (referred to as segment architectures), is an important aspect of this activity. In 2009 we reported that, while HUD had established an enterprise architecture program that met key aspects of related best practices, its efforts to develop segment architectures were not sufficient. For example, HUD had identified and prioritized segments to be modernized; however, it did not adhere to these priorities, the segments developed did not reflect important elements of federal guidance, and most were out of date. We found that HUD had developed eight segment architectures; however, these segments were not the department’s eight highest priorities. As a result, HUD’s segment architectures did not provide a sufficient basis for guiding and directing segment projects in a manner to ensure that both, system enhancements and new development efforts were properly sequenced, well integrated, and not duplicative. We recommended that HUD develop a plan for reexamining segment priorities and updating and developing segment architectures in accordance with these priorities and relevant guidance. We subsequently reported in September 2011, that the department had made progress toward implementing our recommendation, by, for example, creating a conceptual enterprise architecture. However, it had not yet established a policy to guide the development, maintenance, and use of this architecture. Thus, we further recommended that HUD establish and approve a policy to govern the EA prior to further developing its segment architectures. In response, HUD officials did not explicitly agree or disagree with our recommendation, but noted that the department was working to draft an enterprise architecture policy. As of this month, the department had not yet finalized its EA policy. To this end, establishing a commitment to its new EA direction remains a challenge for the department. Out of concern about HUD’s capacity to manage its IT modernization efforts, Congress established limitations on the funding provided to the department for this purpose. Specifically, the appropriations acts stated that the department could not obligate more than 25 percent of fiscal year 2010 funds and 35 percent of fiscal year 2011 funds until the Secretary of HUD submitted to the appropriations committees in each year an expenditure plan that satisfied two sets of statutory conditions and had been reviewed by GAO. To address the first set of statutory conditions, for each modernization project, HUD was required to identify in the plan (1) functional and performance capabilities to be delivered, (2) expected mission benefits, (3) estimated lifecycle costs, and (4) planned key milestones. To address the second set of statutory conditions, the plan had to demonstrate that each project (1) was supported by an adequately staffed project office, (2) conformed to capital planning and investment control requirements, (3) complied with the department’s enterprise architecture, and (4) was being managed in accordance with applicable lifecycle management policies and guidance. Our assessment found that the department’s first expenditure plan, submitted in April 2010, did not adequately satisfy the two sets of statutory conditions. In particular, we found that the plan did not describe specific and measureable mission benefits for all of HUD’s IT modernization projects. In addition, the plan did not include information that demonstrated compliance with regard to the department’s enterprise architecture and capital planning for IT investments. For example, the modernization projects could not show how they aligned to the department’s EA because the existing EA was no longer operative. In the absence of this information, the plan was limited as a congressional oversight and decision-making mechanism. As a result, we recommended that HUD ensure that future expenditure plans satisfied each element of both sets of statutory conditions and describe the status of HUD’s efforts to establish and implement modernization management controls. In response, HUD submitted a revised 2010 expenditure plan in February 2011, which we found satisfied both sets of statutory conditions. For example, the plan identified key milestones by project phase and deliverable timeframes for the development of requirements and software releases. The plan also described how each of seven identified modernization projects complied with the department’s evolving enterprise architecture. Additionally, the plan clearly described the status of the department’s efforts to implement the management controls. Further, in January 2012, HUD submitted its 2011 expenditure plan for our review, which also satisfied both sets of statutory conditions. For example, the plan described specific and measureable mission benefits for each of the identified IT modernization projects. In addition, it described costs associated with the lifecycle of each project, providing details on funds needed for major work activities and deliverables. Further, the plan categorized each project relative to HUD’s evolving architecture. As a result of the measures that HUD has taken to respond to our recommendations and improve the content of each subsequent expenditure plan, it has rendered these plans more useful. In turn, the plans should facilitate continued and more effective oversight of the department’s IT modernization projects. Going forward, the fiscal year 2012 appropriations act has directed us to evaluate HUD’s 2012 expenditure plan. Additionally, the 2012 conference report directed us to evaluate implementation of project management practices, including contractor oversight and cost estimation for selected IT modernization projects. We have also been directed to assess the department’s institutionalization of IT governance. We anticipate initiating aspects of this work in spring 2012. In summary, HUD has made progress in addressing certain weaknesses that we identified in its IT management capabilities. However, it is important to note that more actions are still needed. In particular, fully addressing the recommendations that we have made is vital to helping the department implement sound management controls and, ultimately, to overcome the challenges it has faced in improving its IT management capabilities. HUD has demonstrated progress in improving the content of its IT expenditure plans. As a result, these plans should be more useful as an oversight tool and thus should better help to demonstrate the extent to which the department takes the important steps that are essential to strengthening its capacity to manage and modernize its IT environment. Chairman Latham, Ranking Member Olver, and Members of the Subcommittee, this concludes my statement today. I would be pleased to respond to any questions that you may have. If you have any questions concerning this statement, please contact Valerie C. Melvin, Director, Information Management and Technology Resources Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions include Shannin G. O’Neill, Assistant Director; Kami J. Corbett; Lee A. McCracken; and Teresa M. Neven. 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.
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The Department of Housing and Urban Development (HUD) performs a range of significant home ownership and community development missions that are integral to the U.S. economy. In doing so, HUD relies extensively on information technology (IT). However, HUDs IT environment has not effectively supported its business operations, and as a result, the department has been working to modernize its IT infrastructure. To provide oversight and inform decision-making, Congress required that HUD develop and submit plans describing how it intends to use its expenditures to support its modernization efforts. In addition, Congress required GAO to review these expenditure plans to determine if they meet statutory conditions. GAO was asked to testify on HUDs progress in implementing its prior recommendations on (1) modernizing its IT systems and (2) improving its expenditure plans. In preparing this statement, GAO relied on previous work at HUD. HUD has made progress in implementing prior GAO recommendations on modernizing its IT environment; however more actions are needed. In 2009, GAO reported that HUD lacked key IT management controls; which are essential to achieving successful outcomes. Specifically, Although the department had established an IT strategic plan that outlined goals and performance measures, it had not assessed its performance against established goals. As a result, HUD did not know how well it was achieving its goals and where it needed to improve. While the department had established policies and procedures for developing a complete portfolio of its investments, it had not established policies and procedures for evaluating that portfolio. This meant that it was limited in its ability to control risks and achieve benefits associated with the mix of legacy systems and modernization investments it selected. HUDs Office of the Chief Information Officer had not adequately assessed its IT workforce needs, inventoried existing staff knowledge and skills, and identified gaps between needs and existing capabilities. As a result, the department was not well positioned to acquire the skill sets it needed. The department had not fully developed its enterprise architecture (EA)which provides a blueprint for investing that connects strategic plans with individual programs and system solutions. This meant that HUD lacked a sufficient basis for guiding and directing its modernization projects. GAO made a number of recommendations to HUD aimed at strengthening its management capabilities, and while progress has been made in addressing them, work remains. For example, HUD issued a department-wide strategic plan with associated goals that aligned with new IT strategic goals. However, the department had not developed criteria for assessing the performance of its portfolios, finalized its plan to address its IT workforce needs, or established an approved policy for its enterprise architecture. HUDs modernization expenditure plans, which are to describe how the agency plans to spend IT modernization funding, have improved in response to GAOs recommendations. These plans are to meet statutory conditions that include identifying, for each modernization project, capabilities to be delivered, expected benefits, estimated costs, and key milestones; and showing that each project is supported by adequate staff, conforms to capital planning and investment control requirements, complies with the departments EA, and is being managed in accordance with department lifecycle management policies. GAO found that HUDs 2010 expenditure plan contained weaknesses and thus was limited as a congressional oversight and decision-making mechanism. Accordingly, GAO recommended, among other things, that the department ensure future plans satisfied each element of the statutory conditions. In response, subsequent expenditure plans submitted in 2011 and 2012 satisfied the conditions. As a result, these more recent plans have provided key information needed for continued oversight of the modernization projects. GAO is not making new recommendations. As noted, GAO has previously made recommendations aimed at assisting HUD in fully implementing key IT management controls.
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This summary report is based on our analysis of the information contained in our reviews of 27 agencies’ draft strategic plans. To do those 27 reviews and the related reports, we used the Results Act supplemented by OMB’s guidance on developing the plans (Circular A-11, part 2) as criteria to determine whether draft plans complied with the requirement for the six specific elements that are to be in the strategic plans. To make judgments about the overall quality of the plans, we used our May 1997 guidance for congressional review of the plans. We recognized in each instance that the plans were drafts and that our assessment thus represented a snapshot at a given point in time. To make judgments about the planning issues needing attention, we also relied on other related work, including our recent report on governmentwide implementation of the Results Act and our guidance for congressional review of Results Act implementation, as tools. The Results Act is the centerpiece of a statutory framework Congress put in place during the 1990s to address long-standing weaknesses in federal operations, improve federal management practices, and provide greater accountability for achieving results. Under the Results Act, strategic plans are the starting point and basic underpinning for results-oriented management. The Act requires that an agency’s strategic plan contain six key elements: (1) a comprehensive agency mission statement; (2) agencywide long-term goals and objectives for all major functions and operations; (3) approaches (or strategies) and the various resources needed to achieve the goals and objectives; (4) a description of the relationship between the long-term goals and objectives and the annual performance goals; (5) an identification of key factors, external to the agency and beyond its control, that could significantly affect the achievement of the strategic goals; and (6) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future program evaluations. In addition to the Results Act, the statutory framework includes the Chief Financial Officers (CFO) Act, as expanded and amended by the Government Management Reform Act of 1994; and information technology reform legislation, in particular the Clinger-Cohen Act of 1996 and the Paperwork Reduction Act of 1995. Congress enacted the CFO Act to remedy decades of serious neglect in federal financial management by establishing chief financial officers across the federal government and requiring the preparation and audit of annual financial statements. The information technology reform legislation is based on the best practices used by leading public and private sector organizations to manage information technology more effectively. Under the information technology reform legislation, agencies are to better link their planned and actual use of technology to their programs’ missions and goals to improve performance. Congress has demonstrated its commitment to the Results Act and reinforced to executive agencies the importance it places on the full and complete implementation of the Act. One such prominent demonstration occurred on February 25, 1997, when the Speaker of the House, the Majority Leader of the Senate, and other senior members of the House and Senate sent a letter to the Director of OMB. The letter underscored the importance that the congressional Majority places on the implementation of the Results Act, noted a willingness on the part of Congress to work cooperatively with the administration, and established expectations for congressional consultations with agencies on their draft strategic plans. Under the Results Act, those consultations are to be an integral part of strategic planning. For example, consultations can help to create a basic understanding among the stakeholders of the competing demands that confront agencies and how those demands and available resources require careful and continuous balancing. In the House, the consultation effort was led by teams consisting of staff from various committees that focused on specific agencies. In an August 1997 letter, the House Majority Leader provided the Director of OMB with an overview of recent congressional consultations and highlighted some recurring themes, such as the need for interagency coordination. Although the consultation process in the Senate has been less structured than the one in the House, a number of consultations have been held there as well. In addition to consulting with agencies, several House and Senate authorizing committees also held hearings on draft strategic plans in July 1997, which further underscored congressional interest in agencies creating good strategic planning processes that support performance-based management. For example, these hearings included those held by the Subcommittee on Water and Power, House Committee on Resources; the House Committee on Science; the Subcommittee on Human Resources, House Committee on Government Reform and Oversight; the House Committee on Banking and Financial Services; the Subcommittee on Forests and Forest Health, House Committee on Resources; and the Senate Committee on Indian Affairs. The Senate and House appropriations committees have been expanding their focus on the Results Act as well. For example, the Senate Appropriations and Governmental Affairs committees held a joint hearing on the status of Results Act implementation, with particular emphasis on agencies’ strategic planning efforts. The Senate Appropriations Committee has included comments on the Results Act in its reports on the fiscal year 1998 appropriations bills. The report language has discussed the Committee’s views on the status and quality of individual agencies’ efforts to implement the Results Act and expressed the need for continuing consultations, among other issues. In the House, the Appropriations Committee has included a standard statement in its appropriations reports that strongly endorses the Results Act. This standard statement notes that each appropriations subcommittee “takes (the annual performance plan) requirement of the Results Act very seriously and plans to carefully examine agency performance goals and measures during the appropriations process.” A significant amount of work remains to be done by executive branch agencies before their strategic plans can fulfill the requirements of the Results Act, serve as a basis for guiding agencies, and help congressional and other policymakers make decisions about activities and programs. Although all 27 of the draft plans included a mission statement, 21 plans lacked 1 or more of the other required elements. Specifically, of the 27 draft strategic plans: 2 did not include agencywide strategic goals and objectives, 6 did not describe approaches or strategies for achieving those goals and 19 did not describe the relationship between long-term goals and objectives and annual performance goals, 6 did not identify key factors that are external to the agency and beyond its control that could affect the achievement of the goals and objectives, and 16 did not discuss program evaluations that the agency used to establish or revise goals and objectives or provide a schedule of future program evaluations. Moreover, while all but six of the plans were missing at least one required element, one-third were missing two required elements. Just over one-fourth of the plans failed to cover at least three of the required elements. Because most of the draft plans did not contain all six required elements, Congress did not have access to critical pieces of information for its consultations with the agencies on their draft strategic plans; and, if these elements are not included in the final plans, federal managers will not have a clear strategic direction upon which to base their daily activities. For example, agencies whose plans lacked strategic goals and strategies for achieving those goals will not have a solid foundation upon which to build the performance measurement and reporting efforts that are required by the Results Act. The incomplete or inadequate coverage of the six required elements in the plans is an indication of the amount of additional work necessary to fulfill the Act’s minimum requirements that agencies had to undertake prior to the submission of strategic plans to Congress on September 30, 1997. Many agencies showed progress in developing comprehensive mission statements upon which they can build strategic goals and strategies for achieving those goals. A mission statement is important because it focuses an agency on its intended purpose. It explains why the agency exists and tells what it does and is the basic starting point of successful planning efforts. However, our reviews of draft strategic plans for 27 agencies found several critical strategic planning issues that are in need of sustained attention to ensure that those plans better meet the needs of agencies, Congress, and other stakeholders and that agencies shift their focus from activities to results. These issues were: the lack of linkages among required elements in the draft plans, the weaknesses in long-term strategic goals, the lack of fully developed strategies to achieve the goals, the lack of evidence that agencies’ plans reflect coordination with other federal agencies having similar or complementary programs, the limited capacity of agencies to gather performance information, and the lack of attention to program evaluations. The majority of the draft strategic plans lacked critical linkages among required elements in the plans. We have noted in our Executive Guide and other recent reports that for strategic plans to drive an agency’s operations, a straightforward linkage is needed among its long-term strategic goals, strategies for achieving goals, annual performance goals, and day-to-day activities. First, as prior work has shown, a direct alignment between strategic goals and strategies for achieving those goals is important for assessing an agency’s ability to achieve those goals. Second, we have noted that the linkage between long-term strategic goals and annual performance goals is important because without this linkage, agency managers and Congress may not be able to judge whether an agency is making annual progress toward achieving its long-term goals. In several draft strategic plans, the agencies’ presentation of information on strategic goals, objectives, and strategies made it difficult to determine which strategy was supposed to achieve which goal or objective and what unit or component within the agency was supposed to carry out the strategy. For example, in the Small Business Administration’s (SBA) plan, objectives were listed as a group under goals, followed by strategies, which were also listed as a group. This presentation does not convey how specific strategies would lead to achieving specific goals. In another example, the Federal Emergency Management Agency (FEMA) listed several areas of focus and operational objectives under each of its five strategies, but if did not establish linkages among them or between the strategies and the agency’s strategic objectives. Accordingly, although an affiliation between specific strategies and objectives may exist, it was not readily apparent from these agencies’ draft strategic plans. In contrast, the Department of Education’s plan linked each strategic goal to a set of objectives that were, in turn, linked to a set of strategies. For example, the strategic goal to “build a solid foundation for learning” had as one of its objectives, “every eighth grader masters challenging mathematics, including the foundations of algebra and geometry.” Two of the strategies listed under this objective were to develop and use a national, voluntary test in mathematics as a means to encourage schools, school districts, states, businesses, and communities to move toward improving math curricula and instruction, among other things; and to increase public understanding and support of mastering mathematics by the end of eighth grade through partnerships with key education, mathematics, and professional organizations. As noted in our section on required elements, 19 of 27 draft plans did not describe the linkages between long-term strategic goals and annual performance goals. As we have reported, without this linkage, it may not be possible to determine whether an agency has a clear sense of how it will assess the progress made toward achieving its intended results. However, some agencies made good attempts at providing this linkage in their draft plans. For example, the Department of Education, the General Services Administration (GSA), and the Postal Service used a matrix to illustrate the linkages among their strategic goals, objectives, and the measures that are to be reflected in their annual performance goals. Our work on the draft plans found that clearly aligning required strategic planning elements is especially important in those cases where agencies, as allowed under OMB guidance, chose to submit a strategic plan for each of their major components and a strategic overview that under the guidance is to show the linkages among these plans, instead of a single agencywide plan. A few agencies, including the Departments of Agriculture (USDA), Labor, and the Interior, used this approach. USDA, Labor, and Interior are large agencies with disparate functions that are implemented by a number of subagencies. For example, USDA has 18 subagencies working in 7 different mission areas, such as farm and foreign agricultural services and food safety and inspection service. None of the three agencies adequately linked component-level goals to the agencywide strategic goals. For example, their plans did not consistently demonstrate how the components’ goals and objectives would contribute to the achievement of agencywide goals. Furthermore, Labor’s overview plan did not contain agencywide goals, even though the Secretary set forth agencywide goals in recent congressional testimony. Leading organizations we have studied set long-term strategic goals that were an outgrowth of a clearly stated mission. Setting long-term strategic goals is essential for results-oriented management, because such goals explain in greater specificity the results organizations are intending to achieve. The goals form a basis for an organization to identify potential strategies for fulfilling its mission and for improving its operations to support achievement of that mission. Congress recognized both the importance and difficulty of setting results-oriented strategic goals. Under the Results Act, all of an agency’s strategic goals do not need to be explicitly results oriented, although the intent of the Act is to have agencies focus on results to the extent feasible. Although most agencies attempted to articulate agencywide strategic goals and objectives in their plans, many of those goals and objectives tended to be weak. We often found that the draft plans contained goals and objectives that were not as results oriented as they could have been. For example, one of the Department of Veterans Affair’s (VA) goals, to “improve benefit programs,” could be more results oriented if VA identified the purpose of the benefit programs (e.g., to ease veterans’ transition to civilian life). In contrast, GSA’s goals and objectives reflect a positive attempt to define the results that it expects from its major functions. For example, one of the goals in the draft strategic plan states that GSA will become the space/supplies/telecommunications provider of choice for all federal agencies by delivering quality products and services at the best value. In several plans, agencies expressed goals and objectives in a manner that would make them difficult to measure or difficult to assess in the future. Although strategic goals need not be expressed in a measurable form, OMB guidance says goals must be expressed in a manner that allows for future assessment of whether they are being achieved. One example of an objective that was not measurable as written is the Social Security Administration’s (SSA) goal “to promote valued, strong, and responsive social security programs through effective policy development and research.” This goal recognized that program leadership cannot be achieved without a strong policy and research capability—the lack of which we have criticized SSA for in the past. Yet, the goal itself and the supporting discussion in the draft strategic plan were difficult to understand and the results SSA expects were unclear. In addition, the goal was not stated in a manner that allows for a future assessment of its achievement. Three plans were missing goals for major functions and operations that are reflected in statute or are otherwise important to their missions. The Department of Health and Human Services (HHS) stated in its draft plan that the plan’s goals relate to those activities that have HHS priority over the next 6 years and that the goals did not cover every HHS activity. However, we found that the plan made no mention of a major function—that is, HHS’ responsibilities for certifying medical facilities, such as clinical laboratories and mammography providers. The section on goals in the Agency for International Development’s (AID) draft plan also did not fully encompass the agency’s major functions, because the section did not specifically address some programs, such as assistance to Eastern Europe and the former Soviet Union and Economic Support Funds, which represent about 60 percent of AID’s budget. In addition, the Postal Service’s draft plan did not contain goals and objectives for two major functions: providing mail delivery service to all communities and providing ready access to postal retail services. In our reports on draft strategic plans, we noted that strategies should be specific enough to enable an assessment of whether they would help achieve the goals in the plan. In addition, the strategies should elaborate on specific actions the agency is taking or plans to take to carry out its mission, outline planned accomplishments, and schedule their implementation. However, many of the strategies in the plans we reviewed lacked descriptions of approaches or actions to be taken or failed to address management challenges that threatened agencies’ ability to meet long-term strategic goals. Incomplete and underdeveloped strategies were a frequent problem with the draft plans we reviewed. For example, the draft plan for the Department of State did not specifically identify the actions needed to meet the plan’s goals but rather often focused on describing the Department’s role in various areas. For example, the Department’s first strategy, “maintaining effective working relationships with leading regional states through vigorous diplomacy, backed by strong U.S. and allied military capability to react to regional contingencies,” did not describe how the Department planned to maintain effective working relationships or coordinate with the other lead agency, the Department of Defense (DOD), identified in the strategy. In some cases, such as in the plans of Justice and Energy, strategies frequently read more like goals or objectives, rather than approaches for achieving goals. Justice’s strategy to promote compliance with the country’s civil rights laws and Energy’s strategy to maintain an effective capability to deter and/or respond to energy supply disruptions did not describe what actions the agencies planned to take to implement their related goals. Instead, their labelled strategies sounded like additional goals and objectives in that they discussed what the agencies expected to achieve. In other cases, such as in the plans of HHS and Commerce, strategies read like program justifications. Under strategies for addressing alcohol abuse, HHS’ draft plan states that “he National Institutes of Health conducts research and develops and disseminates information on prevention and treatment effectiveness.” Under strategies for providing technical leadership for the nation’s measurement and standards infrastructure, the Commerce plan stated that the “laboratories of the National Institute of Standards and Technology provide companies, industries, and the science and technology community with the common language needed in every stage of technical activity.” Without fully developed strategies, it will be difficult for managers, Congress, and other stakeholders to assess whether the planned approach will be successful in achieving intended results. One purpose of the Results Act is to improve the management of federal agencies. Therefore, it is particularly important that agencies develop strategies that address management challenges that threaten their ability to meet long-term strategic goals as well as this purpose of the Act. However, we found that most of the plans did not adequately address the major management challenges and high-risk areas that we and others have identified. For example, in our recent high-risk report series, we noted that DOD has long-standing management problems in six high-risk areas, including financial management, information technology, infrastructure, and inventory management. However, DOD’s draft plan generally paid little—and in one case, no—attention to high-risk management issues. We also placed Medicare, one of the largest federal entitlement programs, on our high-risk list, because of Medicare’s losses each year due to fraudulent and abusive claims. For example, the recent audit of financial statements performed by the Inspector General of HHS disclosed improper payments of $23.2 billion nationwide, or about 14 percent of total Medicare fee for service benefit payments. However, HHS’ draft plan did not address the long-standing problem the agency has with Medicare claims processing. Another management-related issue that presents a challenge to agencies is ongoing and proposed restructuring of federal activities, which will likely require adjustments to agencies’ management practices, processes, and systems. For example, the administration has ongoing efforts to integrate (1) the Department of State, the U.S. Information Agency, and the Arms Control and Disarmament Agency into one agency with the intent to better serve the U.S. national interests and foreign policy goals in the 21st century; and (2) certain shared administrative functions of State and AID. However, State’s draft plan did not discuss how State planned to integrate these agencies into its organizational structure or address substantive support requirements for the reorganization. For many years, we have reported on federal agencies’ chronic problems in developing and modernizing their information systems. Given the government’s ever-increasing dependency on computers and telecommunications to carry out its work, agencies must make dramatic improvements in how they manage their information resources in order to achieve mission goals, reduce costs, and improve service to the public. Moreover, without reliable information systems, agencies will not be able to gather and analyze the information they need to measure their performance, as required by the Results Act. Yet most of the 27 plans did not cover strategies for improving the information management needed to achieve their strategic goals or provided little detail on specific actions that agencies planned to take in this critical area. In its draft plan, for example, DOD—which receives 15 percent of the federal budget—did not explicitly discuss how it plans to correct information technology investment problems. These problems led us to place its Corporate Information Management initiative on our high-risk list, because DOD continues to spend billions of dollars on automated information systems with little sound analytic justification. Without such discussions, Congress will not be able to assess the agencies’ planned approaches for upgrading information technology to improve the agencies’ performance. Furthermore, we have identified as high risk two technology-related areas that represent significant challenges for the federal government: resolving the need for computer systems to be changed to accommodate dates beyond the year 1999, which is referred to as the “year 2000 problem”; and providing information security for computer systems. Yet most of the plans did not contain discussions of how agencies intend to address the year 2000 problem, and none of the plans addressed strategies for information security. For example, the draft plan of the Office of Personnel Management (OPM) did not discuss the year 2000 problem even though many of its critical information systems are date dependent and exchange information with virtually every federal agency. In another example, DOD’s draft plan did not specifically address information security even though DOD recognizes that information warfare capability is one of a number of areas of particular concern, especially as it involves vulnerabilities that could be exploited by potential opponents of the United States. OMB’s guidance stated that agencies’ strategies for achieving goals should include a description of the process for communicating goals throughout an agency and for holding managers and staff accountable for achieving the goals. However, a few of the plans that we evaluated, such as those for Education and SSA, indicated that agencies had developed, or are planning to develop, approaches for communicating goals to employees or for holding managers and staff accountable for achieving results. We noted that assigning clear expectations and accountability to employees so that they see how their jobs relate to the agency’s mission and goals can be useful in implementing a strategic plan. It is especially important that managers and staff understand how their daily activities contribute to the achievement of their agencies’ goals and that they are held accountable for achieving results. In contrast to the lack of strategies in most plans for addressing management weaknesses, we found that a few plans had operational strategies that indicated agencies are beginning to consider management, financial, and information technology weaknesses that need to be corrected to ensure that management practices, processes, and systems support the achievement of agency goals. For example, Education took an important step toward implementing results-oriented management by outlining in its draft strategic plan changes needed in activities, processes, and operations to better support its mission. To illustrate, Education’s plan contained core strategies for the goal that schools are safe, disciplined, and drug-free. These strategies included proposals for new legislation, public outreach, improved data systems, and interagency coordination. Energy and Education were among those agencies that included agencywide strategies to address needed process and operational realignments that would better enable them to achieve their missions. For example, Energy’s plan discussed strategies that emphasize changing contracting approaches to focus on results, contractor accountability, and customer satisfaction. As we recently reported, a focus on results, as envisioned by the Results Act, implies that federal programs contributing to the same or similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. This means that federal agencies are to look beyond their organizational boundaries and coordinate with other agencies to ensure that their efforts are aligned. Our work has underscored the need for such coordination efforts. Uncoordinated program efforts can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. Our recent report to you provided further information on mission fragmentation and program overlap in the federal government.We have often noted that the Results Act presents to Congress and the administration a new opportunity to address mission fragmentation and program overlap. OMB and Congress recognize that the Results Act provides an approach for addressing overlap and fragmentation of federal programs. OMB’s guidance stated that agencies’ final submission of strategic plans should contain a summary of agencies’ consultation efforts with Congress and other stakeholders, including discussions with other agencies on crosscutting activities. During its Summer Review of 1996, OMB provided feedback to agencies where it found little sign of significant interagency coordination to ensure consistent goals among crosscutting programs and activities. This feedback also underscored the need for such coordination. In an August 1997 letter to heads of selected independent agencies and members of the President’s Management Council, OMB reiterated the importance of interagency coordination and stated that during the 1997 Fall Budget Review, it intended to place a particular emphasis on reviewing whether goals and objectives for crosscutting functions or interagency programs were consistent among strategic plans. Congress has also shown active interest in using the Results Act to better ensure that crosscutting programs are properly coordinated. The February 25, 1997, letter from congressional Majority leaders to the Director of OMB outlined the leaderships’ interest in agencies’ strategic plans addressing how the agencies were coordinating their activities (especially for crosscutting programs) with other federal agencies working on similar activities. In addition, the staff teams in the House of Representatives, which were to coordinate and facilitate committee consultations with executive branch agencies, often have asked agencies about crosscutting activities and programs. Despite this interest, we found that 20 of the 27 draft plans lacked evidence of interagency coordination as part of the agency and stakeholder consultations and that some of the plans—including those from some agencies that are involved in crosscutting program areas where interagency coordination is clearly implied—lacked any discussion of coordination. For example: According to Energy, it does not have any crosscutting programs because its functions are unique. However, our review of draft strategic plans indicated areas of potential overlap concerning Energy’s programs. For example, Energy’s science mission was to maintain leadership in basic research and to advance scientific knowledge. The National Science Foundation’s (NSF) mission included promoting the progress of science and enabling the United States to uphold a position of world leadership in all aspects of science, mathematics, and engineering. NSF’s plan also did not discuss the possible overlap between the two missions. Another area of potential overlap for Energy included environmental and energy resources issues addressed by Energy as well as the Environmental Protection Agency (EPA) and other agencies. Similarly, nuclear weapons production issues involve Energy and DOD. The draft plan for HHS did not address coordination of alcohol and drug abuse prevention and treatment programs, even though these programs are located in several of its subagencies and in 15 other federal agencies. These other agencies include VA, Education, Housing and Urban Development, and Justice. In the June 27, 1997, consultation with congressional staff on OPM’s draft plan, OPM officials said that they had not yet involved stakeholders, including other federal agencies, in developing their strategic plan. Among the organizations with which OPM must work to achieve its desired results are the Interagency Advisory Group of federal personnel directors, the Personnel Automation Council, the National Partnership Council, the Security Policy Board and Security Policy Forum, the Federal Bureau of Investigation, the Equal Employment Opportunity Commission, the Federal Labor Relations Authority, and the Merit Systems Protection Board. Even if an agency’s draft plan recognized the need to coordinate with others, it generally contained little information about what strategies the agency pursued to identify and address mission fragmentation and program overlap. For example: State’s draft plan recognizes several crosscutting issues but does not clearly address how the agency will coordinate those issues with other agencies. State and over 30 agencies and offices in the federal government are involved in trade policy and export promotion, about 35 are involved in global programs, and over 20 are involved in international security functions. Treasury’s draft plan listed as a strategy that it will “continue participating in productive Federal, State, and local anti-drug task forces” but did not provide any detail about which bureaus or other federal agencies would participate in those task forces or what their respective responsibilities would be. Even though it recognized the roles of other organizations, Labor’s draft plan did not discuss how the agency’s programs could fit in with a broader national job training strategy and the coordination required to develop and implement such a strategy. In 1995, we identified 163 employment training programs spread across 15 federal agencies, including Labor. Commerce’s draft plan did not indicate how its emphasis on restructuring export controls to promote economic growth complements or contrasts with the strong emphasis of State’s Office of Defense Trade Controls and the U.S. Nuclear Regulatory Commission, which are both responsible for licensing exports overseas on safeguarding against proliferation of dual-use technology. To efficiently and effectively operate, manage, and oversee activities, we have reported that agencies need reliable information on the performance of agency programs, the financial condition of programs and their operations, and the costs of programs and operations. For example, agencies need reliable data during their planning efforts to set realistic goals and later, as programs are being implemented, to gauge their progress toward achievement of those goals. However, our prior work indicated that agencies often lacked information and that even when this information existed, its reliability was frequently questionable. On the basis of our recent report on implementing the Results Act, we found that some agencies lacked results-oriented performance information to use as a baseline for setting appropriate improvement targets. Our survey of federal managers done for that report suggested that those agencies were not isolated examples of the lack of performance information in the federal government. In this survey, we found that fewer than one-third of managers in the agencies reported that results-oriented performance measures existed for their programs to a great or very great extent. The existence of other types of performance measures also was reported as low. For example, of the managers reporting the existence of such measures to a great or very great extent, 38 percent reported the existence of measures of output, 32 percent reported the existence of customer satisfaction measures, 31 percent reported the existence of measures of product or service quality, and 26 percent reported the existence of measures of efficiency. Our prior work also suggests that even when information existed, its reliability was frequently questionable. In our report on the Department of Transportation’s (DOT) draft plan, we stated that we had identified information resources and database management as one of the top management issues facing DOT. For example, the Federal Aviation Administration, which is a component of DOT, may rely on source data that are incomplete, inconsistent, and inaccurate for an aviation safety database that is under development. In our report on the draft HHS strategic plan, we stated that the agency had only limited data on the Medicaid program, some of which were of questionable accuracy. Some of these data problems stemmed from data originating in the 50 states and the District of Columbia, which did not all use identical definitions for data categories. In addition to HHS, other agencies will likely have difficulties collecting reliable data from parties outside the federal government. Some agencies, such as Education, HHS, and EPA, planned to use or to strengthen partnerships with outside parties; thus, those agencies will also need to rely on those parties to provide performance data. During our recent review of analytic challenges that agencies faced in measuring their performance, agency officials with experience in performance measurement cited ascertaining the accuracy and quality of performance data as 1 of the top 10 challenges to performance measurement. The fact that data were largely collected by others was the most frequent explanation for why ascertaining the accuracy and quality of performance data was a challenge. In our report on implementing the Results Act, we also reported on the difficulties agencies were experiencing with their reliance on outside parties for data. These experiences suggest that agencies face many challenges in gathering reliable information and that it is important that agencies follow through with the implementation of the CFO Act, the Clinger-Cohen Act, and the Paperwork Reduction Act. These experiences also suggest that coherent strategies for using or strengthening partnerships with outside parties would also include a strategy for data collection and verification plans. To Education’s credit, its draft plan recognized that improvements were needed in these areas. For example, Education’s plan identified core strategies for improving the efficiency and effectiveness of operations through the use of information technology, such as development of an agencywide information collection and dissemination system. As another example, EPA’s draft plan discusses the agency’s initiative to draft “core performance measures” with the environmental commissioners of state governments. As we noted in our guide on assessing strategic plans, program evaluations are a key component of results-oriented management. In combination with an agency’s performance measurement system, evaluations can provide feedback to the agency on how well an agency’s activities and programs contributed to achieving strategic goals. For example, evaluations can be a potentially critical source of information for Congress and others in assessing (1) the appropriateness and reasonableness of goals; (2) the effectiveness of strategies by supplementing performance measurement data with impact evaluation studies; and (3) the implementation of programs, such as identifying the need for corrective action. In our recent report on the analytic challenges facing agencies in measuring performance, we stated that supplementing performance data with impact evaluations may help provide agencies with a more complete picture of program effectiveness. A recurring source of the programs’ difficulty in both selecting appropriate outcome measures and in analyzing their results stemmed from two features common to many federal programs: the interplay of federal, state, and local government activities and objectives and the aim to influence complex systems or phenomena whose outcomes are largely outside government control. Evaluations can play a critical role in helping to address the measurement and analysis difficulties agencies face. Furthermore, systematic evaluation of how a program was implemented can provide important information about why a program did or did not succeed and suggest ways to improve it. In that report, we also said that evaluation offices can provide analytical support for developing a performance measurement system. When asked where they needed assistance in performance measurement, agency officials were most likely to report that they could have used more evaluation help with creating quantifiable, measurable performance indicators and developing or implementing data collection and verification plans. Under the Results Act, program managers may wish to turn to their evaluation offices for formal program evaluations and for assistance in developing and using a performance measurement system. However, we have also reported that a 1994 survey found a continuing decline in evaluation capacity in the federal government. Although the Results Act requires agencies to discuss program evaluations in their strategic plans, 16 of the draft plans we reviewed did not contain such a discussion. Of the 11 plans that did contain a section on evaluations, most of those sections lacked critical information specified in OMB guidance, such as a discussion of how evaluations were used to establish strategic goals or a schedule of future evaluations. Given the importance of evaluation for results-based management and the continuing decline in evaluation capacity, it is important that agencies’ strategic plans systematically address this issue. It is clear that much work remains to be done if strategic plans are to be as useful for congressional and agency decisionmaking as they could be. We found that agencies’ draft strategic plans were very much works in progress. This situation suggests that agencies are struggling with the first step of performance-based management—that is, adopting a disciplined approach to setting results-oriented goals and formulating strategies to achieve the goals. As agencies continue their strategic planning efforts and prepare for the next step of performance-based management—measuring performance against annual performance goals—it is important that the agencies, working with Congress and other stakeholders, address those strategic planning issues that appear to need particularly sustained attention. Our past work has shown that leading organizations focus on strategic planning as a dynamic and continuous process and not simply on the production of a strategic plan. They also understand that stakeholders, particularly Congress in the case of federal agencies, are central to the success of their planning efforts. Therefore, it is important that agencies recognize that strategic planning does not end with the submission of a plan in September 1997 and that a constant dialogue with Congress is part of a purposeful and well-defined strategic planning process. Authorization, appropriation, budget, and oversight committees each have key interests in ensuring that the Results Act is successful, because once fully implemented, it should provide valuable data to help inform the decisions that each committee must make. In that regard, Congress can continue to express its interest in the effective implementation of the Results Act through iterative consultations with agencies on their missions and goals. Congress can also show its interest by continuing to ask about the status of agencies’ implementation of the Act during congressional hearings and by using performance information that agencies provide to help make management in the federal government more performance based. On September 3, 1997, we provided a draft of this report to the Director of OMB for comment. We did not provide a draft to individual agencies discussed in this report, because the drafts of the reports we prepared on individual agency plans in response to your request were provided to the relevant agency for comment. Those comments were reflected, as appropriate, in the final versions of those reports. On September 10, 1997, a senior OMB official provided us with comments on this report. He generally agreed with our observations and said that the report was a useful summary of the 27 reports we issued on agencies’ draft strategic plans. The official also said that by identifying areas of widespread compliance or noncompliance with requirements of the Results Act, the report can be used to focus on those parts of plans that may require further work. The senior OMB official did, however, raise an issue regarding program evaluations and the Results Act. He said that many strategic goals and objectives included in strategic plans will not require a program evaluation to help determine whether the goal was achieved. Thus, the absence of a schedule for future program evaluations should not be the basis for a categorical conclusion that a plan is deficient for this requirement. He also said that process evaluations can be useful in defining why a program is not working; they may be less instructive on why a program is succeeding. In his view, process evaluations are more aligned with the strategies section of a strategic plan than with determinations of whether strategic goals and objectives are being achieved. In addition, the OMB official said that an evaluation of program impact is beyond the scope of the Results Act and that agencies are not required or expected to define their goals or objectives in terms of impact. We note that the Results Act establishes two approaches for assessing an agency’s performance: annual measurement of program performance against performance goals outlined in a performance plan and program evaluations to be conducted by the agency as needed. Although the Act gives agencies wide discretion in determining the need for program evaluations, the Act also requires that agencies report to Congress and other stakeholders in their strategic plans on their planned use of evaluations to assess achievement of goals. Therefore, although program evaluations may not be necessary for determining whether every strategic goal in the strategic plan is achieved, a fuller discussion of how evaluations will, or will not, be used to measure performance is critical. Without this discussion, Congress and other stakeholders will not have assurances that agencies, as intended by the Act, systematically considered the use of program evaluations, where appropriate, to validate program accomplishments and identify strategies for program improvement. Thus, in cases where an agency concludes that program evaluations are not needed, we continue to believe that the agency’s plan would be more helpful to Congress if it contained such a statement and the reasons for the agency’s conclusion. Moreover, the Senate report that accompanied the Results Act described program evaluations in broad terms, specifically “including evaluations of . . . operating policies and practices when the primary concern is about these issues rather than program outcome.” In this context, program evaluations are to be used to assess both the extent to which a program achieves its results-oriented goals (outcome evaluations) and the extent to which a program is operating as it was intended (process evaluation.) Understanding how a program’s operations produced, or did not produce, desired outcomes is critical information for agencies’ senior managers and Congress to consider as decisions are being made about programs and strategic goals. Although the Act does not explicitly mention impact evaluations, it does require programs to measure progress toward achieving goals and explain why a performance goal was not met. Impact evaluations can be employed when external factors are known to influence the program’s objectives in order to isolate the program’s contribution to achievement of its objectives. Given the complexity of crosscutting federal programs as well as state and local programs, we continue to believe that in some circumstances, impact evaluations could be useful in helping to provide a more accurate picture of program effectiveness than might be portrayed by annual performance data alone or by other types of evaluations. 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 Minority Leader of the House; Ranking Minority Members of your Committees; other appropriate congressional committees; and the Director, Office of Management and Budget. We also will make copies available to others on request. If you or your staffs have any questions concerning this report, please contact me on (202) 512-2700. The major contributors to this letter are listed in appendix II. The Government Performance and Results Act (GPRA) is the primary legislative framework through which agencies will be required to set strategic goals, measure performance, and report on the degree to which goals were met. It requires each federal agency to develop, no later than by the end of fiscal year 1997, strategic plans that cover a period of at least 5 years and include the agency’s mission statement; identify the agency’s long-term strategic goals; and describe how the agency intends to achieve those goals through its activities and through its human, capital, information, and other resources. Under GPRA, agency strategic plans are the starting point for agencies to set annual goals for programs and to measure the performance of the programs in achieving those goals. Also, GPRA requires each agency to submit to the Office of Management and Budget (OMB), beginning for fiscal year 1999, an annual performance plan. The first annual performance plans are to be submitted in the fall of 1997. The annual performance plan is to provide the direct linkage between the strategic goals outlined in the agency’s strategic plan and what managers and employees do day-to-day. In essence, this plan is to contain the annual performance goals the agency will use to gauge its progress toward accomplishing its strategic goals and identify the performance measures the agency will use to assess its progress. Also, OMB will use individual agencies’ performance plans to develop an overall federal government performance plan that OMB is to submit annually to Congress with the president’s budget, beginning for fiscal year 1999. GPRA requires that each agency submit to the president and to the appropriate authorization and appropriations committees of Congress an annual report on program performance for the previous fiscal year (copies are to be provided to other congressional committees and to the public upon request). The first of these reports, on program performance for fiscal year 1999, is due by March 31, 2000; and subsequent reports are due by March 31 for the years that follow. However, for fiscal years 2000 and 2001, agencies’ reports are to include performance data beginning with fiscal year 1999. For each subsequent year, agencies are to include performance data for the year covered by the report and 3 prior years. In each report, an agency is to review and discuss its performance compared with the performance goals it established in its annual performance plan. When a goal is not met, the agency’s report is to explain the reasons the goal was not met; plans and schedules for meeting the goal; and, if the goal was impractical or not feasible, the reasons for that and the actions recommended. Actions needed to accomplish a goal could include legislative, regulatory, or other actions or, when the agency found a goal to be impractical or infeasible, a discussion of whether the goal ought to be modified. In addition to evaluating the progress made toward achieving annual goals established in the performance plan for the fiscal year covered by the report, an agency’s program performance report is to evaluate the agency’s performance plan for the fiscal year in which the performance report was submitted. (For example, in their fiscal year 1999 performance reports, due by March 31, 2000, agencies are required to evaluate their performance plans for fiscal year 2000 on the basis of their reported performance in fiscal year 1999.) This evaluation will help to show how an agency’s actual performance is influencing its plans. Finally, the report is to include the summary findings of program evaluations completed during the fiscal year covered by the report. Congress recognized that in some cases not all of the performance data will be available in time for the March 31 reporting date. In such cases, agencies are to provide whatever data are available, with a notation as to their incomplete status. Subsequent annual reports are to include the complete data as part of the trend information. In crafting GPRA, Congress also recognized that managerial accountability for results is linked to managers having sufficient flexibility, discretion, and authority to accomplish desired results. GPRA authorizes agencies to apply for managerial flexibility waivers in their annual performance plans beginning with fiscal year 1999. The authority of agencies to request waivers of administrative procedural requirements and controls is intended to provide federal managers with more flexibility to structure agency systems to better support program goals. The nonstatutory requirements that OMB can waive under GPRA generally involve the allocation and use of resources, such as restrictions on shifting funds among items within a budget account. Agencies must report in their annual performance reports on the use and effectiveness of any GPRA managerial flexibility waivers that they receive. GPRA called for phased implementation so that selected pilot projects in the agencies could develop experience from implementing GPRA requirements in fiscal years 1994 through 1996 before implementation is required for all agencies. When this part of the pilot phase concluded at the end of fiscal year 1996, a total of 68 pilot projects representing 28 agencies were project participants. OMB also was required to select at least five agencies from among the initial pilot agencies to pilot managerial accountability and flexibility for fiscal years 1995 and 1996; however, we found that the pilot did not work as intended. OMB did not designate as pilot projects any of the 7 departments and 1 independent agency that submitted a total of 61 waiver proposals because, among other reasons, changes in federal management practices and laws that occurred after the Act was enacted affected agencies’ need for the managerial flexibility waivers. Finally, GPRA required OMB to select at least five agencies, at least three of which have had experience developing performance plans during the initial GPRA pilot phase, to test performance budgeting for fiscal years 1998 and 1999. Performance budgets to be prepared by pilot projects for performance budgeting are intended to provide Congress with information on the direct relationship between proposed program spending and expected program results and the anticipated effects of varying spending levels on results. However, we found that the performance budgeting pilots are likely to be delayed. According to OMB, few agencies currently have either sufficient baseline performance or financial information or the ability to use sophisticated analytic techniques to calculate the effects that marginal changes in funding can have on performance. The Results Act: Observations on the Draft Strategic Plan of the Department of Agriculture (GAO/RCED-97-169R, July 10, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Commerce (GAO/GGD-97-152R, July 14, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Defense (GAO/NSIAD-97-219R, Aug. 5, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Education (GAO/HEHS-97-176R, July 18, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Energy (GAO/RCED-97-199R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Health and Human Services (GAO/HEHS-97-173R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Housing and Urban Development (GAO/RCED-97-224R, Aug. 8, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of the Interior (GAO/RCED-97-207R, July 21, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Justice (GAO/GGD-97-153R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Labor (GAO/HEHS-97-172R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of State (GAO/NSIAD-97-198R, July 18, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Transportation (GAO/RCED-97-208R, July 30, 1997). The Results Act: Observations on the Draft Strategic Plan of the Treasury (GAO/GGD-97-162R, July 31, 1997). The Results Act: Observations on the Draft Strategic Plan of the Department of Veterans Affairs (GAO/HEHS-97-174R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the U.S. Agency for International Development (GAO/NSIAD-97-197R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Environmental Protection Agency (GAO/RCED-97-209R, July 30, 1997). The Results Act: Observations on the Draft Strategic Plan of the Federal Emergency Management Agency (GAO/RCED-97-204R, July 22, 1997). The Results Act: Observations on the Draft Strategic Plan of the General Services Administration (GAO/GGD-97-147R, July 7, 1997). The Results Act: Observations on the Draft Strategic Plan of the National Aeronautics and Space Administration (GAO/NSIAD-97-205R, July 22, 1997). The Results Act: Observations on the Draft Strategic Plan of the National Science Foundation (GAO/RCED-97-203R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Nuclear Regulatory Commission (GAO/RCED-97-206R, July 31, 1997). The Results Act: Observations on the Draft Strategic Plan of the Office of Management and Budget (GAO/GGD-97-169R, Aug. 1997). The Results Act: Observations on the Draft Strategic Plan of the Office of Personnel Management (GAO/GGD-97-150R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the U.S. Postal Service (GAO/GGD-97-163R, July 31, 1997). The Results Act: Observations on the Draft Strategic Plan of the Small Business Administration (GAO/RCED-97-205R, July 11, 1997). The Results Act: Observations on the Draft Strategic Plan of the Social Security Administration (GAO/HEHS-97-179R, July 22, 1997). The Results Act: Observations on the Draft Strategic Plan of the U.S. Trade Representative (GAO/NSIAD-97-199R, July 18, 1997). The Results Act: Observations on Federal Science Agencies (GAO/T-RCED-97-220, July 30, 1997). Financial Management: Indian Trust Fund Strategic Plan (GAO/T-AIMD-97-138, July 30, 1997). The Results Act: Observations on Draft Strategic Plans of Five Financial Regulatory Agencies (GAO/T-GGD-97-164, July 29, 1997). National Labor Relations Board: Observations on the NLRB’s July 8, 1997, Draft Strategic Plan (GAO/T-HEHS-97-183, July 24, 1997). The Results Act: Observations on the Forest Service’s May 1997 Draft Strategic Plan (GAO/T-RCED-97-223, July 23, 1997). Results Act: Observations on the Department of Energy’s August 15, 1997, Draft Strategic Plan (GAO/RCED-97-248R, Sept. 2, 1997). Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap (GAO/AIMD-97-146, Aug. 29, 1997). Managing for Results: The Statutory Framework for Improving Federal Management and Effectiveness (GAO/T-GGD/AIMD-97-144, June 24, 1997). The Results Act: Comments on Selected Aspects of the Draft Strategic Plans of the Departments of Energy and the Interior (GAO/T-RCED-97-213, July 17, 1997). Managing for Results: Prospects for Effective Implementation of the Government Performance and Results Act (GAO/T-GGD-97-113, June 3, 1997). The Government Performance and Results Act: 1997 Governmentwide Implementation Will Be Uneven (GAO/GGD-97-109, June 2, 1997). Managing for Results: Analytic Challenges in Measuring Performance (GAO/HEHS/GGD-97-138, May 30, 1997). Agencies’ Strategic Plans Under GPRA: Key Questions to Facilitate Congressional Review (GAO/GGD-10.1.16, May 1997). Performance Budgeting: Past Initiatives Offer Insights for GPRA Implementation (GAO/AIMD-97-46, Mar. 27, 1997). Measuring Performance: Strengths and Limitations of Research Indicators (GAO/RCED-97-91, Mar. 21, 1997). Managing for Results: Enhancing the Usefulness of GPRA Consultations Between the Executive Branch and Congress (GAO/T-GGD-97-56, Mar. 10, 1997). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb. 12, 1997). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed individual agencies' draft strategic plans, as required by the Government Performance and Results Act of 1993, focusing on: (1) summarizing the overall results of GAO's reviews of those plans; and (2) identifying, on the basis of those reviews, the strategic planning issues most in need of sustained attention. GAO noted that: (1) a significant amount of work remained to be done by executive branch agencies if their strategic plans are to fulfill the requirements of the Results Act, serve as a basis for guiding agencies, and help congressional and other policymakers make decisions about activities and programs; (2) although all 27 of the draft plans included a mission statement, 21 plans lacked 1 or more of 5 other required elements; (3) overall, one-third of the plans were missing two required elements; and just over one-fourth were missing three or more of the required elements; (4) GAO's reviews of agencies' draft strategic plans also revealed several critical strategic planning issues that are in need of sustained attention if agencies are to develop the dynamic strategic planning processes envisioned by the Results Act; (5) most of the draft plans did not adequately link required elements in the plans; (6) these linkages are important if strategic plans are to drive the agencies' daily activities and if agencies are to be held accountable for achieving intended results; (7) furthermore, 19 of the 27 draft plans did not attempt to describe the linkages between long-term strategic goals and annual performance goals; (8) long-term strategic goals often tended to have weaknesses; (9) although the Results Act does not require that all of an agency's strategic goals be results oriented, the intent of the Act is to have agencies focus their strategic goals on results to the extent feasible; (10) many agencies did not fully develop strategies explaining how their long-term strategic goals would be achieved; (11) most agencies did not reflect in their draft plans the identification and planned coordination of activities and programs that cut across multiple agencies; (12) the questionable capacity of many agencies to gather performance information has hampered, and may continue to hamper, efforts to identify appropriate goals and confidently assess performance; (13) the draft strategic plans did not adequately address program evaluations; and (14) evaluations are important because they potentially can be critical sources of information for ensuring that goals are reasonable, strategies for achieving goals are effective, and that corrective actions are taken in program implementation.
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In 1993, DOE, at the direction of the President and Congress, established the SSP to sustain the safety and effectiveness of the nation’s nuclear weapons stockpile without returning to the use of underground nuclear tests. NNSA administers the program through its Office of Defense Programs. This responsibility encompasses many different tasks, including the manufacture, storage, assembly, nonnuclear testing, qualifying, and dismantlement of weapons in the stockpile. To accomplish the mission of the program, the Office of Defense Programs relies on private M&O contractors to carry out various tasks at each of the nuclear security enterprise sites. (See fig. 1.) NNSA reimburses its M&O contractors under cost-reimbursement-type contracts for the costs incurred in carrying out the department’s missions. The contractors, in turn, may subcontract out major portions of their work, especially in mission-support areas such as constructing and maintaining facilities. While most day-to-day activities are managed and operated by the various contractors, NNSA is responsible for the planning, budgeting, and ensuring the execution of interconnected activities across the eight sites that comprise the enterprise. Nuclear weapons are technically complex devices with a multitude of components and over time, a weapon’s reliability could decline unless mitigating precautions are taken. Since the establishment of the SSP, NNSA has worked with its M&O contractors to provide data on weapon phenomena through science-based approaches that assess the safety and reliability of the weapons in the stockpile and that seek to extend their operational lives. As a result of these efforts, since 1996, the Secretaries of Energy and Defense have provided the President with independent reports prepared individually by the directors of the three weapons laboratories and the Commander of the U.S. Strategic Command confirming that the stockpile is safe and reliable and that there is no need to resume underground nuclear testing. During the past 15 years, Congress has made significant investments in the nation’s stockpile stewardship capabilities, and NNSA has identified a number of accomplishments it has achieved in fulfilling the SSP mission. For example, the SSP has completed a life extension program for one warhead; conducted numerous weapon alterations to address safety, reliability, or performance issues; and has dismantled more than 7,000 nuclear weapons since fiscal year 1991. Further, the SSP reestablished the capability to produce plutonium pits—a key component of nuclear warheads. In its recently released Stockpile Stewardship and Management Plan for Fiscal Year 2011, NNSA stated that the SSP’s mission is dependent upon the enterprise’s facilities and physical infrastructure and the critical skills of its workforce. Facilities and Infrastructure. NNSA’s real property portfolio dedicated to its nuclear weapons mission is vast, with thousands of facilities and associated infrastructure. A number of these facilities are unique national assets used for research and development. As such, while individual contractors operate a given facility, its capabilities may be needed to support users and activities across the enterprise. NNSA has three categories of facilities and infrastructure that indicate the extent to which they are critical to the achievement of the SSP. These categories are: (1) Mission critical. Facilities and infrastructure that are used to perform activities—such as nuclear weapons production, research and development, and storage—to meet the highest-level SSP goals, without which operations would be disrupted or placed at risk. (2) Mission dependent, not critical. Facilities and infrastructure—such as waste management, nonnuclear storage, and machine shops—that play a supporting role in meeting the SSP’s goals, without which operations would be disrupted only if they could not resume within 5 business days. (3) Not mission dependent. Facilities and infrastructure—such as cafeterias, parking structures, and excess facilities—that do not link directly to SSP goals but support secondary missions or quality-of- workplace initiatives. Many of the facilities and infrastructure of the enterprise were constructed more than 50 years ago, and NNSA has reported that they are reaching the end of their useful lives. NNSA is undertaking a number of capital improvement projects to modernize and maintain these facilities. To identify and prioritize capital improvement project needs, NNSA is to follow DOE directives and guidance for project management. Among these is DOE Order 413.3A, which establishes protocols for planning and executing a project. The protocols require DOE projects to go through a series of five critical decisions as they enter each new phase of work: Critical decision 0. Approves a mission-related need. Critical decision 1. Approves the selection of a preferred solution to meet a mission need and a preliminary estimate of project costs based on a review of a project’s conceptual design. Critical decision 2. Approves that a project’s cost and schedule estimates are accurate and complete based on a review of the project’s completed preliminary design. Critical decision 3. Reaches agreement that a project’s final design is sufficiently complete and that resources can be committed toward procurement and construction. Critical decision 4. Approves that a project has met its completion criteria or that or that the facility is ready to start operations. To oversee projects and approve these critical decisions, NNSA conducts its own reviews, often with the help of independent technical experts. Critical Human Capital Skills. NNSA reports that sustaining a large number of critical skills throughout the enterprise is central to the mission of the SSP. The importance of these critical skills has been of interest to Congress for a number of years. For example, in the National Defense Authorization Act of Fiscal Year 1997, Congress established the Commission of Maintaining United States Nuclear Weapons Expertise (referred to as the Chiles Commission). Congress tasked the commission to review ongoing efforts of DOE to attract scientific, engineering, and technical personnel and to develop a plan for the recruitment and retention within the DOE nuclear weapons complex. The Chiles Commission reviewed efforts across the enterprise and developed a number of recommendations, including the need to develop and implement a detailed and long-term site-specific and enterprisewide plan for replenishing the nuclear weapons workforce. NNSA reported in its response to Congress that it will take a number of actions, including giving greater attention to ensuring sites devote adequate resources to critical skills generation, retention, and regeneration. NNSA lacks comprehensive data needed for informed enterprisewide decision-making; however, according to a NNSA official and agency documents, NNSA is considering the use of computer models that may help to address some of these critical shortcomings. We found that NNSA lacks complete data on (1) the condition and value of its existing infrastructure, (2) cost estimates and completion dates for planned capital improvement projects, (3) shared use facilities within the enterprise, and (4) critical human capital skills in its M&O contractor workforce needed to maintain the SSP. Facilities and Infrastructure Data. NNSA does not have accurate and reliable data on the condition and replacement value of its facilities and other infrastructure. This is in part because NNSA (1) has not ensured that contractors comply with a DOE directive that requires facility inspections at least once every 5 years, and (2) does not ensure consistency among the varying approaches and methodologies contractors use when determining replacement property value. DOE requires its sites—including those within the nuclear security enterprise—to assess the condition of all real property at least once during any 5-year period. Sites are to use the results of these assessments to identify maintenance costs, which are then compared to the replacement property value for the facility. Using this information, DOE is to calculate a condition index for each of its facilities and other infrastructure. While DOE requires periodic condition assessments, in our analysis of data in DOE’s agencywide infrastructure database, the Facilities Information Management System (FIMS), we found 765 of DOE’s 2,897 weapons activities facilities, or 26 percent, have not met this requirement—having either an inspection date outside of the 5-year period or no inspection date recorded (see table 1). NNSA officials report that FIMS is the only centralized repository for infrastructure data and that the agency, in part, relies on these data to support funding decisions. Further, we found that sites used varying approaches and methodologies in determining deferred maintenance and replacement property values, but did so without validation from NNSA that the various methods were consistent with base criteria and could be aggregated for decision-making purposes. In fact, during an inspection conducted in July 2008 of one site’s approach, NNSA found that the methodology for determining deferred maintenance and replacement property values were “suspect, difficult to validate, and unreliable.” In addition, the agency stated in the inspection report that it was concerned that the site’s approach for conducting inspections was resulting in inconsistent calculation of repair and maintenance costs from year to year. NNSA conducted a follow-up assessment in April 2010 and reported that the site had made progress in addressing the concerns highlighted in the 2008 assessment but significant efforts are still needed to reach satisfactory levels. A site official at one location also told us that even though the site complied with DOE requirements to conduct an inspection of all facilities at least once every 5 years, NNSA’s data on facility and infrastructure condition for that site is not always accurate because an inspection from 3 to 5 years ago does not always reflect the rapid degradation of some facilities. In particular, the official noted that, in the last 2 years, the site experienced about $36 million of unplanned facility maintenance. NNSA officials stated that they are aware of the limitations of FIMS data and know that conditions change more rapidly than can be tracked by 5-year assessments. As a result, NNSA officials told us the agency also uses a variety of other methods to track site facility conditions, including budget requests, regularly updated planning documents, and daily dialogue with federal and contractor personnel at the sites. However, as we have reported, agencies that have a centralized database with accurate and reliable data on their facilities can better support investment decisions in planning and budgeting. Data on Capital Improvement Projects. NNSA does not have estimated total costs or completion dates for all planned capital improvement projects. While NNSA identified each of its ongoing projects as necessary to ensure future viability of the program, without more complete information on these projects NNSA cannot identify how the timing of these projects impacts other projects or how delays could increase costs and impact budgetary requirements in future year planning. NNSA identified 15 ongoing capital improvement projects to replace or improve existing infrastructure (see app. II for detailed information on each capital improvement project). The status of these projects range from preliminary design to completion, with some projects scheduled for completion in 2022. The estimated cost associated with the ongoing projects range from $35 million for the replacement of fire protection piping at the Pantex Plant in Amarillo, Texas, to up to $3.5 billion for construction of the Uranium Processing Facility (UPF) at the Y-12 Plant in Oak Ridge, Tennessee. However, NNSA does not have key information for a number of these projects, including initial estimates for cost, amount of remaining funding needed to complete the project, or completion dates. NNSA officials offered two explanations for this lack of complete information. First, they said that the lack of data is due in part to the early design phase for some of these projects. For example, NNSA’s highest infrastructure priorities—CMRR and UPF—are still in design and according to NNSA officials final cost estimates for capital improvement projects will not be available until design is 90 percent complete. NNSA’s current estimate prepared in 2007 for UPF indicates the project will cost between $1.4 and $3.5 billion to construct. As we recently reported, the 2007 figure is more than double the agency’s 2004 estimate of between $600 million and $1.1 billion. In addition, we reported that the costs for project engineering and design, which are less than halfway completed, have increased by about 42 percent—from $297 to $421 million. For CMRR, as of October 2010, NNSA did not provide us with an estimated completion cost for the project but based on information reported in the Stockpile Stewardship and Management Plan the agency is using a planning figure of approximately $8 billion for completion of both UPF and CMRR. In response to our reports, DOE and NNSA have recently initiated a number of actions that, if fully implemented, may improve its management of capital improvement projects. Second, a NNSA official told us that changes in project scope and unforeseen complications have hindered the agency’s ability to estimate costs and completion dates for some projects. For example, an NNSA official said that the project to upgrade the Radioactive Liquid Waste Treatment facility at Los Alamos National Laboratory had an initial cost estimate of $82 to $104 million, but site officials at Los Alamos reported to NNSA a need to change the building materials used in the original design estimate. As a result, the NNSA official told us this project is estimated at over $300 million. Our prior work has identified persistent problems at NNSA with cost overruns and schedule delays for capital improvement projects. For example, we found that NNSA’s National Ignition Facility—a high energy laser that NNSA reports will improve its understanding of nuclear weapons—was $1 billion over budget, and over 5 years in delays. As we have reported, without reliable information on costs and schedules, NNSA will not have a sound basis for making decisions on how to most effectively manage its portfolio of projects and other programs and will lack information that could help justify planned budget increases or target cost savings opportunities. . A LANSCE cientit review the proposand the safety nd ecrity checklind comment on the prcticl feasility, environmentsafety nd helth, nd ecrity aspect of the propoed work. Shared Enterprise Assets. NNSA lacks complete data to ensure that facilities with unique capabilities that are used by more than one site— known as shared assets—are effectively utilized. The enterprise comprises numerous state-of-the-art research facilities that NNSA describes as being unique national assets. These shared assets, which are found at the national weapons labs, plants, and test site, represent a large and continuing investment of U.S. resources and offer advanced science and technology capabilities that are desirable for solving problems throughout the enterprise. NNSA delegates responsibility for operating authority of these facilities to its M&O contractors, though NNSA broadly defines the scope of work to be performed at a facility. According to NNSA and site officials, the process to determine specific users and individual activities at the facilities are managed by each individual facility. For example, the Los Alamos Neutron Science Center (LANSCE)—a powerful proton accelerator used for, among other things, nuclear weapons research—has a management plan governing its submission and review process for shared use of the facility that only applies to LANSCE. Other shared assets operate under their own management plans. NNSA has identified a need to effectively manage these assets enterprisewide to ensure that programmatic priorities are addressed and that users enterprisewide have well supported access to these facilities. In February 2009, NNSA developed a directive stating that the Assistant Deputy Administrators within the Office of Defense Programs will (1) select and approve the research and development facilities to be designated as shared assets, and (2) review and concur on the governance plan developed for each designated facility. However, we found that NNSA does not have information on which facilities are designated as shared use assets, and a NNSA official told us the agency has not reviewed individual management plans throughout the enterprise to ensure that each facilities’ submission and review process for use of the facility provides for adequate enterprisewide access. Critical Human Capital Skills. NNSA lacks comprehensive information on the status of its M&O contractor workforce. Specifically, the agency does not have an enterprisewide workforce baseline of critical human capital skills and levels for the contractor workforce to effectively maintain the capabilities needed to achieve its mission. NNSA officials said this is primarily because NNSA relies on its contractors to track these critical skills. While contractor efforts may be effective at a specific site, these efforts do not ensure long-term survival of these skills across the enterprise, nor do they provide NNSA with the information needed to make enterprisewide decisions that have implications on human capital. NNSA reports in the Stockpile Stewardship and Management Plan that sustaining a large number of critical capabilities throughout the enterprise is central to the mission of stockpile stewardship and that maintaining the right mix of skills is a significant challenge. The agency also reported that the enterprise is losing critical capabilities, stating that the M&O contractor workforce has been reduced significantly in the past 20 years, which has decreased the availability of personnel with required critical skills. Further, NNSA stated in a 2009 internal human capital critical skills report that the site-based independent approach to sustaining key capabilities has not always been sufficient. For example, NNSA reported that increased retirements and higher than normal turnover rates have depleted the intellectual and technical knowledge and skills needed to sustain critical capabilities. Specifically, in that report, NNSA attributed problems that caused delays on an ongoing life extension program to the loss of skilled employees. Over the last several years, there have been many efforts to characterize the state of the critical human capital skills associated with the enterprise and to project its availability. In its 2009 internal human capital critical skills report, NNSA identified some preliminary actions it needs to take to maintain critical skills, which include (1) identifying enterprisewide functions and critical skills needs, (2) establishing common language and definitions across the enterprise, (3) assessing the current state of the program, and (4) identifying potential solutions to attract and retain critical skills. These actions are consistent with best practices we reported on human capital issues. Specifically, our work has shown that the ability of federal agencies to achieve their missions and carry out their responsibilities depends in large part on whether they can sustain a workforce that possesses the necessary education, knowledge, skills, and competencies. To do so, agencies need to be aware of the number of employees they need with specific skills, competencies, and levels that are critical to achieving their missions and goals, and identify any gaps between their current workforce and the workforce they will need in the future. Identifying mission-critical occupations, skills, and competencies can help agencies adjust to changes in technology, budget constraints, and other factors that alter the environment in which they operate. Nevertheless, NNSA officials told us that the agency had, until recently, made limited progress completing these actions. In October 2010, however, NNSA established the Office of Corporate Talent and Critical Skills to bring focused attention to meeting critical human capital skills and announced that the agency hired a director to develop and implement a critical skills sustainment strategy. The newly hired Director told us that NNSA has begun the process of reassessing the need for the activities identified in the 2009 report to be completed but has not yet established time frames or milestones for completing these efforts. In addition, NNSA officials stated that the agency sponsors academic outreach programs to provide a linkage between the agency and the talent that have the skills needed to complete certain SSP activities. NNSA, recognizing that its ability to make informed enterprisewide decisions is hampered by the lack of comprehensive data and analytical tools, is considering the use of computer models—quantitative tools that couple data from each site with the functions of the enterprise—to integrate and analyze data to create an interconnected view of the enterprise, which may help to address some of the critical shortcomings we identified. A NNSA official told us that if the enterprise modeling efforts are fully realized it will give decision-makers an additional tool to take a broad and accurate assessment of the enterprise and to highlight the interdependencies between various components of the enterprise so that trade-offs between costs and benefits can be analyzed. In July 2009, NNSA tasked the eight M&O contractor sites to form an enterprise modeling consortium. NNSA stated in a 2009 Enterprise Modeling Consortium Project Plan for FY 2010-2012 that the consortium is responsible for leading efforts to acquire and maintain enterprise data, enhance stakeholder confidence, integrate modeling capabilities, and fill in any gaps that are identified. Since its creation, the consortium has identified areas in which enterprise modeling projects could provide NNSA with reliable data and modeling capabilities, including infrastructure and critical skills. In addition to identifying these areas, a NNSA official told us its first steps are to build a collection of “trusted data sources” and inventory of the existing models used throughout the enterprise. Once the initial phase is complete, the official told us it will work with the sites to assess the various data collected across the enterprise, identify any data gaps, and then determine whether an existing approach can be integrated across the sites to provide NNSA with consistent and reliable enterprise data. A NNSA official told us that they are in the process of developing a plan of action for fiscal year 2011 outlining the next steps and identifying goals and milestones. As the benefits of these tools depend on the quality of the data, the official stated that a key action for fiscal year 2011 will be to determine the accuracy and reliability of data that will populate the models. NNSA faces a complex task planning, budgeting, and ensuring the execution of interconnected activities across the eight M&O contractor sites that comprise the nuclear security enterprise. Among other things, maintaining government-owned facilities that were constructed more than 50 years ago and ensuring M&O contractors are sustaining critical human capital skills that are highly technical in nature and limited in supply are difficult undertakings. Congress has long insisted that, as prerequisite to the modernization of the nuclear stockpile and supporting infrastructure, the current and past administrations develop firm nuclear weapons policy, requirements, and plans. With the completion of the congressionally- mandated Nuclear Posture Review and the Stockpile Stewardship and Management Plan, the Administration has made strides to meet congressional expectations. In doing so, it has pledged billions of dollars over the next decade to improve key stockpile stewardship capabilities, modernize and, in some cases, replace aging infrastructure, and maintain a highly skilled and specialized workforce in order to ensure the continued safety, reliability, and performance of our nuclear deterrent without returning to underground nuclear testing. For NNSA to fully meet expectations, however, it must be able to demonstrate to Congress that it can effectively manage its program so that planned budget increases are targeted to areas that will produce demonstrable returns on investments. While this task is far broader and more challenging than the scope of this report, certain data related issues are currently hindering NNSA’s enterprisewide decision-making capabilities and its ability to justify programmatic choices to Congress. These include the lack of (1) consistent, accurate, and complete data on the condition of its facilities; (2) assurance that contractors are in compliance with a DOE directive (DOE Order 430.1B) requiring facility inspections to ensure that sites’ varying approaches in determining deferred maintenance and real property values are valid and consistent; (3) information on shared use assets—although a NNSA directive (NNSA Supplemental Directive M 452.3) identifies the need for the federal and contractor officials to identify and ensure proper governance of these assets; and (4) comprehensive data on its M&O contractors’ workforce—to include identification of critical human capital skills, competencies, and staffing levels—as well as a plan with time frames and milestones for collecting this data. Continuing to make decisions without a full understanding of programmatic impact is not the most effective approach for program management or use of federal resources. We recommend the Administrator of NNSA take the following four actions. To ensure that NNSA is equipped with the information needed to effectively and efficiently manage the Stockpile Stewardship Program: Develop standardized practices for assessing the condition of its facilities and review the sites’ methodologies for determining replacement value to ensure consistency, accuracy, and completeness throughout the enterprise. Ensure contractor compliance with DOE Order 430.1B: Real Property Asset Management, which requires routine inspections of all facilities. Ensure federal and contractor compliance with NNSA Supplemental Directive NA-1 SD M 452.3: Managing the Operation of Shared NNSA Assets and Shared National Resources, which requires NNSA’s sites to identify shared assets and NNSA to review the governance plans developed for each facility. Establish a plan with time frames and milestones for the development of a comprehensive contractor workforce baseline that includes the identification of critical human capital skills, competencies, and levels needed to maintain the nation’s nuclear weapons strategy. We provided NNSA with a draft of this report for their review and comment. NNSA provided written comments, which are reproduced in appendix III. NNSA stated that it understood our recommendations and believes that it can implement them. NNSA did state, however, that it believed the report provided an incomplete picture of how the agency makes enterprisewide decisions concerning facilities and infrastructure. In response, we added additional details of NNSA’s decision making processes for facilities and infrastructure (see p. 12). Additionally, NNSA noted that its shortfall in required inspections occurs primarily in facilities that are not critical to the SSP mission. We believe that our report adequately reflects this. We also note that over 1,000 facilities identified by NNSA as not critical—such as waste management facilities and machine shops—play important supporting roles in the SSP mission and can, by NNSA’s own definition, disrupt operations if they are non-functional for more than 5 business days. Over 150 of these facilities have an inspection date outside of the required 5-year inspection period or no inspection date recorded. Finally, NNSA provided us with updated data from its FIMS database to show that additional inspections of facilities were conducted since the time of our analysis. We noted this updated data in our report, but did not independently verify the analysis NNSA conducted (see p. 11). NNSA also provided other additional technical information, which we incorporated where appropriate. NNSA’s letter also described a number of broader management initiatives that, when fully implemented, could enhance the agency’s enterprise decision making. While we are encouraged that NNSA is taking these steps, it is unclear whether the actions identified in the agency’s response would address the current shortfalls we identified in the data on infrastructure, capital improvement projects, shared use of facilities, and critical human capital skills. We continue to believe that our recommendations would provide decision makers with an increased enterprisewide knowledge that would be beneficial to understand the potential impact of programmatic decisions. If you or your staff have questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. In conducting our work, we reviewed National Nuclear Security Administration (NNSA) documents and directives, including the 2010 Nuclear Posture Review and the FY 2011 Stockpile Stewardship and Management Plan; met with Department of Energy (DOE), NNSA, and contractor officials; assessed the reliability of the data provided; and visited four of the eight enterprise sites. Specifically, to determine the condition of nuclear weapons facilities, we reviewed management and operation (M&O) contractor’s 10-year site plans for each enterprise site, and we obtained and analyzed data from DOE’s Facilities Information Management System (FIMS). DOE extracted data from FIMS in April 2010, for all facilities and other structures identified within the database as supporting NNSA’s nuclear weapon program. As a DOE directive requires inspection of facilities at least once every 5 years, we further limited our review to those facilities and other structures built prior to April 2005. Further, we limited our review to facilities and other structures identified within FIMS as being in current operational status. We worked with DOE and NNSA to ensure the data provided to us, current as of April 2010, met these criteria. Based on our analysis of this FIMS data, we determined that data needed to evaluate condition are incomplete, possibly out of date, and inconsistent across the sites. As a result, we do not believe they are sufficiently reliable for presenting current property condition. In response to our draft report, NNSA provided us with its own analysis of facility condition based on more recent FIMS data. We did not, however, independently verify the analysis, the results of which are noted on p. 11. We did not independently verify the agency’s analysis of the data. We toured a nonrandom sample of facilities at the Los Alamos and Sandia National Laboratories in New Mexico, the Pantex Plant in Texas, and the Nevada National Security Site. In selecting our site visit locations, we considered a number of factors, including the type of site (production, laboratory, or test), missions carried out at the sites, the potential for shared use facilities, and geographic location. The data we obtained from our site visits are used as examples and cannot be generalized to indicate condition throughout the nuclear security enterprise. To determine NNSA’s plans for improvements to enterprise infrastructure, NNSA identified all ongoing capital improvement projects and provided us with data for these projects. We did not independently confirm or evaluate the agency’s data. To determine the extent to which NNSA has identified shared use facilities within the enterprise and how these facilities are managed, we reviewed NNSA’s 2009 facility governance directive and met with NNSA, Los Alamos, and Sandia officials to discuss shared use facilities. We also collected and reviewed governance documents for several facilities that site officials identified to us as shared use assets. To determine NNSA’s efforts to maintain the critical human capital skills of the Stockpile Stewardship Program (SSP), we reviewed NNSA’s Development of the NNSA Critical/Capability Inventory draft report and the Report of the Commission on Maintaining United States Nuclear Weapons Expertise. In addition, we met with human capital officials at NNSA, Pantex, the Nevada National Security Site, Los Alamos, and Sandia. We also reviewed NNSA’s Fiscal Year 2010 Enterprise Modeling Consortium Project Plan to identify efforts undertaken by the agency to develop enterprisewide data and analysis tools. We conducted this performance audit from January 2010 to February 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Replace the existing 1952 CMRR facility. Estimated to be operational by 2022. Replace the existing highly enriched uranium processing capabilities. Estimated to be operational by 2022. Replace the existing facility for non-nuclear production. Construction is estimated to begin in summer 2010. Provide a base criticality experiments capability. For example, it will provide training for criticality safety professionals and fissile materials handlers. Completion estimated in second quarter fiscal year 2011. Provide a new high explosive main charge pressing facility. Completion estimated in September 2016. Refurbish air dryers; seismic bracing of gloveboxes; replace power supply, confinement doors, criticality alarms, water tank, and exhaust stack. Support handling of newly generated TRU waste. Continue operation of existing facilities until UPF is operational. Modernize existing experimental and test capabilities. Project proceeding with a low level of activity. Provide two new fire stations. Completion is expected in fiscal year 2011. Replace existing facility and provide standalone capability for use of accelerated ions. Completion is expected in April 2012. Provide the capability to maintain existing components. Completion expected in October 2010. Replace fire protection piping and install cathodic protection to prevent corrosion. Completion expected in mid fiscal year 2011. Replace cooling towers and chiller equipment at LANL’s research and development facilities. Completed June 2010. Upgrade the facility in order to comply with current codes and standards. To be determined. An NNSA official stated that the Pantex project was delayed for about a year so that a study could be conducted to determine if this capability could be outsourced. The results of the report are still in draft, but officials told us the conclusion was that the capability could not be outsourced. As a result of the delay, Pantex revised the baseline for the costs of the project and the U.S. Army Corps of Engineers are currently planning to award a construction contract in May 2011. In addition to the individual named above, Jonathan Gill, Assistant Director; David Holt; Jonathan Kucskar; Alison O'Neill, Steven Putansu; Jeremy Sebest; Rebecca Shea; and Jay Spaan made significant contributions to this report.
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The United States intends to invest about $80 billion to maintain and modernize its nuclear weapons capabilities and infrastructure over the next decade. The National Nuclear Security Administration (NNSA), a semi-autonomous agency within the Department of Energy (DOE), maintains the nation's nuclear weapons through its Stockpile Stewardship Program (SSP). NNSA uses contractors to manage and operate eight separate sites, referred to as the nuclear security enterprise, to achieve the SSP's mission. The National Defense Authorization Act for Fiscal Year 2010 directed GAO to review the SSP. This report focuses on the extent to which NNSA has the data necessary to make informed, enterprisewide decisions, particularly data on the condition of infrastructure, capital improvement projects, shared use of facilities, and critical human capital skills. GAO analyzed agency infrastructure data; reviewed agency directives and guidance; and interviewed DOE, NNSA, and contractor officials. In its FY 2011 Stockpile Stewardship and Management Plan, NNSA outlines plans for substantial investments in important nuclear weapons capabilities and physical infrastructure. However, the agency lacks important enterprisewide infrastructure and workforce data needed for informed decision-making. In response to this shortcoming, which NNSA recognizes, the agency is considering the use of computer models that integrate data from across the enterprise, which, if fully realized, may give decision-makers a tool to take a broad and accurate assessment of the situation. Specifically, (1) NNSA does not have accurate, reliable, or complete data on the condition and replacement value of its almost 3,000 weapons activities facilities. This is, in part, because NNSA has not ensured contractor compliance with a DOE directive that requires facility inspections at least once every 5 years. For example, according to data in DOE's Facilities Information Management System (FIMS), as of April 2010, 26 percent of facilities have either an inspection date outside of the 5-year period or no inspection date recorded. NNSA officials stated that they are aware of the limitations of FIMS data and told us that they use a variety of other methods to track site facility conditions, such as budget requests and daily dialogue with federal and contractor personnel at the sites. (2) NNSA has identified 15 ongoing capital improvement projects as necessary to ensure future viability of the program, but the agency does not have estimated total costs or completion dates for all projects. For example, NNSA has not estimated total costs for the largest projects it is conducting--the Chemical and Metallurgy Research Replacement Facility at Los Alamos National Laboratory in Los Alamos, New Mexico, and the Uranium Processing Facility at the Y-12 Plant in Oak Ridge, Tennessee. DOE regulations do not require a total cost estimate until the initial design phase is complete, but without reliable cost and schedule data NNSA does not have a sound basis to justify decisions and planned budget increases. (3) NNSA has identified a need to effectively manage facilities used by more than one site--known as shared use assets--and issued a directive in 2009 requiring identification of these assets and a review of the governance plan developed for each designated facility to ensure that the plans align with programmatic priorities and that users enterprisewide have well supported access to these facilities. However, NNSA has not collected data on shared use assets and has not reviewed individual management plans. (4) NNSA lacks comprehensive data on the critical skills and levels needed to maintain the SSP's capabilities. NNSA primarily relies on its contractors to maintain the workforce and, while these efforts may be effective for a specific site, NNSA lacks assurance that the overall program is maintained. Without such data, NNSA cannot forecast the impact of programmatic actions or identify consequences of those actions. NNSA officials told GAO that the agency recently established an Office of Corporate Talent and Critical Skills to bring attention to these issues. GAO recommends that NNSA take four actions to ensure that it is equipped with the information needed to effectively and efficiently manage the SSP. NNSA stated that it understood and can implement GAO's recommendations.
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DOD is one of the largest and most complex organizations in the world. In support of its military operations, the department performs an assortment of interrelated and interdependent business functions, such as logistics management, procurement, health care management, and financial management. Yet, we have previously reported that the DOD systems environment that supports these business functions is overly complex and error prone, and is characterized by (1) little standardization across the department, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, and (4) the need for data to be entered manually into multiple systems. For fiscal year 2015, the department requested about $10.038 billion for its business system investments. According to the department’s authoritative source for certification data, its environment is composed of approximately 2,329 business systems, including 228 for acquisition, 14 for defense security enterprise, 28 for enterprise IT infrastructure, 286 for financial management, 730 for human resources management, 293 for installations and environment, 702 for logistics and materiel readiness, and 8 for security cooperation. (See fig. 1.) Of these 2,329 business systems, 1,180 are covered by the act’s certification and approval requirements. DOD currently bears responsibility, in whole or in part, for 15 of the 30 programs across the federal government that we have designated as high risk. Seven of these areas are specific to the department, and eight other high-risk areas are shared with other federal agencies. Collectively, these high-risk areas relate to DOD’s major business operations that are inextricably linked to the department’s ability to perform its overall mission and directly affect the readiness and capabilities of U.S. military forces and can affect the success of a mission. In particular, the department’s nonintegrated and duplicative systems impair its ability to combat fraud, waste, and abuse. Consequently, DOD’s business systems modernization is one of the department’s specific high-risk areas and is essential for addressing many of the department’s other high-risk areas. For example, modernized business systems are integral to the department’s efforts to address its financial, supply chain, and information security management high-risk areas. Congress included provisions in the NDAA, as amended, that are aimed at ensuring DOD’s development of a well-defined BEA and associated ETP, as well as the establishment and implementation of effective investment management structures and processes. The act requires DOD to, among other things, establish an investment approval and accountability structure along with an investment review process, not obligate funds for a defense business system program with a total cost in excess of $1 million unless the approval authority certifies that the business system program meets specified conditions, develop a BEA that covers all defense business systems, develop an ETP for implementing the architecture, and identify systems information in DOD’s annual budget submissions. The act also requires that the Secretary of Defense annually submit to the congressional defense committees a report on the department’s compliance with these provisions. DOD submitted its annual report to Congress in March 2014, describing steps taken, under way, and planned to address the act’s requirements. As of April 2014, the department’s approach to modernizing its business systems environment, which is part of DOD’s overall effort to transform its business operations, included improving business systems investment management, reengineering the business processes supported by its defense business systems, and improving and using the BEA and associated ETP. These efforts are to be guided by DOD’s Chief Management Officer and Deputy Chief Management Officer (DCMO). Specifically, the Chief Management Officer’s responsibilities include developing and maintaining a department-wide strategic plan for business reform; establishing performance goals and measures for improving and evaluating overall economy, efficiency, and effectiveness; and monitoring and measuring the progress of the department. The DCMO’s responsibilities include recommending to the Chief Management Officer methodologies and measurement criteria to better synchronize, integrate, and coordinate the business operations to ensure alignment in support of the warfighting mission and developing and maintaining the department’s enterprise architecture for its business mission area. DOD has assigned roles and responsibilities to various governance entities and positions related to business systems modernization. For example, the Deputy’s Management Action Group is a senior-level forum that meets several times a month to discuss department-wide management issues, including business-related topics. This group is to convene as the Defense Business Systems Management Committee when it reviews defense business system portfolios. Under this committee, the Defense Business Council (DBC) acts as a corporate- level investment review board (IRB) by overseeing the approach and guidance for selecting and controlling the investment portfolio and making recommendations on funds certifications. Table 1 describes selected roles and responsibilities and composition of key governance entities and positions related to business systems modernization. In order to manage and oversee the department’s business operations and approximately 1,180 covered defense business systems, the Office of the DCMO developed its Integrated Business Framework. According to the Office of the DCMO, this framework is used to align the department’s strategic objectives—laid out in the National Security Strategy, Quadrennial Defense Review, and Strategic Management Plan—to its defense business system investments. Using the overarching goals of the Strategic Management Plan, principle staff assistants develop six functional strategies that cover eight functional areas. These functional strategies define business outcomes, priorities, measures, and standards for a given functional area within DOD. The functional areas are Acquisition, Defense Security Enterprise, Enterprise IT Infrastructure, Financial Management, Human Resources Management and Health Management, Installations and Environment, Logistics and Materiel Readiness, and Security Cooperation. The business objectives and compliance requirements laid out in each functional strategy are to be integrated into the BEA. The precertification authorities in the Air Force, Navy, Army, and other departmental organizations use the functional strategies to guide the development of organizational execution plans, which are to summarize each component’s business strategy for each functional area. Each plan includes a description of how the component’s goals and objectives align with those in the functional strategies and the Strategic Management Plan. In addition, each organizational execution plan includes a portfolio of defense business system investments organized by functional area. The components submit each of these portfolios of systems to the DBC for certification on an annual basis. According to DOD’s investment management guidance, the DBC reviews the organizational execution plans and associated portfolios based on four investment criteria—compliance, strategic alignment, utility, and cost—to determine whether or not to recommend the portfolio for certification of funding. The Vice Chairman of the Defense Business Systems Management Committee approves certification decisions and then documents those decisions in investment decision memoranda. These memoranda state whether an individual organizational execution plan has been certified, conditionally certified (i.e., obligation of funds has been certified and approved but may be subject to conditions that restrict the use of funds, a time line for obligation of funds, or mandatory changes to the portfolio of business systems), or not certified (i.e., certification is not approved due to misalignment with strategic direction, mission needs, or other deficiencies). The Office of the DCMO manages the day-to-day aspects of department- level business system oversight. It is currently composed of five directorates with various responsibilities related to business systems modernization. Table 2 shows the organizational components of the Office of the DCMO and key responsibilities. These responsibilities may shift as a result of planned organizational changes. More specifically, on December 4, 2013, the Secretary of Defense issued a memorandum that outlined the results of an organizational review completed by the Office of the Secretary of Defense. Among other things, the Secretary called for strengthening the office of the DOD Chief Information Officer (CIO) by moving the oversight of business systems from the DCMO to the CIO, and for strengthening the Office of the DCMO to better coordinate the department’s business affairs. According to the Director of Investment and Acquisition Management in the Office of the DCMO, final decisions about how this directive will be implemented have not yet been made. The memorandum calls for all of the changes to occur by January 2015. DOD’s BEA is intended to serve as a blueprint for the department’s business transformation efforts. In particular, the architecture is to guide and constrain implementation of interoperable defense business systems by, among other things, documenting the department’s business functions and activities; the information needed to execute its functions and activities; the business outcomes from using the BEA; and the list of business rules, laws, regulations, and policies associated with its business functions and activities. According to DOD, its architecture is being developed using an incremental approach, where each new version of the architecture addresses business mission area gaps or weaknesses based on priorities identified by the department. The department’s BEA focuses on documenting information associated with its end-to-end business process areas (e.g., hire-to-retire and procure-to-pay). The department considers its current approach to developing the BEA both a “top down” and “bottom-up” approach. Specifically, according to DOD, the architecture focuses on developing content to support investment management and strategic decision making and oversight (“top down”) while also responding to department needs associated with supporting system implementation, system integration, and software development (“bottom up”). The department’s approach to developing its BEA involves the development of a federated enterprise architecture, where member architectures (e.g., Air Force, Army, and Navy) conform to an overarching corporate or parent architecture and use a common vocabulary. This approach is to provide governance across all business systems, functions, and activities within the department and improve visibility across DOD’s efforts. Between 2005 and 2008, we reported that DOD had taken steps to comply with key requirements of the NDAA relative to architecture development, transition plan development, budgetary disclosure, and investment review, and to satisfy relevant systems modernization management guidance. However, each report also concluded that much remained to be accomplished relative to the act’s requirements and relevant guidance. We made recommendations to address each of the areas, and DOD largely agreed with our recommendations. However, in May 2009, we reported that the pace of DOD’s efforts in defining and implementing key institutional modernization management controls had slowed compared with progress made in each of the previous 4 years, leaving much to be accomplished to fully implement the act’s requirements and related guidance. In addition, between 2009 and 2012, we found that progress had been made, but long-standing challenges we had previously identified remained to be addressed. For example, the department’s budget submission for fiscal year 2013 did not include all systems because of the lack of a reliable, comprehensive inventory of all defense business systems. We concluded that DOD’s progress in addressing the act’s requirements, its vision for a federated architecture, and our related recommendations was limited, in part, by continued uncertainty surrounding the department’s governance mechanisms, such as roles and responsibilities of key organizations and senior leadership positions. Accordingly, we made recommendations to address the issues identified. DOD partially agreed with our recommendations. In 2013, we reported that DOD had continued to make improvements, particularly by taking steps to establish a portfolio-based approach to reviewing and certifying its defense business systems. However, among other things, we also found that the BEA and ETP were still missing important content and BEA and business process reengineering certifications were not validated. We made additional recommendations in these areas, and the department partially agreed with our recommendations. In addition, our most recent high-risk report noted that, while DOD’s capability and performance relative to business systems modernization had improved, significant challenges remained. For example, the department had not fully defined and established a family of management controls, such as corporate and component business architectures and business system investment management processes. These management controls are vital to ensuring that DOD can effectively and efficiently manage an undertaking with the size, complexity, and significance of its business systems modernization, and minimize the associated risks. Furthermore, we also recently reported that, in order to better identify and address potential duplication, DOD needed to develop supporting component architectures, align them with its corporate architecture to complete the federated BEA, and leverage its federated architecture to avoid investments that provide similar, but duplicative, functionality in support of common DOD activities. DOD has made progress in addressing the provisions of the NDAA and recommendations that we have made in recent years. Specifically, the department issued its March 2014 Congressional Report on Defense Business Operations, which describes updates and next steps for its investment review process; improved the data used to manage its business systems certification and approval process; issued an updated ETP in December 2013; and issued its fiscal year 2015 funding request for defense business systems. However, the department still faces challenges in complying with key parts of the act and managing its business systems. For example, the department needs to further refine its approach for reviewing system certifications so that the reviews occur at an appropriate level based on factors such as cost and complexity. Without continued progress in improving its investment management approach, DOD will be challenged in its ability to manage the billions of dollars invested annually in modernizing its business system investments. The act, as amended by the NDAA for Fiscal Year 2012, included significant changes to the requirements for investment review and certification of defense business systems. Specifically, it required DOD to establish a department-wide IRB, chaired by the DCMO, and an investment management process. The act also called for the use of threshold criteria to ensure an appropriate level of review within the department of, and accountability for, defense business system programs depending on scope, complexity, and cost. In addition, IT investment management best practices describe key practices for instituting an IRB, including (1) grouping investments into portfolios, (2) coordinating the investment management process with other internal management controls, and (3) ensuring that systems receive an appropriate level of review by developing tiered review boards. Since we reported in May 2013, DOD has continued its efforts to establish the IRB and further define and implement its defense business system governance framework—called the Integrated Business Framework—as discussed earlier in this report. This framework is used to manage the department’s business operations and investments, and includes six portfolios that align to functional areas. Of the three key practices for establishing an IRB described above, DOD’s Integrated Business Framework fully addresses one practice, partially addresses one practice, and does not address one practice (see table 3). Officials from the Office of the DCMO provided several reasons why two of the key practices for instituting an IRB were not fully addressed. With respect to aligning the Integrated Business Framework with the budget process, officials stated that specific plans take time and coordination to develop and implement. These officials noted that these efforts are affected by the ongoing shift of responsibilities for business systems from the Office of the DCMO to the DOD CIO. Notwithstanding the uncertainty associated with this transition, until the department takes further steps to align its business system investment review and budgeting processes, it risks allocating resources to business system investments that might be used more efficiently or effectively elsewhere across the department. In addition, aligning the business system investment management process with the budget process would improve the ability of components to guide their investments from a strategic perspective and reduce pressure on the DBC to approve the obligation of funds that have already been budgeted for a given system. Regarding the development of multiple review boards, officials from the Office of the DCMO said that the DBC guidance does not call for developing IRBs at multiple levels within the department because it is important for the DBC to certify and approve all covered business systems, and not just those that are more costly. These officials added that some systems may be important for the business environment regardless of their relatively small dollar value. In addition, these officials stated that the Integrated Business Framework calls for reviewing systems as part of system portfolios, not as individual systems. We agree that the DBC should certify and approve all systems as called for by the act, that it may want to occasionally focus greater attention on smaller systems, and that the department should review systems as part of larger system portfolios. However, by not using a tiered review board approach, the department may hamper the quality of the information submitted and the associated reviews. This is evidenced by the results of the Office of the DCMO’s validations of certifications discussed later in this report. Systems— including systems submitted as part of portfolios—that are larger in scope, complexity, cost, or risk may benefit from additional scrutiny by the DBC, while those that are less complex or lower cost could be reviewed at the component level. Our IT investment management guidance notes that enterprise-wide IT investment boards should be responsible for systems that have high cost, high risk, or significant scope or duration, while retaining responsibility and visibility into other system review activities. However, lower-level boards could be chartered within business units to oversee the investment management process for other systems that are smaller or less costly, risky, or complex. While officials from the Office of the DCMO stated that different systems are reviewed with different levels of scrutiny based on various factors, those factors are not documented in existing guidance. Until DOD ensures that investments are reviewed at an appropriate level based on defined criteria, the DBC is at an increased risk of failing to identify and address important issues associated with large-scale and costly systems. The NDAA requires that, prior to obligating funds, DOD certify that investments meet certain conditions set out in the act. For fiscal year 2014, the department certified and approved most of its business systems investments. In addition, it has made significant improvements to the data used to manage information about these investments. However, while DOD continued to assert the compliance of its investments with the department’s BEA and business process reengineering, the quality of the reviews supporting these assertions can be improved. According to DOD’s March 2014 Congressional Report on Defense Business Operations, the DBC reviewed certification requests totaling $6.996 billion for 1,180 defense business systems across eight functional areas. Of those requests, according to the March report, the council approved $6.379 billion for 1,173 defense business systems and did not approve $617 million associated with 40 business systems (see table 4). These certifications included about $563 million in funds for fiscal year 2014 that the DBC conditionally certified (i.e., certified on the condition that additional steps were taken). According to DOD’s March 2014 report, the primary reason that systems were denied certification or conditionally certified was that they were lacking a problem statement (or “business need”). The following are examples of systems that were denied certification or were conditionally certified in fiscal year 2014: The Defense Logistics Agency’s Standard Procurement System requested—but was denied—$3.6 million in development funds because a problem statement had not been submitted. As of March 2014, no problem statement had been submitted, and the item remained open. The Defense Health Agency’s Armed Forces Health Longitudinal Technology Application requested—and was conditionally approved for—about $133.1 million for fiscal year 2014, with the condition that the component submit a problem statement. As of April 2014, the problem statement had been submitted and approved. The Defense Logistics Agency’s Defense Retired and Annuitant Pay System 2 requested a total of $12.6 million, but was only approved for $2.2 million, with the condition that, among other things, the component submit an updated cost estimate. As of March 2014, the cost estimate had been submitted to the Office of the DCMO, but had not yet been approved. Our IT investment management framework states that to make good IT investment decisions, an organization must be able to acquire pertinent information about each investment and store that information in a retrievable format, to be used in future investment decisions. As part of this process, an organization should identify its IT assets and create a comprehensive repository of investment information. The information in the repository should identify each IT investment and its associated components and should be accessible where it is of the most value to those making decisions about IT investments. DOD’s ability to address the act’s certification and approval requirements depends in large part on its ability to capture and use data about business systems and the department’s business system environment. To that end, DOD maintains three key data sources or data repositories and requires in its investment management guidance that components include updated data within each source. Table 5 provides additional information about each data source. Since our May 2013 report, DOD has demonstrated important improvements to the data it uses to manage its business systems. In May 2013, we reported that we were unable to verify the number of certifications that occurred during the fiscal year 2013 certification and approval process. At the time, DOD officials noted that certain data fields in the original data sources were incomplete, incorrect, or duplicative when certification requests were submitted. They also stated that extensive manual cleanup efforts had been ongoing since the beginning of the investment review process. Since then, the department has established and used its DITIP system, which it developed in part as a response to our recommendations associated with improving data about business system investments. DITIP contains information on certification decisions, including the amounts requested for certification and subsequently certified (or not certified). According to officials from the Office of the DCMO and DOD business system investment review guidance, fiscal year 2014 certification requests and approval decisions were all entered and maintained directly in this system. As a result, information about investment certification requests and approval decisions was consistently documented. While this new approach has allowed DOD to improve certain information about its business system certification and approvals, other information needs continued improvement. Specifically, we have previously reported that information about investment certifications and approvals was not always reliable, and we have made recommendations aimed at improving the department’s data about its business systems. For example, according to officials from the Office of the DCMO, the numbers of business systems reflected by DITIP and DITPR are not always consistent. These officials stated that data issues persist in DITPR due to the amount of data stored by the systems as well as the tight time frames associated with implementing improvements. DOD intends to make further updates to DITPR, including an update in the fourth quarter of fiscal year 2014, which will include a data validation process intended to align and reconcile the data common to DITPR and SNAP-IT via DITIP. Under the act, funds may not be obligated for covered business systems unless the precertification authority asserts that, among other things, the system is in compliance with the BEA and has undertaken appropriate business process reengineering efforts. For fiscal year 2014 certification reviews, investments were to follow the Office of the DCMO’s March 2013 BEA compliance guidance and September 2012 guidance on business process reengineering. The BEA guidance describes an incremental approach to BEA compliance requirements, including key elements needed for asserting architecture compliance. The business process reengineering guidance calls for specific levels of business process reengineering for systems in different stages of development. For example, prior to investing in development and modernization funds for a defense business system, the components are required to submit a problem statement to document and validate the system’s business need. DOD’s guidance required submission of a form that includes questions in areas related to various aspects of business process reengineering, such as change management and target process improvements. For fiscal year 2014, DOD officials reported that 89 percent (1,053 of 1,180 systems) of defense business systems asserted compliance with the BEA. Of the 44 systems that asserted non-compliance, 35 were within one component of DOD—the Defense Finance and Accounting Service. According to DOD officials, this component now has plans to comply with BEA requirements and plans to update its assertions. DOD’s business system investment review guidance calls for the department to validate selected business system BEA assessments that support the component’s assertions of compliance. We have previously reported on the need to improve the quality of BEA compliance assertions, and in 2013 we recommended that DOD implement and use the BEA compliance assessments more effectively to support organizational transformation efforts by, among other things, establishing milestones by which selected validations of BEA compliance assertions are to be completed. DOD partially agreed with this recommendation. DOD selected 15 defense business systems for review, as called for in its guidance. DCMO officials stated that of the 15 selected, all had asserted that they complied with version 10.0 of the BEA. However, DCMO officials found that 13 of the 15 selected had issues with their BEA compliance assertions. Specifically, DCMO officials stated that they found that 9 of the 13 had inconsistencies in the organizational execution plan or had significantly incomplete compliance assertions in DOD’s BEA Compliance System, and 4 of the 15 were assessed as having other opportunities for improvements. According to DOD officials, some of these concerns were addressed prior to system certification. They further stated that no systems were denied funding certification due to incomplete BEA compliance assertions because the Office of the DCMO worked with the components to address the issues to the satisfaction of the DBC prior to certification. Where additional action was needed, action items were created and DCMO is tracking the progress of these systems’ efforts to become compliant. The Office of the DCMO’s validations of selected assessments are important for helping to ensure that BEA assessments are accurate. However, as demonstrated by these results, DOD needs to continue working to ensure the quality of BEA assessments, as we have previously recommended. Continued improvement in the BEA assessments will help ensure that programs are being defined and implemented in a way that facilitates interoperability and avoids duplication and overlap, which are both goals of the BEA and the related investment management approach. According to DOD officials, in fiscal year 2014, nearly 100 percent of certified and approved defense business systems asserted that business process reengineering had been completed. Further, the Office of the DCMO also validated a sample of assessments associated with these systems. According to DOD’s March 2014 report, this validation effort showed that assertions were incomplete. Specifically, the DCMO selected 12 investments for validation, and the results of this effort were as follows: Four systems received a “positive” rating, indicating that appropriate business process reengineering was conducted. Four systems received a “positive with recommendations” rating, indicating that sufficient business process reengineering was conducted but more could be done to improve the effort. DOD recommended that the precertification authorities for these systems ensure that appropriate business process reengineering compliance is again assessed at the next milestone. For example, one system, the Learning Management System, received a recommendation to consider creating expected business outcomes, such as providing career roadmaps to guide financial management employees in planning and progressing in a DOD career. Further, another system, the Next Generation Resource Management System did not provide evidence of a change management plan, or documentation of the resolution of the root causes identified in its “to-be” process models. Four systems received a “could not validate” rating, indicating that the business process reengineering assessment team was not able to determine that a sufficient business process reengineering assessment had been conducted. In these cases, DOD recommended that the precertification authority ensure business process reengineering assessment compliance is assessed at the next acquisition milestone. For example, according to DOD officials, the systems could not be validated because insufficient objective evidence had been provided to substantiate their business process reengineering assertions. According to the Office of the DCMO, three of these four systems were in operations and maintenance, and it is not often cost-effective to conduct business process reengineering compliance reviews on investments in operations and maintenance. The need for improvement demonstrated by some of DCMO’s selected validations is consistent with our previous findings. Specifically, in May 2013 we reported on business process reengineering assertions of four case study systems. All four assertions generally followed DOD’s business process reengineering guidance; however, we also found that limited documentation of root cause analyses was provided for all four. We have previously made recommendations to improve DOD’s business process reengineering-related efforts, including recommendations aimed at the four systems we assessed in 2013. The Office of the DCMO’s validations of selected systems’ business process reengineering assessments are important for helping to ensure that sufficient business process reengineering is conducted. However, without further validation of the business process reengineering assertions—as we have previously recommended—DOD is at risk of not being able to accurately determine whether appropriate business process reengineering has been undertaken, including ensuring that the business processes supported by defense business systems have been streamlined and have eliminated or reduced unique requirements to the maximum practical extent. The act requires DOD to develop a BEA that covers all defense business systems and their related functions and activities and includes key information. For example, the act requires the BEA to include specific information about data standards, policies and procedures, and performance measures. In addition, the department seeks to use the BEA to help guide, constrain, and enable interoperable business systems. Moreover, we have previously emphasized that the BEA can be an important tool for reducing potential overlap and duplication among DOD business systems. As we reported in May 2013, the current version of the BEA—Version 10.0— includes information aimed at meeting the act’s requirements, such as data standards; business rules to help ensure compliance with the laws, regulations, and policies incorporated in the BEA; and performance measures associated with the department’s Strategic Management Plan. However, as of April 2014, this version was still missing other important content associated with achieving the department’s goal of using the BEA to guide, constrain, and enable interoperable business systems. For example, the BEA was missing information about business systems associated with each of the architecture’s business activities, and its business activities have not been defined at a level that allows for more effective identification of potential duplication and overlap. Adding such content is important for various reasons, including improving the department’s ability to use the architecture as a tool for managing its business systems investments by more effectively identifying areas of potential duplication and overlap. In addition, DOD has not yet demonstrated that the BEA has produced business value for the department. According to the Director of Investment Acquisition and Management and the Chief Architect, previous versions of the BEA were designed to meet the requirements of the act, but were not clearly focused on achieving business outcomes. However, the act defines specific business outcomes that the BEA is intended to support, such as integrating budget, accounting, and program information and systems, and the department has defined additional BEA goals, such as using the BEA to guide, constrain, and enable interoperable business systems. These officials stated that in the future they plan to use the BEA as a tool to better support interoperability, data sharing, and reducing duplication. To help achieve this goal, according to officials from the Office of the DCMO, DOD has established a process for defining changes to the BEA that are intended to better support the department’s ability to achieve business outcomes, and they first used this process for defining updates to BEA 10.0. More specifically, the Office of the DCMO established a BEA configuration control board— composed of representatives from the military departments and other departmental offices—to make recommendations to the DBC on BEA requirements and related content changes. Such a process may help the department as it refines the architecture and seeks to achieve business outcomes. Further, while DOD has established a tool that can assist in identifying potential duplication and overlap among business systems even with the current gaps in BEA content, the department has not demonstrated that it has used this information to reduce duplication and overlap. The April 2013 investment management guidance and a January 2013 memorandum issued by the DCMO established a single BEA compliance tool—the BEA Compliance System—to document system-level BEA compliance assertions and required all business systems submitted for certification and approval for fiscal year 2014 to use this tool. Officials from the Office of the DCMO stated that the results of BEA compliance assessments conducted as part of the business system certification and review process are available to staff across DOD to review in making determinations about potential overlap and duplication. For example, information provided by the department showed that, as of February 2014, 120 systems performed activities associated with maintaining asset information, 110 systems performed activities associated with managing military health services, and 73 systems performed activities associated with receiving and accepting a purchase request. Officials from the Army and the Air Force stated that in fiscal year 2014 they have begun to identify systems using BEA data that were potentially duplicative. According to these officials, both the Army and the Air Force have taken initial steps to phase out potentially duplicative systems. However, the department has yet to demonstrate that it has terminated these or other potentially duplicative programs that were identified by using the BEA. Officials from the Office of the DCMO offered several reasons why the BEA compliance process has yet to result in the elimination of potentially duplicative systems. For example, officials stated that it is difficult for the DBC to make such determinations because information presented to the council is high level and only points to potential instances of overlap and duplication, which would require additional research. Instead, these officials said, precertification authorities at the component level are in the best position to determine whether their systems are duplicative of other systems. However, these precertification authorities are not required to identify and assess potential overlap and duplication before asserting compliance with the BEA. In addition, the BEA continues to lack important content, such as additional information about business activities, that would further assist in identifying potential duplication and overlap among business systems. Continued improvements to DOD’s BEA—as we have previously recommended—and calling for more proactive identification of potential overlap and duplication using information available in existing tools can help the department use its BEA to identify and address potential overlap and duplication among its billions of dollars in annual defense business system investments. The act calls for the development of an ETP that implements the BEA and covers all defense business systems and includes a listing of the (1) new systems that are expected to be needed to complete the target defense business systems computing environment, along with each system’s performance measures, financial resource needs, and risks or challenges to integration into the BEA; (2) legacy systems that will be phased out of the defense business systems computing environment within 3 years, together with the schedule for terminating those legacy systems; and (3) existing systems that are part of the target defense business systems computing environment, as well as a strategy for making the modifications to those systems that will be needed to ensure that such systems comply with the defense BEA, including time-phased milestones, performance measures, and financial resource needs. The department’s fiscal year 2014 ETP, which was issued in December 2013 and uses data as of October 1, 2013, includes information about 1,179 covered defense business systems, including 79 legacy systems, or those that will be terminated within 36 months. The ETP also includes links to related documentation, including the functional strategies, organizational execution plans, and investment decision memoranda. DOD has taken steps to improve its ETP by including key content, but has not included other information, as described below. Milestones: The plan includes acquisition milestone information for covered defense business systems (both legacy and core) through its links to other systems, such as the Defense Acquisition Management Information Retrieval system, DITIP, DITPR, and Office of Management and Budget exhibit 300s. Specifically, according to DOD’s April 2013 investment management guidance, system owners are required to include start and end dates for life-cycle phases of each system within DITPR. Performance measures: The plan includes portfolio-level performance measures in the organizational execution plans. For example, the Air Force Human Resources Management organizational execution plan includes performance measures associated with improving the accuracy and timeliness of pay for airmen. However, these measures are not linked to specific business systems. Financial resource needs: The plan includes information about fiscal year 2014 funding that was requested and ultimately approved under the department’s business system investment review process for each business system (both legacy and core). Risks or challenges for BEA integration: The plan and related documentation do not discuss each system’s risks or challenges to integration into the BEA. Instead, the organizational execution plans include portfolio-level risks and challenges, with only some related to the BEA. For example, the Air Force Defense Security Enterprise organizational execution plan identifies a challenge that the BEA and business process reengineering process do not fit well with the initiatives in this specific portfolio, and that many BEA and business process reengineering compliance requirements are not applicable. Termination dates: The ETP data also includes termination dates for all 79 of the covered legacy systems and a listing of both new and existing systems that will be part of the target defense business systems computing environment. Defining when and how the ETP will include the missing information—as we have previously recommended—will help to ensure that DOD more fully complies with the requirements of the act and help to inform oversight of its business systems investments. Another requirement of the NDAA for Fiscal Year 2005, as amended, is that DOD’s annual IT budget submission must include key information on each business system for which funding is being requested, such as the system’s precertification authority and designated senior official, the appropriation type and amount of funds associated with modernization and current services (i.e., operation and maintenance), and the associated Defense Business Systems Management Committee approval decisions. The department’s fiscal year 2015 budget submission includes a range of information for business system investments requesting funding, such as the system’s (1) name, (2) precertification authority, (3) designated senior official, (4) approved funding for fiscal year 2014, and (5) requested funding for fiscal year 2015. The submission also identifies the amount of the fiscal year 2015 request that is for modernization versus current services. DOD has made important progress developing a framework to manage the department’s business systems and more fully comply with the act, yet additional and sustained efforts are necessary to fully achieve the department’s modernization goals. Specifically: The Office of the DCMO developed a portfolio-based investment management framework—the Integrated Business Framework. However, establishing specific plans for aligning the budgeting and investment management processes would help ensure that systems included in the budget also meet the department’s mission needs and requirements, and may result in less money being budgeted for systems that are duplicative or do not meet the needs of the department. In addition, allowing less complex, costly, and risky systems to be reviewed at the component level will give the DBC more time to review more complex, costly, and risky systems. The department also released a new system that should help to address data reliability issues and certified most systems as meeting the BEA and business process reengineering requirements. Implementing our prior recommendations in this area will help DOD improve the certification process. The Office of the DCMO has taken steps to improve its ETP by including most of the key content required by the act. Fully implementing our prior recommendations will help to further inform oversight of the department’s business systems investments. The department formed a configuration control board for the BEA to help manage future changes, which should provide decision makers with better information on which to base their certification and approval decisions. However, a more proactive use of the BEA—by requiring precertification authorities to ensure that their systems do not duplicate existing systems—will save time, money, and resources by not investing in redundant systems. Accordingly, further refinements to DOD’s business system investment management process and more proactive use of the BEA to inform decisions would assist the department in leveraging its limited resources to more efficiently and effectively manage its business systems. We are recommending that the Secretary of Defense direct the appropriate DOD management entity to take the following three actions to help ensure that the department’s business systems modernization program is fully compliant with the act and is more effectively implemented: Define by when and how the department plans to align its business system certification and approval process with its Planning, Programming, Budgeting, and Execution process. Define criteria for reviewing defense business systems at an appropriate level in the department based on factors such as complexity, scope, cost, and risk, in support of the certification and approval process. Develop guidance requiring military departments and other defense organizations to use existing BEA content to more proactively identify potential duplication and overlap. We received written comments on a draft of this report from DOD, reprinted in appendix II. In its comments, the department concurred with two recommendations and partially concurred with one recommendation. DOD concurred with our first recommendation, to define by when and how the department plans to align its business system certification and approval process with its Planning, Programming, Budgeting, and Execution process, and noted that further alignment of these processes will continue in fiscal year 2015. The department partially concurred with our second recommendation, to define criteria for reviewing defense business systems at an appropriate level in the department, in support of the certification and approval process. In particular, DOD stated that it will continue to mature a process that incorporates a variety of factors, including business process complexity, risk, and portfolio costs. However, the department also stated that our recommendation implies that it has not ensured that reviews occur at an appropriate level. DOD noted that pre-certification authorities are required to review the entire portfolio of investments before they are presented to the DBC. The department added that these reviews enable decision making, to include resourcing decisions at an organizational level, which allows the DBC to focus on enterprise-level business issues facing DOD. DOD also stated that, for fiscal year 2015, pre-certification authorities will report the results of their review to the DBC, rather than simply presenting their portfolio for certification. We acknowledge that DOD’s guidance calls for reviews of investment portfolios at multiple organizational levels, and our recommendation is not intended to imply otherwise. Rather, its intent is to help ensure that DOD establishes guidance and criteria for ensuring that detailed reviews of individual systems occur at the appropriate levels within the department. As described in this report, such an approach may involve establishing investment review boards at multiple organizational levels. Such a tiered review board approach would allow the DBC—acting at the executive- level IRB for the department—to focus its attention on more costly, complex, or risky systems, while delegating detailed reviews of other systems to lower organizational levels. By not using such an approach, the department may not be able to ensure that the quality of the information submitted for review is sufficient, and the associated investment reviews may not be adequate for identifying and addressing important issues associated with large-scale and costly systems. This is evidenced by the results of the Office of the DCMO’s validations of BEA and business process reengineering certifications discussed in this report. While DOD’s planned actions reflect continued improvement in the department’s oversight of defense business systems, these actions do not fully address the recommendation. Accordingly, we believe that full implementation of our recommendation is needed. Finally, the department concurred with our recommendation to develop guidance requiring military departments and other defense organizations to use existing BEA content to more proactively identify potential duplication and overlap. DOD added that the department plans to improve its investment review process in fiscal year 2015 with a method that uses BEA data to identify candidate systems for further review and, if appropriate, retirement. We are sending copies of this report to the appropriate congressional committees; the Director, Office of Management and Budget; the Secretary of Defense; and other interested parties. This report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions on matters discussed in this report, please contact me at (202) 512-4456 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 assess the actions taken by the Department of Defense (DOD) to comply with section 332 of the National Defense Authorization Act for Fiscal Year 2005 as amended. The specific elements we assessed were (1) establishing a system investment approval and accountability structure along with an investment review process, (2) certifying and approving any business system program costing in excess of $1 million, (3) developing a business enterprise architecture (BEA) to cover all defense business systems, (4) developing a transition plan for implementing the architecture, and (5) identifying systems information in its annual budget submission. To address the act’s provision for establishing an investment approval and accountability review structure, along with an investment review process, we reviewed the department’s current policies, procedures, and guidance relative to the act’s requirements and criteria documented in our information technology (IT) investment management framework. Specifically, to determine whether the foundation for DOD’s new investment management process had been fully established, we reviewed and analyzed the department’s investment management guidance— published in April 2013—and the six functional strategies prepared for the fiscal year 2014 certification process. We also reviewed DOD documentation on future plans, including a draft version of its updated investment management guidance and the March 2014 Congressional Report on Defense Business Operations. We reviewed and analyzed DOD’s investment management guidance to determine whether criteria and procedures had been fully defined for making portfolio-based investment decisions and the extent to which they aligned to our IT investment management framework. Further we reviewed prior GAO reports, DOD business system investment management guidance, and DOD budget process policy to determine how the budget process aligned with the business system investment review process. Finally, we interviewed cognizant officials in the Office of the Deputy Chief Management Officer (DCMO) to gain a better understanding of the investment management process, its outputs, and planned improvements for fiscal year 2015 defense business system certifications. To determine whether the department was certifying and approving business system programs costing in excess of $1 million in accordance with the act’s provisions, we reviewed DOD’s March 2014 Congressional Report on Defense Business Operations, and all functional strategies and organizational execution plans, as well as their precertification request memoranda, which were submitted as part of the fiscal year 2014 investment review process. We also reviewed investment decision memoranda that documented the decisions made by the Defense Business Council. To determine whether DOD had made progress in improving the data used to manage its business system investments, we reviewed data from the department’s three authoritative data sources—the Defense Information Technology Investment Portal (DITIP), the Defense Information Technology Portfolio Repository (DITPR), and the Select and Native Programming Data Input System for Information Technology (SNAP-IT). We compared our results with the information reported in DOD’s annual report to Congress to identify any discrepancies and discussed these with cognizant officials from the Office of the DCMO. Because DOD uses one system—DITIP—as the authoritative source for information about defense business system certification and approvals, we determined that the data were sufficiently reliable for our purposes. As part of our evaluation under the certification requirement, we also identified the processes associated with asserting BEA and business process reengineering compliance for covered defense business systems and the documentation used to support those assertions. To accomplish this, we reviewed DOD guidance and related documentation that applied to the fiscal year 2014 investment portfolio reviews and relevant updates to that guidance issued during our audit. Further, we reviewed action items, the status of those actions, selected business process reengineering and BEA assertions, and data from DOD’s BEA compliance assertion system— the BEA Compliance System— to understand the extent to which defense business systems asserted compliance with BEA requirements. In addition, we interviewed officials from the Office of the DCMO about steps completed, under way, or planned relative to BEA and business process reengineering compliance and validation activities. We also reviewed DOD’s annual report to Congress to determine if business process reengineering outcomes had been reported. To address the provision associated with developing the BEA, we reviewed our previous findings associated with version 10.0 of the BEA, released in February 2013, relative to the act’s architectural requirements. We also identified recommendations from previous GAO reports related to the act and measuring results and outcomes, and gathered documentation to support the current status of those recommendations. Specifically, we reviewed documentation related to steps completed, under way, or planned to address the act’s requirements and previously reported weaknesses, including slides presented to the Defense Business Council regarding BEA requirements criteria and updates, and the March 2014 Congressional Report on Defense Business Operations. In addition, we reviewed documentation related to efforts to achieve business value from the BEA, including meeting minutes and charters from the BEA configuration control board and sub-groups under that forum. To determine whether it is used to identify and reduce potential overlap and duplication, we reviewed data in DOD’s BEA Compliance System to determine how systems are mapping to the department’s business functions, and reviewed DOD’s guidance on BEA compliance. Finally, we interviewed officials from the Office of the DCMO about planned updates and improvements to the BEA’s content, and reasons that it has not yet been used to identify duplication and overlap. To address the provision associated with developing a transition plan, we analyzed DOD’s enterprise transition plan, released in December 2013, and associated guidance in DOD’s April 2013 investment management guidance, relative to the act’s transition plan requirements and related findings documented in previous GAO reports. Specifically, we reviewed enterprise transition plan documentation, including functional strategies, organizational execution plans, Office of Management and Budget exhibit 300s, and data from the DITIP and DITPR systems, to identify whether that documentation met the requirements of the act. We also interviewed officials from the Office of the DCMO to determine the steps completed, under way, or planned to address the act’s requirements and previously reported weaknesses. To assess the system information in DOD’s fiscal year 2015 information technology budget submission, we analyzed information contained in the department’s fiscal year 2015 budget request, including the department’s Section 332 Report and information contained in the systems that are used to prepare its budget submission—SNAP-IT, DITPR, and DITIP— against the act’s requirements in this area. We also interviewed officials from the Office of the DCMO and the Office of the Chief Information Officer to discuss the accuracy and comprehensiveness of information contained in the systems, and reasons for any discrepancies in the information they contained. We conducted this performance audit from October 2013 to May 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 objective. In addition to the contact above, individuals making contributions to this report include Michael Holland (Assistant Director), Camille Chaires, Debra Conner, Kate Feild, Angel Ip, Anh Le, Lee McCracken, and Christine San.
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GAO designated DOD's multibillion-dollar business systems modernization program as high risk in 1995, and since then has provided a series of recommendations aimed at strengthening DOD's institutional approach to modernizing its business systems investments. Section 332 of the Fiscal Year 2005 NDAA requires the department to take specific actions relative to its modernization efforts and GAO to assess actions taken by DOD to comply with section 332 of the act. In evaluating DOD's compliance, GAO analyzed, among other things, investment management policies and procedures, certification actions for business system investments, and the latest versions of the department's business enterprise architecture and enterprise transition plan. The Department of Defense (DOD) has developed a portfolio-based investment management process for its defense business systems, certified and approved a majority of its defense business systems, made key improvements to the data used to manage its business investments, and updated its transition plan to assist its efforts in complying with key provisions of section 332 of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 (NDAA or “the act”), as amended (10 U.S.C. § 2222). However, the department continues to face challenges in fully complying with the act's requirements, modernizing its business systems environment, and addressing GAO's prior recommendations (see table). Department officials cited various reasons for the shortfalls noted above. For example, they stated that aligning the investment review process with the budgeting process takes time to coordinate. They also noted that different systems are reviewed with different levels of scrutiny based on various factors, but those factors are not documented in existing guidance. Continued progress in improving its investment management approach will allow DOD to more effectively manage the billions of dollars the department invests annually in modernizing its business systems. GAO is making three recommendations to help improve the department's business system investment management process and business enterprise architecture. DOD concurred with two recommendations and partially concurred with the third—to define criteria for reviewing business systems at appropriate levels in the department. In particular, DOD noted that systems are reviewed within components before being reviewed by the executive-level investment review board. However, until DOD ensures that investments are reviewed at an appropriate level based on defined criteria such as cost, scope, complexity, and risk, the department is at an increased risk of failing to identify and address important issues associated with large-scale and costly systems.
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Coal is an important domestic energy source, and BLM is responsible for managing coal resources on about 570 million acres of federal, state, and private land. Since 1990, all federal coal leasing has taken place through a lease-by-application process where companies propose lease tracts to be put up for sale by BLM. In fiscal year 2012, about 1.05 billion tons of coal was produced in the United States, including production from federal coal leases, and the biggest coal production area for federal coal was the Powder River Basin in northeast Wyoming and southeast Montana. Coal is also an important fuel source worldwide and consumption of coal continues to increase. To meet this growing demand, there has been an increase in global trade of coal, including exports from the United States. The Federal Coal Leasing Amendments Act (FCLAA) of 1976 amended the Mineral Leasing Act of 1920 to generally require that all federal coal leases be offered competitively. Competitive leasing provides an opportunity for any interested party to competitively bid for a federal coal lease. There are two procedures that can be used for competitive leasing: (1) regional leasing, where the Secretary of the Interior selects tracts within a region for competitive sale based on, among other things, expected demand for coal resources and potential economic impacts and (2) lease-by-application, where companies submit an application to nominate lease tracts that they are interested in leasing. Under both of these methods, BLM examines the potential environmental impact that could result from coal leasing. In April 1982, the first regional coal lease sale was held for 13 lease tracts containing 1.6 billion tons of coal located in the Powder River Basin in Montana and Wyoming, and a follow-up sale was held in October 1982 for 2 lease tracts. Controversy surrounded the 1982 sale. Specifically, there were allegations that confidential appraisal information was disclosed to coal companies prior to the lease sale and that appraisal and sale procedures failed to assure that the public received fair market value for the leased coal tracts. These allegations led to an investigation by the House Appropriations Committee and a report that we issued in May 1983. Later that year, Congress directed the Secretary of the Interior to establish a commission to review the coal leasing procedures to ensure the receipt of fair market value, known as the Commission on Fair Market Value Policy for Federal Coal Leasing or the Linowes Commission. Congress imposed a moratorium on lease sales until after the commission’s final report was issued in 1984. Among its key findings on the fair market value process, the Linowes Commission found that Interior used appraisal methods that were widely accepted by industry and government, but that Interior needed to, among other things, enhance its capacity to perform appraisals and seek independent reviews of its appraisals and, more broadly, of the federal coal leasing program. From March 1984 through February 1987, coal leases were subject to another moratorium to enable development and implementation of revised coal leasing procedures based on the commission’s recommendations. Two other coal regions were decertified in 1981 and 1982. mines or new mines could begin operations. Under the lease-by- application process, companies may submit applications to BLM state offices to nominate lease tracts to be put up for sale.the regional leasing process where Interior would decide which lease tracts would be put up for sale. Tracts nominated under the lease-by-application process, commonly referred to as maintenance tracts, are generally adjacent to existing mining operations and are nominated by companies that own these operations. The BLM state office where the tract is located will review the application to determine whether it is consistent with applicable regulations, or if leasing the proposed property would be contrary to the public interest. For example, a lease application may be rejected if BLM determines that the land is unsuitable for coal mining or if a qualified During this review surface owner does not consent to surface mining. process, BLM may also choose to redraw the lease tract boundaries in the public interest, a process known as tract modification. Reasons for tract modification include ensuring that economically recoverable coal adjacent to the original lease tract not be bypassed, or enticing another mining company to bid on a lease tract by making the boundaries of the proposed tract adjacent to more than one potential bidder, according to BLM officials. Once BLM accepts an application, it will begin either an environmental assessment or an environmental impact statement in accordance with the National Environmental Policy Act (NEPA). In preparing for a lease sale, BLM will also develop a presale estimate of fair market value of the lease tract’s coal, which is generally expressed in cents per ton of coal that is recoverable from the lease tract. “Recoverable” refers to an estimate of the amount of coal that can be commercially mined from the tract and excludes coal that is not mined, such as top and bottom sections of a coal seam, which are typically There are also instances when fair mixed with less valuable rock.market value is expressed on a per acre basis. The presale estimate of fair market value is generally documented in an appraisal report prepared by the BLM state office overseeing the lease sale. Other reports, such as geologic, engineering, and economic reports, may also be prepared during the appraisal process by either the relevant BLM state office or an associated BLM district or field office in the state. The geologic report contains a legal description of the tract, along with an estimate of the amount of coal that can be recovered on the lease tract along with the characteristics of the coal, including its heating content. An engineering report generally contains a mining plan, along with estimates of the costs to extract the coal based on the number of employees and capital equipment necessary to carry out this plan, among other costs. An economic report provides information on future coal market conditions, including price and demand levels for the lease tract’s coal. Prior to a lease sale, BLM is required to publicly announce in the Federal Register and a local newspaper when and where a lease sale will be held and the bidding procedures. Any company is free to bid on the lease using a sealed bid process. The amount that a company will pay to lease the tract—known as a bonus bid—is a function of the cents per ton they are willing to pay multiplied by the estimated recoverable tons of coal from a lease tract. These bonus bids are then reviewed by a BLM sales panel, which includes officials from the relevant BLM state office and BLM headquarters. Bids are accepted or rejected based on whether they meet the estimate of fair market value, and the lease is awarded to the highest qualified bidder that meets or exceeds this estimate of fair market value.This successful bidder must either pay the total bonus bid in full at the time of lease sale or pay 20 percent of the bonus bid at the lease sale followed by four equal payments on the first four anniversary dates of the lease. The minimum bid that BLM can accept for a lease tract is $100/acre. If a lease sale does not receive a qualified bid at or above the estimate of fair market value, the lease tract can be renominated again through the lease-by-application process by the company that originally nominated the tract or by another interested company. If there is no interest in the lease tract, the application is closed by BLM. In addition to paying a bonus bid for the rights to mine the coal on a lease tract, companies also pay rents and royalties on the coal they extract. Rent amounts are at least $3 an acre and royalties are 8 percent of the sale price for coal produced from underground mines and at least 12.5 percent of the sale price for coal produced from surface mines. These royalties are paid on the price of the coal received at the first point of sale after it is removed from the ground. Tracts are leased out for an initial 20- year period, so long as the lessee produces coal in commercial quantities within a 10-year period and meets the condition of continued operations. Lease terms can be extended if a company is actively producing coal on the lease tract. According to EIA data, about 1.1 billion tons of coal was produced in the United States in 2011 from 1,325 mines, which employed over 91,000 people. Coal is produced from three major regions––Appalachia, the interior United States, and the western United States (see fig. 1). More than half of U.S. coal came from the western region, which includes the Powder River Basin in northeast Wyoming and southeast Montana. The Powder River Basin is the largest coal-producing region in the United States, and all 10 of the top-producing U.S. coal mines are in the Powder River Basin, with 9 of these located in the Wyoming portion of the basin, according to EIA data. Coal in the Powder River Basin has less sulfur than eastern coals, making it attractive to utilities for meeting Clean Air Close to 100 percent of federal coal is produced from Act requirements.leases located in the western region and, in fiscal year 2012, federal coal accounted for nearly 80 percent of the western region coal production totals. Production from the western region is expected to continue to be the largest source of coal production in the future—in 2040, an estimated 56 percent of total U.S. coal production will come from western mines according to our analysis of EIA data. ) and nitrogen oxides (NO), which have been linked to respiratory illnesses and acid rain. The Clean Air Act requires EPA to establish national ambient air quality standards for six pollutants, including sulfur oxides and nitrogen oxides, which states are primarily responsible for attaining. States attain these standards, in part, by regulating emissions of these pollutants from certain stationary sources, such as electricity generating units In addition, the Clean Air Act Amendments of 1990 established a national cap-and-trade program to reduce SO emissions limitations for coal-fueled electric power plants. In response to these Clean Air Act requirements, many utilities installed scrubbers and switched to burning low-sulfur coal such as that from the Powder River Basin to reduce SO emissions. Domestically, coal continues to be an important energy source and fuels a large portion of the electric power sector in the United States, according to EIA data. In 2011, coal-fueled electric power plants supplied about 42 percent of the nation’s total electricity and, within the past decade, coal has provided as much as 50 percent of electricity in the United States. More than 90 percent of the coal consumed in the United States is used by the electric power sector. According to EIA, for this reason, coal production trends are strongly influenced by coal demand in the electric power sector, which is sensitive to both changes in the overall demand for electricity generation and changes in the mix of fuel sources. Recently, there has been a general decline in the amount of coal used to generate electricity in the United States due to a combination of factors including a decline in overall electricity demand and shifts in the relative prices of other fuels. Coal used in electricity generation is referred to as steam coal, as the coal is burned to produce steam which turns turbines that generate electricity. Most of the coal that is leased out through the federal leasing program is steam coal, according to BLM officials. In addition to its use in the generation of electricity, coal can also be used for a variety of industrial uses. For example, metallurgical coal is baked at high temperatures to make coke, which is used as fuel to make steel. Metallurgical coal has low sulfur and ash content, among other properties needed for making coke. The amount of coal produced and consumed worldwide continues to increase. The International Energy Agency (IEA) reported that worldwide coal production increased by 6.6 percent in 2011, the twelfth straight year of growth.primary energy consumption worldwide and is the second primary energy source behind oil. China continues to drive much of the world coal markets as its consumption and production of coal accounted for about 45 percent of both global consumption and production totals in 2011 according to IEA data. To respond to this growing international demand, there has been an increase in coal exports with global coal trade increasing 7 percent in 2011 according to IEA. In addition, as of 2011, coal supports 28 percent of the total The United States exports a small but increasing amount of coal primarily to Europe and Asia and, in 2011, the United States ranked fourth globally in coal exports behind Indonesia, Australia, and Russia. According to EIA data, total U.S. coal exports more than tripled from 2002 to 2012, as shown in figure 2 below. In 2012 about 126 million tons of coal was exported––about 12 percent of the total coal produced in the United States. The majority of this coal is exported to Europe and Asia. Metallurgical coal, which is generally not mined on federal coal leases, has historically made up the majority of U.S. coal exports. Nonetheless, there has been growth in exports the last few years of steam coal––the primary type of coal mined on federal coal leases. Specifically, from 2010 to 2012, steam coal exports from the United States more than doubled, rising from 25.6 million tons to 55.9 million tons. Based on EIA data, exports from Wyoming and Montana, the two largest states in terms of production from federal leases, accounted for less than 2 percent of total U.S. coal production in 2011. In addition, coal companies have announced plans to further increase steam coal exports in the future, and there are several coal export facilities that are being proposed on the West Coast to transport coal to growing Asian markets. The price for coal varies widely across the United States. Among the four states with the most production from federal coal leases—Colorado, Montana, Utah, and Wyoming—the average prices for coal originating in these states in 2011 were $39.88/ton in Colorado, $16.02/ton in Montana, $33.80/ton in Utah, and $13.56/ton in Wyoming, according to EIA’s 2011 Annual Coal Report. This large difference in price is tied to coal quality, which is referred to as coal rank.determined by the amount of carbon that the coal contains and the amount of heat energy it can produce, with higher rank coal having more Among other factors, coal rank is energy content. The total amount of coal that an electric utility will need to fuel a power plant is tied to the heat content of coal. For example, a utility will need to buy more tons of coal with lower energy content to achieve the same output of energy that could be attained using less coal with a higher energy content. Other factors that affect a coal’s quality are sulfur, moisture, and ash content. The sulfur content of the coal affects the sulfur dioxide emissions that result when coal is burned, and using coal with less sulfur content can help electric utilities meet air quality requirements. Coal with higher moisture and ash content is lower rank because both of these impact the amount of energy obtained from burning the coal. For example, coal with lower moisture content has greater energy content. Since January 1990, BLM has leased 107 coal tracts under the lease-by- application process, and both coal production and the associated revenues have grown. Most lease sales had a single bidder, and the successful bid amounts––typically expressed in cents per ton––have varied by state, with the greatest increases over time observed in Wyoming. The amount of coal produced from federal leases and associated revenues increased from fiscal year 1990 to fiscal year 2002. Since fiscal year 2002, coal production from federal leases has remained relatively steady, but revenues continued to grow. In total, revenues from federal coal leases have generated about $1 billion annually in recent years. In 1990, BLM began using the lease-by-application process as the primary method to lease out coal, and since then BLM has leased 107 coal tracts, 31 of which were in Wyoming. (See app. II for a complete list of lease sales held since 1990.) The coal from the Wyoming lease tracts comprise approximately 8 of the 9 billion tons, or about 88 percent, of the coal available from federal tracts leased since 1990, as shown in table 1. Of the 107 leased tracts, sales for 96 (about 90 percent) involved a single bidder (see fig. 3), which was generally the company that submitted the lease application. More than 90 percent of the lease applications BLM received were for maintenance tracts used to extend the life of an existing mine or to expand that mine’s annual production. According to BLM officials and coal industry representatives, there is limited competition for coal leases because of the significant capital investment and time required to establish new supporting infrastructure to start a new mine or to extend operations of an existing mine to a tract that is not directly adjacent to it. For these reasons, there have not been many new mines established on federal leases recently. For example, according to BLM officials the last new mine started on a federal lease in the Powder River Basin in Wyoming was the North Rochelle mine, which began operations in 1982. Officials from coal companies told us they typically submit new applications for federal coal leases to maintain a 10- year coal supply at their existing mining operations. In 1983, we noted a similar lack of competition for federal coal leases following the 1982 regional coal lease sale in the Powder River Basin and concluded that the market for coal leasing was largely noncompetitive because lease tracts According to BLM sold “appear captive to adjacent mining operations.”officials, this same issue remains relevant today, and it is difficult to attract multiple bidders on a lease tract if it is not adjacent to multiple mining operations. For example, as shown in figure 4, tracts submitted for lease-by-application that are north and west of the Black Thunder mine are less likely to be bid on by the operators of the North Antelope Rochelle or Antelope mines. This is because it would be too costly and take significant time for these mine operators to move their heavy equipment to extract coal from these lease tracts, which are not directly adjacent to their existing operations. In contrast, the lease tracts that are located between two mines are more likely to be bid on by multiple mine operators, according to BLM officials. BLM officials told us that, where possible, BLM uses the tract modification process to encourage competition for lease sales. For example, Wyoming BLM officials told us that they recently divided an applicant’s proposed tract into two distinct tracts to be sold in two separate coal lease sales upon realizing that one segment may potentially interest another mining company. Colorado BLM officials told us that they altered boundaries of one coal lease application to allow for multiple entry points to the coal for underground mining to make the tract attractive to other companies. In our review of case files related to 31 recent lease sales, we found that BLM modified boundaries for seven tracts (23 percent) to enhance competition. Six of these tracts were located in Wyoming and comprised more than half of the 11 Wyoming lease sales we reviewed; 1 was located in Utah. None of these leases, however, received multiple bids when sold. Of the 107 leased tracts, 89 (about 83 percent) were leased the first time they were offered for sale. According to representatives of appraisal organizations we spoke with, this high acceptance rate of initial bids may reflect the reliance of existing mines on federal coal leases to maintain their operations and a willingness of mine owners to submit slightly higher bids to ensure they win federal coal leases. The remaining 18 tracts were leased after being reoffered for sale one or more times because the initial Of the 18 bonus bid offered was below the estimate of fair market value. tracts that were reoffered for sale, 8 were in Wyoming and 5 were in Colorado. Fifteen tracts were leased after a second sale; two tracts leased after a third sale; and one tract was leased after a fourth sale. The total amount of coal produced from federal leases has nearly doubled since fiscal year 1990. Growth in coal production from federal coal leases was largest from fiscal years 1992 to 2002, when it grew from 239 million tons to 444 million tons. The proportion of coal produced from federal leases relative to the total amount of U.S. coal production also grew over this same period from about 24 percent in fiscal year 1992 to about 40 percent in fiscal year 2002 (see fig. 5). During this period there was an increase in U.S. western coal production, where a majority of federal coal is located, and a corresponding decline in production from eastern coal regions. In particular, BLM officials told us that Powder River Basin coal grew in demand over eastern coal because it enabled utilities to meet the stricter emissions limits due to its low sulfur content. Powder River Basin coal was also attractive to utilities because of its low production costs and access to transportation networks, both of which help to decrease the market price that a utility must pay for the coal. A United States Geological Survey (USGS) study reported that this shift reflected the fact that western mines, which typically rely on surface mining, can extract coal more cheaply than eastern mines, where coal is generally mined using underground methods. Since fiscal year 2002, coal production from federal leases remained relatively steady, averaging near 450 million tons annually, or about 41 percent of total U.S. production. Production peaked in fiscal year 2008 at 483 million tons and has since declined by 8 percent to 442 million tons in fiscal year 2012. In October 2012, we reported the amount of electricity generated using coal has decreased recently due to a decline in overall electricity demand and growth in the use of natural gas to fuel power plants. In fiscal year 2012, 85 percent of the coal produced from federal leases came from Wyoming. As shown in figure 6, Wyoming and three other western states—Montana, Colorado, and Utah—accounted for 97 percent of coal produced from federal leases. The remaining 3 percent of coal (about 12 million tons) was produced from federal leases in five other states—Alabama, Kentucky, New Mexico, North Dakota, and Oklahoma. The total revenue generated from federal coal leases has nearly doubled from $682 million in fiscal year 2003 to $1.2 billion generated in fiscal year 2008 and again in fiscal year 2012. Total revenues from federal coal leases have remained relatively steady since fiscal year 2005 averaging about $1.0 billion per year according to our analysis of ONRR data. There are three sources of revenue from federal coal leases–– royalties, bonus bids, and rents––but royalties and bonus bids account for nearly 100 percent of the revenues from the federal coal leasing program. Royalties. Royalties comprised the majority of the revenue from federal coal leases—nearly two-thirds of the total revenue over the period from fiscal years 2003 to 2012. Royalty rates for coal depend on the mine type and are generally calculated based on a proportion of sales value, less allowable deductions, such as transportation and processing allowances. BLM generally sets royalty rates at 12.5 percent for surface mines, the required minimum royalty rate, and 8 percent for underground mines, the rate prescribed by regulation. In total, royalties generated from federal coal leases have more than doubled since fiscal year 1990, from $392 million to $796 million in fiscal year 2012 (see fig. 7). In addition, as with coal production from federal leases, royalties generated from the sale of coal from federal leases in Wyoming comprise an increasing proportion of the royalty stream ranging from 50 percent of total royalties in 1990 to 80 percent in 2012 (see fig. 6). Coal prices have been a major driver of the increases in royalty revenues. For instance, from fiscal years 1990 to 2000, royalty revenues remained relatively steady even though production of federal coal increased over this period related to a decline in coal prices. Since then, coal royalty revenues have steadily increased, even with a recent decline in production. Specifically, from fiscal years 2008 to 2012 the amount of coal produced from federal leases declined by about 41 million tons of coal (or 8 percent); however the reported sales value of this coal increased 15 percent from $6.7 billion to $7.7 billion, reflecting growth in coal prices. The effective royalty rate—the rate actually paid by lessees after processing and transportation allowances have been factored in along with any royalty rate reductions––generated from coal produced from federal leases has remained on average at about 11 percent since fiscal year 1990. Royalty rate reductions may be approved by BLM in cases where a reduction is needed to promote mining development. For example, BLM officials told us they may approve royalty rate reductions to enable continued operations in cases where mining conditions may be particularly challenging and costly, or to enable expanded recovery of federal coal. The effective royalty rate varies by state due to differences in mine type and other factors. For example, the effective royalty rate is higher in Wyoming and Montana where most coal is extracted using surface mining. In fiscal year 2012, the effective royalty rates for the top federal coal producing states were: Wyoming (12.2 percent), Montana (11.6 percent), Utah (6.9 percent), and Colorado (5.6 percent). Bonus bids. Bonus bids are generally expressed in cents per ton of coal that is recoverable from the lease tract. The total bonus bid paid is the cents per ton multiplied by the estimated recoverable tons of coal from the lease tract. According to BLM officials, typically an initial payment of 20 percent of the total bonus bid is provided with the sealed bid, and the remaining 80 percent is paid in four equal annual installments over a 4- year period, but it may also be paid in full by the lessee at the time of a lease sale. ONRR revenue data from fiscal years 2003 to 2012 show total bonus bids received from all federal coal leases averaged $335 million annually, or about one-third of the total revenues from federal coal leases, as shown in figure 8. Since fiscal year 2003, revenue from bonus bids has fluctuated from year to year related to lease sale activity. For example, since fiscal year 2003, revenue from bonus bids has fluctuated from a peak of about $521 million in fiscal year 2005, when bonus bids made up 49 percent of the total revenue generated from coal leases, to a low of $116 million in fiscal year 2010, when bonuses comprised 13 percent of total revenue. Based on our analysis of BLM data on coal lease sales, BLM accepted $6.4 billion in total bonus revenue for the 107 tracts leased since 1990, with total bids ranging from $5,000 to more than $800 million for a lease tract. In addition, successful bonus bid amounts for coal leases varied across states, with bonus bids received in Wyoming showing the greatest increase since 1990 when compared with the other seven states with active federal coal leases. Successful bonus bids for lease sale tracts in Wyoming ranged from $0.04 to $1.37 per ton of coal, after adjusting for inflation, and generally increased from 1990 to 2012. In comparison, successful bonus bids in Colorado bids ranged from $0.02 to $0.55 per ton and slightly increased from 1990 to 2012, and in North Dakota all successful bonus bids were $100 per acre in nominal dollars, the minimum bid BLM can accept for a lease tract and did not vary meaningfully over time when measured on a per ton scale. In other states, trends in bonus bids were not discernable due to variation in the successful bids over time or there being too few sales in these states. According to officials from coal companies we spoke with, bonus bids for federal coal leases depend on many factors, including coal quality, mine type (e.g., underground or surface mining), and the price of coal at the time of the sale. Even when coal quality, mine type, and price are similar, successful bonus bids can vary greatly because of other factors. For example, mining conditions in Colorado and Utah are similar in several respects— most mines are underground, the energy content of the coal being mined generally exceeds 11,500 BTUs per pound of coal, and coal prices were in a similar range from 1990 to 2011. Yet, the total bonus bids accepted by Colorado since 1990 have been about $22 million less after adjusting for inflation than those accepted by Utah despite the fact that Colorado has leased out almost 76 million tons more coal than Utah. When asked about the differences in total bonus bids, BLM officials reiterated that differences in conditions affecting coal marketability across these states, such as access to transportation options and proximity of customer base, make direct comparison of bonus bid values across these states difficult. Specifically, BLM officials told us that most of the coal produced in Utah is consumed locally by power plants in state; this proximity to the customer could be considered an advantage. In contrast, much of the coal produced in Colorado needs to be transported out of state. Rents. Rents, which are set at $3 per acre, are also collected annually from federal coal leasing tracts but comprise an insignificant amount of the revenue stream. generated from federal coal leases, composing 0.1 percent of the annual revenue related to coal. 43 C.F.R. § 3473.3-1(a). BLM’s guidance offers flexibility in how to estimate fair market value, and BLM state offices vary in the approaches they use to develop an estimate of fair market value. Some state offices use both the comparable sales and income approaches in their appraisals while others rely solely on the comparable sales approach and may not be fully considering future market conditions as a result. In addition, we found that BLM did not consistently document the rationale for accepting bids that were initially below the fair market value presale estimate, and some state offices were not following guidance for review of appraisal reports. Furthermore, no independent review of appraisals is taking place, as is recommended by commonly used appraisal standards, despite Interior having expertise that could be leveraged to do so. According to BLM guidance, the goal of BLM’s appraisal process is “to provide a well-supported estimate of property value that reflects all factors that influence the value of the appraised property,” and it gives state offices flexibility in how they do so. BLM’s guidance lays out two approaches to develop an estimate of fair market value—comparable sales and income—but does not say that both approaches must be used. Under the comparable sales approach, bonus bids received for past sales are used to value the tract being appraised. Adjustments may be made to these comparable sales based on how the characteristics of these past lease tract sales compare with the lease tract being appraised. For example, if a past lease sale involved coal that had lower heating content than the lease tract being appraised, BLM might conclude that the current tract should have a higher fair market value than the bonus bid received for this past sale. In contrast, under the income approach, the revenues received from selling the coal and costs to extract it are projected into the future, and this net revenue stream is discounted back to the present. The resulting net present value of this revenue stream becomes an estimate of the fair market value for the lease tract. See table 2 for a summary of methods used and information needed for the comparable sales and income approaches. BLM’s guidance states that the comparable sales approach is preferred to the income approach when similar comparable sales are available because it is assumed that this method will provide the best indication of value. When comparable sales are not available, the guidance states that the income approach is a viable alternative, but the guidance highlights the uncertainty associated with using the income approach. This uncertainty stems from its reliance on projections of future market conditions, such as demand for coal, coal prices, and the costs to extract the coal. The guidance also provides examples for how the results of the comparable sales and income approaches can be used together. For example, information from comparable sales can be used as a comparison point for results from the income approach. In addition, results from the income approach can be used to adjust past comparable sales. Specifically, if the net present value of the tract being appraised is less than the net present value of a past lease sale, a conclusion can be made that the tract being appraised is less valuable than the past lease, and a numeric adjustment can be made to the actual sales prices of the past lease sale to account for this difference. During our interviews with BLM officials, we found that BLM state offices use different approaches to develop an estimate of fair market value of coal leases, and we confirmed this during our case file review. For example, for lease sales in Wyoming, Montana, and New Mexico,BLM state offices use both the comparable sales and income approaches, based on our review of case files. Moreover, the BLM Wyoming state office goes a step further to numerically adjust its comparable sales using the results of the income approach. In contrast, for lease sales in Colorado, North Dakota, Oklahoma, and Utah, the BLM state offices have generally used just the comparable sales approach in recent years. For the two lease sales we reviewed in both Alabama and Kentucky, one of the sales used both approaches, while the other used just the comparable sales approach. When using the comparable sales approach, BLM state offices generally only used sales information for coal sales that occurred in their state. (See app. III for specific information on the approaches used for the lease sales that we reviewed.) the BLM officials in some state offices said that they did not have the resources to perform appraisals using the income approach. In particular, the income approach may require the help of an economist, and some BLM state offices do not have an economist on staff. For example, officials in both the Utah and Colorado state offices said they did not have economists on staff. For this reason, the Utah BLM office recently contracted with a firm to help them perform the income approach for a lease under consideration. However, BLM headquarters officials told us that the income approach did not require an economist and that some mining engineers in state offices could perform appraisals using this method. Officials in other state offices said they could not justify using the income approach due to the market for coal in their states. For example, they said that most coal mining in Oklahoma involves privately held coal, and a bonus bid is not required to obtain the rights to mine the coal, while in North Dakota, bonus bids offered as part of private sales have generally been less than or equal to the $100/acre minimum required for federal coal leases. When using these private sales as comparable sales, BLM officials in these states concluded that the minimum bonus bid of $100/acre should be the estimate of fair market value. BLM officials told us that if they did not set fair market value at this level, the coal on the federal lease tracts would be bypassed and never mined. The reliance solely on the comparable sales approach among certain BLM state offices contrasts with the recommendations of officials from appraisal organizations we spoke with, who generally supported using both the comparable sales and income approaches when conducting mineral valuations. Representatives from three U.S. appraisal organizations told us that the income approach can provide helpful information and should be used along with the comparable sales Specifically, the income approach can serve as a check on approach.the results of the comparable sales approach. In addition, we reviewed general appraisal standards in the United States and industry-developed standards for mineral valuation in Canada and Australia, as identified by appraisal organizations we spoke with, and we found that mineral valuation standards in Canada were the most prescriptive in terms of using multiple appraisal methods. Specifically, the Canadian standards require that more than one appraisal approach be used unless justification is provided, and these standards recommend use of both the income and comparable sales approaches. All of the standards we reviewed stated that appraisal reports should include a discussion of the rationale for the appraisal approaches used, as well as the rationale for any approaches not used. Similarly, representatives from one of the appraisal groups we interviewed said that if only a single approach is employed, the reasons for doing so should be documented and justified. According to BLM’s guidance, officials must document the rationale for choosing a certain appraisal approach in the appraisal report but, during our review of case files, we generally did not find this rationale documented in states where one approach was used. In contrast, appraisal reports prepared for lease sales in New Mexico, North Dakota, Montana, and Wyoming contained explanations for the appraisal approaches they chose to use. Because the income approach examines estimates of future market conditions while the comparable sales approach focuses on past coal lease sales, BLM state offices that rely solely on the comparable sales approach may not be fully considering current or new trends in coal markets when estimating fair market value. This is particularly true if a state office is using comparable sales from a time during which market conditions were different. During our case file review, we found there were several comparable sales used that were over 5 years old. One official from an appraisal organization told us that he would hesitate to use comparable sales that were older than 5 years because of changes in market conditions. BLM officials noted that the usefulness of sales over 5 years old would depend on the extent to which the market has changed. During our case file review of 31 selected lease sales, we found four lease tracts in three states where the bonus bid offered was below the fair market value presale estimate, but BLM accepted these bids after additional consideration was given to them. In total, the accepted bonus bid amounts related to all four tracts was more than $2 million below the presale estimate of fair market value. Three of these sales occurred in the 1990s, and one occurred in 2007. As outlined in BLM’s guidance, bonus bids below the presale estimate of fair market value may be considered as long as the bid is above the minimum bonus bid requirement of $100 per acre, among other factors. Furthermore, BLM’s guidance allows for additional information to be considered or additional analysis to be completed as part of a postsale review process to address technical errors or in cases where appraisal standards are not met. BLM’s guidance states that postsale analysis be documented and any revised fair market value be reviewed, but it does not clearly describe what postsale documentation is needed. According to BLM headquarters officials, this postsale analysis must be documented and a new estimate of fair market value needs to be completed and reviewed. We did not, however, find this documentation in the case files we reviewed for these four sales. Specifically, we found no documented evidence of a single, revised fair market value estimate against which to compare the bids. The files contained general statements about additional information that was considered during the postsale review process, such as changes in mining plans or changes in coal prices. In each of the four cases, BLM found that the respective bids fell within an “acceptable range of values” close to the initial presale fair market value estimate and, as a result, BLM determined in each of these cases that the bid should be accepted. Without better documentation of these decisions, including specifying the revised fair market value estimate and clear justification for the revision, BLM has not demonstrated that the accepted bids met or exceeded the fair market value estimate as required under the Mineral Leasing Act. We also found inconsistencies in the appraisal reports prepared as part of coal lease sales. In particular, some states consistently updated past comparable sales for inflation while others did not. For example, we found instances where the Montana/Dakotas and New Mexico state BLM offices used comparable sales that were more than 5 years old, but did not adjust them for inflation. In contrast, the Colorado, Utah, and Wyoming BLM state offices generally updated sales that were more than 5 years old for inflation. BLM headquarters officials told us that past comparable sales should be adjusted for differences in market conditions over time. State offices also varied in the number of comparable sales they consulted when using the comparable sales approach. For the 31 lease sales we reviewed, the number of comparables used in the appraisal ranged from a low of 2 to a high of 10 comparable sales. In addition, we found instances where BLM did not fully document its estimate of fair market value. Specifically, we found three related lease sales in Oklahoma where a formal appraisal report was not prepared to justify using the minimum bid amount of $100/acre as the estimate of fair market value. In the case file, there was discussion of the general market for coal in Oklahoma, including the fact that private coal sales did not involve up-front payments, such as bonus bids, but there was no description of the methods used to develop an estimate of fair market value. A BLM official said that he believed comparable sales were reviewed to determine that the fair market value estimate would be below the minimum bid value for these leases, but this was not documented in a formal appraisal report. From our review of 31 case files, we found differences in the appraisal review process used by different state offices and, in some cases, states had not followed BLM guidance. According to BLM guidance, appraisal reports must be signed by three BLM officials—the chief of the regional evaluation team, a qualified mineral reviewer, and the deputy state director—to ensure technical accuracy of the fair market value estimate and conformance with BLM’s appraisal guidance. The chief of the regional evaluation team is an outdated position that no longer exists because BLM no longer leases coal on a regional basis, but the guidance has not been updated to reflect this. BLM headquarters officials said they expected that the mineral appraiser’s signature would take this official’s place. However, we found that appraisal reports were not consistently signed by the three officials, and there was no mechanism in place to ensure that this review was taking place. While appraisal reports in Wyoming were signed by three officials—the mineral appraiser, mineral reviewer, and deputy state director—other state offices had appraisal reports that were reviewed and signed by a single official. For example, two appraisal reports in Colorado were signed only by the branch chief of solid minerals, while in Alabama, one appraisal report was just signed by an economist. Of the two appraisals we reviewed for lease sales in Kentucky, one was signed by only an economist, and one was not signed at all. Without clear guidance on who is supposed to be reviewing reports and consistent reviews by these officials, BLM does not have assurance that proper oversight is taking place in all state offices responsible for coal leasing. Currently, review of appraisal reports takes place primarily at the state office level, and there is no review by an independent third party outside of BLM state offices. In its review of the coal leasing procedures in 1984, the Linowes Commission concluded that periodic independent review of coal activities by a group with clear independence from the coal leasing program was desirable. Furthermore, both the Uniform Standards of Professional Appraisal Practice and the Uniform Appraisal Standards for Federal Land Acquisition note that independent appraisal review is an important tool for ensuring that the valuation estimate is credible. BLM headquarters officials currently have a very limited role in reviewing appraisal reports prior to a lease sale, and they told us that headquarters officials receive copies of between 5 and 10 percent of appraisal reports prior to a lease sale occurring. These officials told us that they are provided with these appraisal reports so that they can participate in sale panel meetings where BLM considers whether to accept bids for lease tracts. BLM headquarters officials do not sign off on these reports or provide comments to the state officials during the period when the appraisal reports are being developed. As a result of not regularly reviewing all appraisals, BLM headquarters officials were unaware of some of the differences in appraisal practices and documentation issues that we found across BLM state offices. In addition, BLM is not currently taking advantage of a potential independent third-party reviewer with appraisal expertise within Interior, specifically, the Office of Valuation Services. The Office of Valuation Services, established by secretarial order in May 2010 and reorganized in Interior’s Departmental Manual in June 2011, is responsible for providing real estate valuation services to the department’s bureaus and offices, including “appraisals, appraisal reviews, consultation services, and mineral evaluation products for Department and client agencies.” Within the Office of Valuation Services, the Office of Mineral Evaluation is responsible for providing mineral evaluations for Interior’s bureaus and offices, according to the Departmental Manual. Because the Office of Mineral Evaluation is a small office with about six staff, it is not feasible for this office to take over the mineral valuation function for the entire coal leasing program, according to officials in this office, and it would not be practical given the knowledge and expertise that state and field BLM staff have regarding coal in their respective regions. Rather, officials in this office said they were amenable to helping BLM in other ways by, for example, providing independent third-party review of appraisal reports, which is critical for ensuring the integrity of the appraisal process. Without additional oversight of the appraisal process by an independent reviewer, BLM is unable to ensure that its results are sound, key decisions are fully documented, and that differences we noted across state offices are warranted. BLM considers coal exports to a limited extent when developing an estimate of fair market value and generally does not explicitly consider estimates of the total amount of coal in the United States that can be mined economically, known as domestic reserve estimates. In the few state offices that did consider exports, we generally found the same generic statements in appraisal and economic reports that stated in general terms the possibility of future growth in coal exports, and there was limited tracking of exports from specific mines. As a result, BLM may not be factoring specific export information into appraisals or keeping up- to-date with emerging trends. Domestic reserve estimates are not considered due to the variable nature of these estimates according to BLM officials. BLM’s guidance states that appraisal reports should consider specific markets for the coal being leased, and that “export potential” may be considered as part of the appraisal process. The export potential for coal from a particular mine can be influenced by several factors, including the quality of the coal and whether there is a transportation system nearby that can ship the large volume and weight of coal to a port for export. Some coal mines, such as those in Wyoming’s Powder River Basin, are part of a national coal market and, in 2011, Wyoming mines shipped coal to 34 states in the United States according to EIA data.supply coal only to neighboring power plants, known as mine mouth operations, meaning that their export potential is limited, and exports would not factor into the fair market value estimation, according to BLM officials. In our review of BLM case files for 31 coal lease sales, we found that coal exports were generally mentioned in appraisal and economic reports for the 13 federal lease sales held in Montana and Wyoming. Mines in these states exported 17.7 million tons of coal in 2011, according to EIA data, or about three-quarters of the total amount of coal exported from western states. Exports from these states represented less than 2 percent of total U.S. coal production and about 17 percent of total U.S. exports of coal in 2011. Of the 13 Montana and Wyoming case files we reviewed, one provided specific export information for the mine that was adjacent to the lease tract being appraised. This appraisal report, which was prepared for a lease tract in Montana, provided detailed information from IHS Global Insight and Wood Mackenzie, two private providers of information on coal.reports in Wyoming typically contained generic boilerplate statements In addition, we found that economic and appraisal about the possibility of coal exports in the future and the uncertainty surrounding them, rather than specific information on actual or predicted coal exports––even for proposed lease tracts that were adjacent to mines on federal leases that are currently exporting coal. Wyoming BLM officials told us that coal exports made up such a small portion of total production from Wyoming that they did not believe it was necessary to provide specific information on exports in their economic or appraisal reports. Wyoming BLM officials told us that future appraisal reports may provide more specific export information if exports became a more significant issue, but they did not identify a threshold for including it. We generally did not find mention of coal exports in the other states with federal coal leasing activity: Alabama, Colorado, Kentucky, New Mexico, State BLM officials in these states North Dakota, Oklahoma, or Utah.told us they did not consider exports when estimating fair market value because there were few or no coal exports from their state. However, we found an example in Utah where the lease tract was adjacent to a mine that, according to EIA data, was exporting coal, but the appraisal report did not mention coal exports. EIA officials told us that they began collecting mine-level information on coal exports in 2008 and received a request from one BLM state office for these data. BLM state and headquarters officials generally told us they were not aware that EIA collects these data. Similarly, Wood Mackenzie has mine-level data on coal exports, but not all state BLM officials were aware that this information was available to them through a BLM subscription. By not tracking and considering all available export information, BLM may not be factoring specific export information into appraisals for lease tracts that are adjacent to mines currently exporting coal or keeping abreast of emerging trends in this area. BLM officials said that they examine projections of future coal prices during the appraisal process, and these projections would account for exports. However, only the income approach for appraisals explicitly considers future prices, so the state offices that use only the comparable sales approach would not explicitly factor export potential into their fair market value assessments. Two states in particular—Colorado and Utah—have coal exports from mines on federal leases, but they generally use the comparable sales approach to estimate fair market value, therefore their fair market values would not explicitly reflect the potential impact of coal exports. BLM officials told us that they are aware that some coal companies plan to export more coal in the future but voiced some concern about weighting these plans too heavily in estimating fair market value because major port infrastructure upgrades are needed on the West Coast to handle increased coal exports. Several stakeholders with expertise in coal markets that we interviewed shared this view. In addition, IEA said it is difficult to predict future coal exports from Wyoming’s Powder River Basin to countries such as China because of a lack of infrastructure in place to handle exports and the uncertainty of market conditions. BLM officials told us that BLM does not consider domestic coal reserve estimates during the fair market value process. One reason they gave was these estimates can vary greatly depending on market conditions. Domestic coal reserve estimates reflect the amount of coal that can be economically recovered at a given point in time; as a result, these estimates can change as coal prices fluctuate and mining technologies advance. For example, USGS estimated reserves of 10.1 billion tons in the Gillette coal field of the Powder River Basin at a sales price of $10.47 per ton in 2007, but it changed this estimate to 18.5 billion tons when prices rose to $14.00 per ton in March 2008.assessment estimated that there was 25 billion tons of coal that can be A more recent USGS economically recovered in the entire Powder River Basin at the time of study, but notes that “mining costs and coal prices are not static as both tend to increase over time.” The report goes on to state that “if market prices exceed mining costs, the reserve base will grow (the converse is also true).” Some BLM officials told us they do not consider domestic reserve estimates when estimating fair market value because the United States has ample coal supplies to meet demand over the next 20 years, the time horizon that BLM uses when evaluating coal lease-by-applications. For example, EIA estimated that the United States has over 190 years of coal reserves, at the time of its most recent Annual Energy Outlook in April 2013. BLM state offices that prepare an economic report as part of estimating fair market value examine future demand and price projections for coal, which impact reserve estimates as mentioned previously. BLM generally provides limited information on federal coal lease sales to the public. Environmental documents produced as part of the NEPA process and required coal lease sale announcements are the primary source of detailed written information made available on coal lease sales. The amount and type of information provided on websites vary by state office, with the most comprehensive information of the websites we reviewed provided by the Wyoming BLM state office. In addition, BLM does not typically make documents used to estimate fair market value publicly available due to the sensitive and proprietary information they contain, although its guidance states that a public version of the appraisal document should be prepared. EIA projects that U.S. coal production will increase at about 0.2 percent per year for the period from 2011 to 2040. If that growth rate continues into the future, estimated recoverable coal reserves would be exhausted in about 194 years if no new reserves are added. BLM provides some information on coal lease sales in environmental documents developed to meet NEPA requirements and in lease sale announcements. BLM is required to share these documents with the public, and these documents are made available for review in public reading rooms in relevant BLM state and field offices and are also typically available on BLM’s websites during the period of leasing activity. These environmental documents include environmental assessments and environmental impact statements, which evaluate the likely environmental effects of leasing and mining the proposed lease tract. These documents generally include information on the lease applicant, mining methods at the existing operation, alternatives considered, and anticipated environmental effects. For example, an environmental assessment for a recent coal lease in Montana included an overview of the mine’s history, the mining methods used at the site, the mine’s layout, and information on potential effects of alternatives considered. In addition to environmental documents, a decision document summarizing the results of the process and the agency decision regarding the lease sale is also issued. BLM is also required to announce forthcoming coal lease sales in the Federal Register and a newspaper in the area of the lease tract. These announcements typically include general characteristics of the lease tract up for sale, such as the size of the tract, and the amount and quality of the coal being offered, including its estimated heating value, ash and moisture content, and the thickness of the coal beds. In addition, the announcements list the applicant and potential use of the tract, such as whether it will be used to extend existing mining operations or the tract’s location adjacent to more than one existing mine. The announcement also notes where interested stakeholders can view lease sale details including bidding instructions, terms and conditions of the proposed coal lease, and case file documents, typically available for review at the relevant BLM state office. BLM websites are another way that public information is released on the leasing program, but we found that it was difficult to locate this information on some of BLM’s websites that we reviewed and the amount and type of information shared across the websites that we accessed in May 2013 varied (see table 3). For example, BLM headquarters’ website contains general information on the federal coal leasing program, but it does not include information on past or upcoming federal coal lease sales or link to relevant BLM state or field office websites. BLM officials told us that they attempted to provide general information on past lease sales on the headquarters website in 2010, but they were unable to obtain state BLM offices’ verification of the data, which stalled the effort. Five of the six state offices do not maintain information on past lease sales on their websites, although officials in BLM headquarters and two state offices also told us they have provided this information upon request. All six state offices that manage lease sales, at a minimum, publish lease sale announcements in the Federal Register, which is searchable via the Internet, and based on our review of BLM websites and interviews with BLM officials, all but one of the state offices issue press releases with lease sale results that are highlighted for limited periods. In addition, during our review of BLM websites, we found that five of the six state offices keep environmental documents related to lease sales on their websites during the time of lease sale activity. Of the six state office websites we reviewed, the Wyoming state office provided the most comprehensive information on the federal coal leasing program, including results for all coal lease sales in the Powder River Basin since 1990. For each lease sale, this website had information on successful bid amounts, associated coal volume and coal quality, and links to environmental documents. Wyoming BLM officials told us that they had this information on their website because they receive regular inquiries from the press and public on coal leasing in the Powder River Basin. In contrast, the New Mexico state office had no coal leasing information on its website. New Mexico BLM officials told us that there is not much public interest in coal lease sales in the states of New Mexico and Oklahoma, which they oversee, and requests for this type of information are limited to inquiries from mining companies. Making electronic information available to the public is a position supported by the Office of Management and Budget (OMB) and has been demonstrated by other agencies. Specifically, OMB guidance directs federal agencies to use electronic media to make government information more easily accessible and useful to the public. In addition, we have previously reported on the importance of federal programs allowing users to easily access and use information on websites. BLM’s federal oil and gas onshore leasing program maintains a list of planned lease sale auction dates on the headquarters level website, along with summary results from recent lease sales by state. Without standard information on BLM websites, federal coal leasing activity is difficult to track by the public, and access to publicly available documents may be hampered. BLM’s guidance states that a public version of the appraisal report that deletes all proprietary material should be prepared for each lease sale, but BLM has not been following this guidance. According to officials from BLM state offices, a public version of appraisal reports is not prepared as a standard practice in the six BLM offices managing the coal lease sale process. According to some BLM officials, they do not prepare this public version because they are concerned about the potential release of proprietary and sensitive information these reports contain and the impact this could have on the bidding process. BLM, H-3070-1 Economic Evaluation of Coal Properties, V-5. whether to release these reports in a redacted format. For two Freedom of Information Act (FOIA) requests received in 2011 for reports used to determine fair market value of coal leases, BLM initially withheld all fair market value documents until Interior’s Office of the Solicitor advised BLM to provide redacted documents in response to an appeal filed in one of these cases. In its response to this FOIA appeal, Interior’s Office of the Solicitor agreed that BLM has discretionary authority to disclose this information and noted that BLM’s guidance “does not require the BLM to release ‘fair market value appraisals and estimates’ to the public and, instead, merely notes that it ‘can’ do so.” In the end, BLM provided redacted appraisal reports to this FOIA request, which we reviewed. These documents included a description of the approaches BLM used to estimate fair market value, the number of comparable sales that were considered, and background information on the mining operation, but the fair market value estimate was redacted along with the supporting analysis behind this number. As of June 2013, BLM was in the process of responding to another request for fair market value documents received in 2012. BLM headquarters and state office officials consistently told us that it is critical that the sensitive information in lease sale documents not be released publicly so that the integrity of the sealed bid process can be maintained. For example, if companies were to obtain the specific comparable sales used for a past lease sale, this information could lead them to reduce their bid for a future lease sale so that it is closer to the fair market value estimate, according to BLM officials. But there are differing views within the agency on the extent of information that should and could be shared. For instance, BLM headquarters officials told us that they are open to releasing additional information on federal coal leasing, including making redacted appraisal reports available. In contrast, Wyoming BLM officials told us they were not comfortable making any additional information on the fair market value process available such as redacted appraisal reports. They told us that, in their opinion, considerable information is already available in documents that must be prepared as part of the process, such as environmental impact statements, public notices, and detailed statements on how to bid. They also told us most people are interested primarily in lease sale results, which Wyoming BLM makes available on its website. Wyoming BLM officials also said they are concerned that, by making additional information available, including redacted appraisal reports, some important information might be shared that would result in reduced bids on future coal lease sales. The Wyoming BLM officials’ point of view stands in conflict with BLM’s guidance that additional information in the form of public versions of the appraisal report should be prepared and the Office of the Solicitor’s determination that FOIA does not allow BLM to withhold entire documents relating to the estimate of fair market value in response to FOIA requests when portions of these documents contain information that is not protected from disclosure and should be released. With about 40 percent of the nation’s coal produced from federal coal lease tracts in recent years, the federal coal leasing program plays an important role in the nation’s energy portfolio. In managing the leasing program, BLM is required to obtain fair market value for coal leases. Because there is typically little competition for federal leases, BLM plays a critical role in ensuring that the public receives fair market value for the coal that is leased. However, we found differences across BLM state offices in the approaches they use to estimate fair market value and the rigor of these reports. Moreover, BLM state offices are not documenting the rationale for choosing their approaches for the appraisal process. Adequate oversight of the fair market value process is critical to ensuring that its results are sound and properly reviewed. However, BLM’s guidance on the valuation of coal properties is out of date, and officials are not reviewing and signing appraisal reports in accordance with BLM’s guidance. Without a mechanism to ensure consistent reviews by three officials, as specified in the guidance, and independent third-party reviews, appraisal reports may not be receiving the scrutiny they deserve. BLM’s guidance allows for additional information and analyses to be considered as part of the postsale review process, which could result in a lower revised fair market value estimate and acceptance of bids below the presale fair market value estimate but above the revised estimate. The guidance calls for such decisions to be fully justified and that a revised fair market value be clearly documented and reviewed. However, we found instances where BLM’s justification to accept such bids was not adequately documented. Without proper documentation of these decisions, adequate oversight cannot take place, and BLM does not have assurance that accepted bids were in compliance with the Minerals Leasing Act. Coal exports make up a small but growing proportion of total U.S. coal production, yet BLM state offices were generally not tracking the export activity for mines on federal leases and were including only generic statements about exports in their appraisal reports, and some state offices were not routinely including export information in appraisal reports. Moreover, BLM officials were largely unaware of the various sources of mine-level information about exports, such as the information that EIA collects and the information collected by private companies. By not tracking and considering all available export information, BLM may not be factoring specific export information into appraisals for lease tracts that are adjacent to mines currently exporting coal or keeping abreast of emerging trends in this area. BLM state offices are not following agency guidance because they have not prepared public versions of appraisal reports, and there is a lack of agreement within the agency on the extent and type of information related to the estimation of fair market value to be shared in response to public requests. Without updated guidance and a consensus, there may continue to be a disconnect between BLM’s guidance and its standard practice of not releasing this information publicly. Finally, BLM provides little summary information on its websites on past lease sales or links to sale-related documents. Having additional information online could increase the transparency of federal coal leasing program. We are recommending that the Secretary of the Interior direct the Director of the Bureau of Land Management to take the following eight actions: To ensure that appraisal reports reflect future trends in coal markets, BLM should revise its guidance to have state offices use both comparable sales and income approaches to estimate fair market value where practicable. Where it is not practicable to do so, the rationale should be documented in the appraisal report. To ensure that appraisal reports receive the scrutiny they deserve and are reviewed by specified officials, BLM should take the following actions: update its guidance so that it reflects the current titles of officials who should review appraisal reports; develop a mechanism to ensure that state offices are reviewing and signing appraisal reports consistent with the guidance; develop a process for independent review of appraisal reports and work with the Office of Valuation Service to determine its role, if any, in this process. To ensure that all accepted bids comply with the Minerals Leasing Act by meeting or exceeding BLM’s estimate of fair market value, BLM should update its guidance to specify the documentation needed for postsale analyses in instances where a decision is made to revise the fair market value estimate and accept a bonus bid that was below the presale estimate of fair market value but above the revised estimate. Such documentation for postsale analyses should include the revised estimate of fair market value, the rationale for this revision, and review of this decision by appropriate officials. To ensure that appraisal reports reflect the current state of export activity for mines on federal leases, BLM headquarters should develop guidance on how to consider exports as part of the appraisal process and identify potential sources of information on coal exports that state offices should use when conducting appraisals. To eliminate the disconnect between its guidance and BLM state offices’ practice of not releasing appraisal documents to the public, BLM headquarters, state office officials, and Interior’s Office of the Solicitor should come to agreement on the extent and type of information related to the estimation of fair market value that should be shared in response to public requests for this information and make sure that its guidance reflects this consensus. To make electronic information on the coal leasing program more accessible to the public, BLM should provide summary information on its websites on results of past lease sales (e.g., amount of coal offered, coal quality, bonus bids received ) and status of any upcoming coal lease sales along with links to sale-related documents. We provided a draft of this report to the Department of the Interior, the Department of Agriculture, and the Department of Energy for review and comment. The Department of the Interior concurred with our recommendations and also noted it has begun to address some of these recommendations. Specifically, BLM has signed a memorandum of understanding with the Office of Valuation Services to enhance the review of fair market values. In addition, BLM stated it will soon publish additional information on lease sales on its national and state websites. The Departments of the Interior, Agriculture, and Energy also provided us with technical comments, which we have incorporated as appropriate. See appendixes IV and V for agency comment letters from the Department of the Interior and the Department of Agriculture. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of the Interior, the Secretary of Agriculture, the Secretary of Energy, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Our objectives were to examine (1) federal coal leasing, including the number of tracts leased, along with the trends in associated coal production and revenues generated since 1990; (2) Bureau of Land Management’s (BLM) implementation of the process to develop an estimate of fair market value for coal leases; (3) the extent to which BLM considers coal exports and domestic coal reserve estimates when developing an estimate of fair market value; and (4) the extent to which BLM communicates information on federal coal lease sales to the public. To provide information on trends in federal coal leasing under the first objective, we analyzed data from BLM’s LR2000 database—used by BLM to track federal land and mineral resources including coal—and summarized federal coal lease sale activity and bonus bids accepted from January 1, 1990 to December 31, 2012. For each lease sale where a bid was accepted and the tract leased, we analyzed data including: lease sale date, tract acreage, the amount of offered coal, number of bids received, and winning bid amounts. We also analyzed data on coal production and revenues generated from federal coal leases from fiscal years 1990 to 2012 from the Department of the Interior’s Office of Natural Resources and Revenue (ONRR), which is responsible for collecting and distributing revenues associated with federal mineral leases including federal coal leases. We used ONRR sales year revenue data, which includes current fiscal year data and adjusted or corrected transactions for sales that took place in previous years. According to ONRR officials, adjustments to sales year data are made on an ongoing basis in real time, such that the data varies daily. We used sales year data because this type of data was identified by ONRR as the best for trending purposes. To complete our analysis, we adjusted both BLM bonus bid data and ONRR revenue data to 2013 dollars using the gross domestic product price index. We conducted interviews with BLM and ONRR officials regarding these data and reviewed documentation on their data systems. We found that some of the revenue data initially provided by ONRR prior to 2003, in particular the bonus, rent, and other income data, had gaps resulting from a data system conversion the agency underwent and was not reliable for use in our analysis. ONRR ultimately provided updated bonus data for this period, but it did so late in our review process, and we were unable to determine its reliability. We determined that all other ONRR data including royalty and production data from 1990 to 2012, as well as BLM federal coal leasing data, were sufficiently reliable for describing trends in the federal coal leasing program. To examine how BLM implements the process to develop an estimate of fair market value, we reviewed applicable regulations and BLM’s guidance for the coal leasing program, including BLM’s H-3070-1 handbook, titled Economic Evaluation of Coal Properties. We also interviewed BLM officials in headquarters and state offices on how they implement these regulations and guidance. Specifically, we interviewed officials in the following BLM state offices because they are the only state offices involved in federal coal leasing at BLM: Colorado, Eastern States, Montana/Dakotas, New Mexico, Utah, and Wyoming. We also spoke with officials in the Casper Field Office who are directly involved in coal leasing activity in the Powder River Basin. In addition, we reviewed other appraisal standards developed by appraisal organizations in the United States and appraisal standards used in other countries. These standards included the Uniform Standards of Professional Appraisal Practice prepared by the Appraisal Standards Board in the United States; the Uniform Appraisal Standards for Federal Lands Acquisitions prepared by the Interagency Land Acquisition Conference in the United States; Standards and Guidelines for Valuation of Mineral Properties prepared by the Canadian Institute of Mining, Metallurgy and Petroleum; and the Code for Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports prepared by several groups, including the Australasian Institute of Mining and Metallurgy. We examined these standards to see what they said about certain aspects of an appraisal including required documentation and review processes. To learn about appraisal practices for mineral properties, we also spoke with appraisal officials, including officials from the Appraisal Institute, the Appraisal Foundation, the American Institute of Mineral Appraisers, and an official involved in the development of the Canadian standards for mineral valuation mentioned above. In addition, we spoke with officials from Interior’s Office of Valuation Services, which is responsible for providing real estate evaluation services to the Department of the Interior’s bureaus and offices. We selected and reviewed a nonrandom sample of case files prepared by BLM officials as part of 31 recent coal lease sales using a data collection instrument we developed. The sample included all reports for lease sales that generally took place from January 1, 2007, to July 31, 2012. This nonrandom sample cannot be generalized to all coal lease sales held but rather has a focus on recently prepared files. However, the results of this sample provide illustrative examples of the coal leasing process used and the documentation prepared. We requested the following documentation from BLM for these lease sales if they had been prepared: appraisal report, economic report, engineering report, geologic report, and tract modification report. As part of our review, we examined 147 documents that were prepared for these 31 lease sales. For those states that did not oversee two lease sales from January 1, 2007, to July 31, 2012— Alabama, Kentucky, New Mexico, North Dakota, and Oklahoma—we examined their two most recent lease sales. To ensure that our data collection instrument was filled out correctly, two GAO staff members reviewed the provided documents: one filled out the data collection instrument the first time, and the other verified this work. We conducted follow-up interviews with BLM state offices to discuss both general questions our review raised about the processes used to estimate fair market value in each of the BLM states and details related to specific cases we reviewed. We reviewed three pre-2007 files for both Oklahoma and New Mexico because these sales involved multiple lease tracts that were held on the same date. National Mining Association, International Energy Agency, and other officials from academia and industry. To determine the extent to which BLM considers reserve estimates, we interviewed a variety of BLM officials at the headquarters and state office level to determine if reserves were considered. In addition, we examined available reserve information from the United States Geological Survey (USGS) and spoke with USGS officials involved in making these estimates. We also obtained perspectives from stakeholders from academia, industry, and environmental organizations. To examine the extent to which BLM provides information to the public on coal lease sales, we analyzed BLM’s policies for making information publicly available, including BLM’s H-3070-1 handbook. We also reviewed BLM websites related to federal coal leasing, and we reviewed a sample of environmental documents that are made publicly available during the coal leasing process. We obtained data from BLM on Freedom of Information Act (FOIA) requests made for fair market value information prepared for federal coal lease sales. We also reviewed copies of request letters and BLM’s response to these requests, including redacted versions of fair market value documents made available in response to the only FOIA request where BLM supplied these documents. We interviewed BLM staff, industry representatives, as well as conservation and environmental groups to get their perspectives on the information made publicly available on federal coal leases. Finally, we conducted site visits to Colorado and Wyoming. During these visits, we met with officials in BLM state offices in Colorado and Wyoming, and we also met with officials in the Casper Field Office in Wyoming. In addition, we met with a coal mining company and toured a large surface mine in Wyoming and met with a professor of economics at the University of Wyoming’s School of Energy Resources. We selected these states because they have different types of mining that take place—generally surface mining in Wyoming and underground mining in Colorado. In addition, we selected Wyoming because of the large amount of federal coal leasing activity in the state. We conducted this performance audit from June 2012 to December 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix presents data on all federal coal lease sales by state that were conducted from January 1, 1990, through December 31, 2012. Table 4 provides information on the lease tract characteristics (acreage, type of mine, and amount of coal) along with the lease sale results (number of bids received, bonus bid accepted, and name of successful bidder). This appendix provides information on the 31 federal coal lease sales we reviewed that generally took place from January 1, 2007, to July 31, 2012. For those BLM state offices that did not conduct 2 lease sales during this time, we reviewed their 2 most recent lease sales. Reports that are relevant to the determination of fair market value include the following: geologic reports, which contain an estimate of the amount of coal that can be recovered on the lease tract along with the characteristics of the coal, including its heating content; engineering reports, which generally contain estimates of the costs to extract the coal based on the number of employees and capital equipment necessary to carry out mining activities; economic reports, which establish price and demand levels for the lease tract’s coal; and appraisal reports, which document the fair market value for the lease tract, along with an explanation of the methods used to develop this number. BLM’s guidance does not direct that all of these reports to be prepared as part of a lease sale. For example, it is unlikely that an economic report would be prepared if the income approach was not used to determine fair market value. However, BLM guidance requires that appraisal reports be signed by three officials. For the files we reviewed, table 5 provides information by lease tract on the amount of coal involved in the sale, types of reports prepared as part of the sale, fair market value approaches used, and compliance with appraisal report review requirements. In addition to the individual named above, Elizabeth Erdmann (Assistant Director), Antoinette Capaccio, Scott Heacock, Rich Johnson, Mehrzad Nadji, Alison O’Neill, Dan Royer, Rebecca Shea, Jeanette M. Soares, Jeff Tessin, and Swati Sheladia Thomas made key contributions to this report.
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In fiscal year 2012, about 42 percent of the 1.05 billion tons of coal produced in the United States came from coal tracts leased under the federal coal leasing program. Interior's BLM is responsible for managing this program, including estimating the fair market value of the coal to be leased. GAO was asked to examine this program. (Representative Markey originally made this request as Ranking Member of the House Committee on Natural Resources. He is now a member of the United States Senate.) This report examines (1) the number of tracts leased, along with the trends in associated coal production and revenues generated since 1990; (2) BLM's implementation of the process to estimate fair market value for coal leases; (3) the extent to which BLM considers coal exports and domestic coal reserve estimates when estimating fair market value; and (4) the extent to which BLM communicates information on federal coal lease sales to the public. GAO analyzed data on coal leasing activity, examined regulations and case files for coal lease sales, and interviewed BLM and other officials. Since January 1990, the Bureau of Land Management (BLM) has leased 107 coal tracts, and associated coal production and revenues have grown. Most lease sales have had a single bidder and were leased the first time offered. The amount of coal produced from federal leases and associated revenues have increased since 1990, although production has leveled off since 2002. Revenues from federal coal leases have generated about $1 billion annually in recent years. Royalties paid when coal is sold and bonus bids paid for the right to mine a federal coal tract account for nearly all of these revenues. BLM's guidance offers flexibility in how to estimate fair market value, and BLM state offices vary in the approaches they used to develop an estimate of fair market value. In estimating fair market value, some BLM state offices used both the comparable sales approach--where bonus bids received for past sales are used to value the tract being appraised--and the income approach--which uses estimates of the future net revenue streams from the sale of coal from the appraised tract. However, some offices relied solely on the comparable sales approach and may not be fully considering future market conditions as a result. In addition, GAO found that BLM did not consistently document the rationale for accepting bids that were initially below the fair market value presale estimate. Furthermore, some state offices were not following guidance for review of appraisal reports, and no independent review of these reports was taking place. Adequate review of the fair market value process is critical to ensure that its results are sound and key decisions are fully documented. In addition, BLM is not currently taking advantage of a potential independent third-party reviewer with appraisal expertise within the Department of the Interior (Interior), specifically, the Office of Valuation Services. BLM considers exports to a limited extent when estimating fair market value and generally does not explicitly consider estimates of the amount of coal that can be mined economically, known as domestic reserve estimates. As a result, BLM may not be factoring specific export information into appraisals or may not be fully considering the export potential of a lease tract's coal as called for in agency guidance. The Wyoming and Montana BLM state offices considered exports, but they generally included only generic statements about exports in the reports they prepared. In the other seven states with leasing activity, exports were generally not considered during the appraisal process. According to BLM officials, domestic reserve estimates, which vary based on market conditions and the costs to extract the coal, are not considered due to their variable nature. BLM generally provides limited information on federal coal lease sales to the public because of the sensitive and proprietary nature of some of this information. The Wyoming BLM state office posts information on its website, including information on past lease sales, but most state office websites provide only general information. BLM's guidance states that redacted public versions of its appraisal reports should be prepared, but no BLM state office has prepared such reports. BLM supplied redacted versions of fair market value documents in response to a recent public information request only after being advised to do so by Interior's Solicitor's office. GAO recommends, among other things, that BLM require state offices to use more than one approach to estimate fair market value where practicable, develop a mechanism to ensure that reviews of appraisal reports take place, and take steps to release additional summary information on its websites, including past lease sales. Interior concurred with these recommendations.
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DOD’s supply chain is a global network that provides materiel, services, and equipment to the joint force. Ineffective and inefficient inventory- management practices and procedures, and weaknesses in accurately forecasting the demand for spare parts, contributed to our designating DOD’s inventory management as a high-risk area in 1990. We initially focused this high-risk area on inventory management including requirements (or demand) forecasting. We subsequently determined, on the basis of work we conducted related to U.S. operations in Iraq and later Afghanistan, that weaknesses extended to other aspects of the supply chain supporting the warfighter, including asset visibility and materiel distribution. Additionally, based in part on our input and input from the Office of Management and Budget in 2005, DOD identified requirements forecasting, asset visibility, and materiel distribution as its focus areas for improving supply chain management. Since that time, DOD has made moderate progress in addressing weaknesses in its supply chain management. For example, in our February 2013 High Risk report we found that DOD had begun developing a strategy to coordinate efforts to improve asset tracking and in-transit visibility. Although DOD has made progress in these efforts, we also found that more work remains to fully address the issues identified for this high-risk area. In February 2013, we reviewed DOD’s draft strategy for in-transit visibility and found that it included some, but not all, of the elements of a comprehensive strategic plan. We found that the draft strategy fully included one of the seven elements of a comprehensive strategic plan, partially included four elements, and did not include two elements. Specifically, the draft strategy fully included goals and objectives that addressed the results desired from implementation of the strategy. The draft strategy partially included (1) a mission statement that summarizes the purpose of the strategy; (2) a problem definition, scope, and methodology that summarizes the issues to be addressed and the scope of the strategy; (3) activities, milestones, and performance measures identifying steps required to achieve results, and timelines and metrics to gauge results; and (4) organizational roles, responsibilities, and coordination for overseeing and managing implementation of the strategy. Lastly, we found that the draft strategy did not include (1) information on resources and investments—including skills and technology and the human capital, information, and other resources required to achieve the goals and objectives—or (2) information on the key external factors that could affect achievement of the goals and objectives. We recommended that DOD finalize its strategy and ensure that the strategy contained all the key elements of a comprehensive strategic plan, including the elements that were not included in the draft strategyresources and investments and key external factors. DOD concurred with our recommendation and, as discussed later in our report, developed its January 2014 Strategy in response to that recommendation. In 1990, we began a program to report on government operations that we identified as “high risk.” Since then, generally coinciding with the start of each new Congress, we have reported on the status of progress to address high-risk areas and have also updated the high-risk list. Our high-risk program has served to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. Our experience with the high-risk series over the past 23 years has shown that the key elements needed to make progress in high-risk areas are congressional action, high-level administrative initiatives, and agencies’ efforts grounded in the five criteria we established for removal of an area from the high-risk list. These criteria call for agencies to demonstrate the following: 1. Leadership Commitment—a strong commitment and top leadership 2. Capacity—the capacity (i.e., the people and other resources) to resolve the risk(s); 3. Corrective Action Plan—a plan that defines the root causes and solutions and provides for substantially completing corrective measures, including steps necessary to implement the solutions we recommended; 4. Monitoring—a program instituted to monitor and independently validate the effectiveness and sustainability of corrective measures; and 5. Demonstrated Progress—the ability to demonstrate progress in having implemented corrective measures and resolving the High-Risk area. In January 2014, DOD issued its Strategy and implementation plans for improving asset visibility, which included five of the seven key elements of a comprehensive strategic plan and partially included the other two elements—resources and investments and key external factors. According to the Strategy, it creates a framework within which the components can work collaboratively to identify improvement opportunities and capability gaps and to leverage technologies that will improve asset visibility. The Strategy includes 22 SEPs developed by the components that outline initiatives intended to improve asset visibility. The SEPs describe the components’ approaches for addressing specific processes, data and technical improvements, and logistics-related opportunities that are intended to improve the visibility of asset data. In February 2013, we recommended that DOD finalize its draft strategy for in-transit visibility and that the strategy contain seven key elements of a comprehensive strategic plan, including resources and investments and key external factors. DOD addressed our recommendation by including, or requiring the components to include, in the Strategy or SEPs, all seven of the elements of a comprehensive strategic plan. We reviewed the Strategy and SEPs and assessed whether they included, partially included, or did not include the elements of a comprehensive strategic plan. Table 1 describes these elements and shows whether they were included in the Strategy and SEPs. We determined that the Strategy fully includes a discussion of the first five elements and partially includes the last two elements. Specifically, we determined that the Strategy fully includes a comprehensive mission statement; a problem definition, scope, and methodology; goals and objectives; activities, milestones, and performance measures; and organizational roles, responsibilities, and coordination. For example, we determined that the Strategy fully includes a comprehensive mission statement because it included a comprehensive statement that summarizes the main purpose of the Strategy. More precisely, as stated in the Strategy, it was developed to guide and integrate department-wide efforts to improve asset visibility, reduce supply chain risk, and improve logistics decision making. Additionally, we determined that the Strategy fully includes a problem definition, scope, and methodology because it presents the issues to be addressed by the strategy, the scope the strategy covers, and the process by which it was developed. Further, we determined that the Strategy fully includes goals and objectives because it lists each of the department’s goals for improving asset visibility and also lists the objectives that support achievement of those goals. Specifically, the Strategy includes goals such as enhance visibility of assets in-transit, in-storage, in-process, and in-theater, and increase inventory existence and completeness in support of audit readiness. In support of achieving these goals, the Strategy also establishes objectives intended to be a foundation for identifying opportunities for improvement across the supply chain, such as increase efficiencies to include delivery accuracy or cycle times, and to provide better customer service by changing or adjusting supply chain or asset movement processes. We also determined that the Strategy fully includes activities, milestones, and performance measures because the SEPs, which were issued along with the Strategy, detail the initiatives (activities) intended to improve asset visibility and include both milestones and performance measures for monitoring their implementation. Lastly, we determined that the Strategy fully includes organizational roles, responsibilities, and coordination due to the inclusion of a responsibilities and oversight discussion in the Strategy that details the key players and their roles in implementing the Strategy. However, not all of these elements were completely addressed in the SEPs, as required by the Strategy, at the time the Strategy was issued. In the Strategy, components were called to address resources and investments and key external factors in their SEPs, which were published as part of the Strategy. However, 4 of the 22 SEPs either did not include resources and investments and key external factors or indicated that the information is “to be determined.” Specifically, 4 of the SEPs did not include information on key external factors, 1 of those 4 SEPs showed “to be determined” for resources and investments and key external factors, while another of those SEPs did not include resources and investments at all. For example, the SEP for the Navy’s Afloat/Ashore Implementation of Navy Ordnance Information System (OIS) Automated Information Technology (AIT) Capability shows “to be determined” for resources and investments, and the SEP for the DOD Item Unique Identification (IUID) Implementation Plan does not address resources and investments at all. The SEPs for DOD IUID Implementation Plans, the Army’s Mortuary Affairs Reporting and Tracking System, and the Joint Staff Development of In-transit Visibility Capabilities within the Global Combat Support System–Joint do not address key external factors that could affect achievement of the goals and objectives. We discussed with officials from the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration why elements such as costs and key external factors were either not addressed or noted as “to be determined” in the SEPs. According to these officials, the Strategy was issued before some of the SEPs had been finalized. The SEPs in which information on resources and investments and key external factors was not available were incorporated into the Strategy without that information. These officials further noted it was DOD’s intent to capture and publish costs and external factors during regular updates to the Strategy. Since the Strategy was published, we have observed that components have been working on updates to help ensure that the SEPs are current and complete. Specifically, we reviewed updates to the 4 SEPs that were missing informationsuch as costs (although they do not distinguish the resources and investments that are included in those costs, as discussed later in our report) and key external factorswhen the Strategy was issued and determined that the missing information had been added in a subsequent update to one of the SEPs. For example, as previously stated, the SEP for the Navy Afloat/Ashore implementation of the Navy OIS AIT showed costs “to be determined.” The update to this SEP shows that the estimated cost to implement the OIS is $6.7 million (over fiscal years 2011 through 2014) and that, starting in fiscal year 2015, an additional $1.1 million will be required annually to sustain equipment and software capabilities. Officials from the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration stated that the components will continue to make quarterly updates to the SEPs. DOD has taken steps to improve its asset visibility, and we found that the department has fully met one of the five criteria for removal from the High- Risk List—leadership commitment—and partially met the other four, as shown in table 2. A discussion of the criteria as well as our assessment of DOD’s progress in meeting each of the criteria is discussed below. Our high-risk criterion for leadership commitment calls for leadership oversight and involvement. DOD has taken positive steps to address asset visibility challenges, and we found, as we did in our February 2013 high-risk assessment, that DOD has fully met our high-risk criterion for leadership commitment. Senior leaders at the department have continued to demonstrate commitment to addressing the department’s asset visibility challenges. For example, this commitment is evidenced by DOD’s issuance of its January 2014 Strategy and senior leadership involvement in asset visibility improvement efforts through groups such as the Supply Chain Executive Steering Committee. The Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration provides department-wide oversight for development, coordination, approval, and implementation of the Strategy, and reviews the implementation of the initiatives. DOD has also established a governance structure for overseeing and coordinating efforts to improve asset visibility, which includes the following groups: Supply Chain Executive Steering Committee: includes senior-level officials responsible for overseeing asset visibility improvement efforts; Asset Visibility Working Group: includes representatives from the components and other government agencies, as needed; identifies opportunities for improvement; and monitors the implementation of SEPs; and Item Unique Identification Working Group: includes representatives from the components and other government agencies, as needed, and identifies and monitors the implementation of item unique identification initiatives, such as those related to asset marking and automated identification system updates. Our high-risk criterion for capacity calls for agencies to demonstrate that they have the people and other resources needed to resolve risks. In February 2013, we found that DOD had limited awareness of in-transit visibility efforts being taken across the department because it lacked a formal, central mechanism to monitor the status of improvements or fully track the resources allocated to them. Key elements of a comprehensive strategic plan include a discussion of resources and investments including the costs to execute the plan and the sources and types of resources and investments—including skills and technology and the human capital, information, and other resources required to meet the goals and objectives. Further, these elements should be complete, accurate, and consistent. Further, according to GAO’s Cost Estimating and Assessment Guide, a reliable cost estimate is critical to the success of any program. Such an estimate provides the basis for informed investment decision making, realistic budget formulation and program resourcing, meaningful progress measurement, proactive course correction when warranted, and accountability for results. DOD has begun to identify the resources and investments that would be required to achieve the goals and objectives outlined in its January 2014 Strategy. For example, as previously discussed, DOD components have included resource and investment information in 18 of the 22 SEPs, and components are starting to include missing information in the remaining SEPs. The Strategy calls for the components to include estimates of costs to implement the initiatives in the SEPs. However, the Strategy does not specify that the specific elements included in those cost estimates, such as human capital, information, and other resources required to meet the goals and objectives, be included. That is, the components provide cost estimates in the SEPs, but generally at an aggregate level without details of the elements included. In our review of the SEPs, we asked component officials which elements—such as human capital, information, and contracts—were used when computing the cost estimates. The elements considered varied from estimate to estimate because the components employ different cost estimating models. Officials agreed that a greater transparency to the elements included in these cost estimates would be helpful. Without including information on the specific elements included in cost estimates, DOD lacks reasonable assurance that the department will have the level of detailed cost information it needs to make well-informed decisions about asset visibility, including setting budget priorities. Our high-risk criterion for a corrective action plan calls for agencies to define the root causes and solutions and provide for substantially completing corrective measures, including steps necessary to implement the solutions. As we concluded in February 2013, DOD’s draft strategy for in-transit visibility was incomplete because the components had not yet submitted their SEPs, which provide key information about the components’ in-transit visibility efforts and describe any gaps or challenges within the supply chain, as well as the components’ corrective actions to address them. DOD has since taken steps to implement our February 2013 recommendation, and it issued its Strategy in January 2014. DOD’s 2014 Strategy represents its corrective action plan and provides goals and objectives as well as SEPs detailing specific initiatives for improving asset visibility. Aligning agency-wide goals and objectives with strategies to achieve those goals and objectives is a key practice that could improve the effectiveness of DOD’s efforts to improve asset visibility. Further, leading practices to promote successful data-driven performance reviews include ensuring alignment between agency goals, program activities, and resources. Realization of the goals and objectives outlined in the Strategy relies heavily on efforts by the Joint Staff, DLA, TRANSCOM, and the services to continue to identify initiatives and to collaborate and capitalize on those initiatives that offer benefits across the department. The SEPs included in the Strategy include asset visibility improvement efforts recently completed or expected to be completed in the near future. Additionally, as indicated in the Strategy, the components are expected to continue to identify opportunities for improving asset visibility. These will be included in future versions of the Strategy, which will be updated annually. As of October 2014, 6 of the 22 SEPs that were included in the Strategy have been fully implemented. For example, a TRANSCOM initiative intended to create an integrated data environment for asset visibility information included in transportation and supply data systems has been fully implemented and is now being used to enhance asset visibility. The implementation of 3 SEPs were halted either because funding was unavailable or the initiatives were not succeeding in reaching their intended purpose, and the remaining 13 SEPs were in the process of being implemented. As previously described, the Strategy includes goals and objectives for improving asset visibility, as well as SEPs detailing specific initiatives. The 22 SEPs identified in the Strategy are categorized by the major categories of effort, or objectives, they address. However, the Strategy does not specifically link the initiatives to the goals and objectives. For example: TRANSCOM identified in the Strategy an initiative that is intended to create a more competitive environment for procuring Active Radio Frequency Identification (RFID) technology. However, the Strategy does not specify which of the goals and objectives this initiative supports. According to TRANSCOM officials, this technology supports many of the goals and objectives in the Strategy. Specifically, they expect that the Active RFID Migration SEP will increase vendor competition, lower product cost, and ensure an unlimited supply of unique identification tags. Although the department is using these outcomes to assess implementation of this initiative, the Strategy does not clearly link how this initiative is related to or contributes towards achieving the Strategy’s goals and objectives. Additionally, the Strategy states that the Army’s enhanced parachute tracking system initiative is intended to provide a web-based automated system to manage parachutes—from delivery to disposal—using standard, DOD-approved interoperable technologies, and will enable these assets to be incorporated into the central Army logistics and DOD visibility systems when in distribution or storage. Specifically, this initiative is expected to increase supply chain performance and improve logistics decision making. However, the Strategy does not provide information about how these initiatives and expected outcomes for the enhanced parachute tracking system will contribute to the achievement of the Strategy’s goals and objectives. We discussed with officials why this linkage was not clearly established in the Strategy, and they indicated that the components that developed the initiatives understood that linkage. However, they agreed the linkage was not explicitly stated in the Strategy and agreed such linkage would be useful to create a shared understanding of which of the goals and objectives each of the initiatives were supporting. Without creating a clear link between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy, DOD may be unable to assess progress toward realizing its goals and objectives. Our monitoring high-risk criterion calls for agencies to institute a program to monitor and independently validate the effectiveness and sustainability of corrective measures, such as through performance measures and data collection and analysis. We found in February 2013 that, while DOD’s draft in-transit visibility strategy included overarching goals and objectives that address the overall results desired from implementation of the strategy, it only partially addressed, among other factors, performance measures that are necessary to enable monitoring progress. We also found that DOD lacked a formal, central mechanism to monitor the status of improvements of its asset visibility efforts or fully track the resources allocated to them. Similarly, in May 2012, we found that DOD had taken steps to improve its approach to implementing a key asset visibility enabling technology—item unique identification—but had not employed best management practices, such as performance measures and milestones, necessary to manage and determine benefits associated with implementation of this technology. As we concluded in May 2012, in the absence of quantifiable metrics to measure progress, it is difficult for officials to assess whether goals were achieved. We recommended that DOD complete its implementation and management framework for item unique identification by incorporating key elements such as goals and metrics for measuring progress. DOD concurred with our recommendation. DOD’s Strategy calls for organizations to identify at least one outcome or key performance indicator for assessing the implementation of each SEP. These performance indicators or outcomes are unique to the initiatives, and any relation they may have to the Strategy’s goals and objectives is not apparent. According to officials from the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration, these key performance indicators are used by the components and oversight bodies such as the Asset Visibility Working Group to, among other things, periodically assess whether the initiatives are meeting implementation goals and achieving performance expectations. For example, one of the expected outcomes for the TRANSCOM Active Radio Frequency Identification (RFID) SEP is to realize a continual reduction in the cost of Active RFID technology products. Specifically, the cost of RFID tags prior to February 2009 was $75 each. Since the latest contract to procure RFID tags was awarded in April 2014, the cost of RFID tags has decreased to $37 each. As a result, according to DOD officials, the department has realized an estimated cost reduction of $5 million to $7 million annually. DOD has established a structure for overseeing and coordinating efforts to improve asset visibility. This structure includes the Asset Visibility Working Group, which is responsible for monitoring the implementation of the initiatives identified by the components. The Asset Visibility Working Group is to meet on a monthly basis to discuss the status of each SEP. The components are to report quarterly to the Asset Visibility Working Group on the status of their initiatives—including progress made on implementation milestones, return on investment, and resources and funding. Additionally, in March 2014, DOD established an online database, or electronic repository, that includes the Strategy and SEPs. According to information provided by the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration, the online database is used to track the status of the SEPs; document the final disposition of the SEP upon completion or cancellation; and include outcomes and results as well as lessons learned from the SEPs. In written comments provided on a draft of this report, DOD stated that subsequent to the issuance of its 2014 Strategy, DOD implemented a Life-cycle of a SEP process that requires the Asset Visibility Working Group to, among other things, review and concur that a SEP has met its performance objectives and document an after action report to include outcomes, lessons learned, and performance measures. DOD officials told us that the components are responsible for assessing whether their initiatives that are being implemented are meeting implementation goals and achieving performance expectations. However, the performance indicators DOD currently uses to assess progress in implementing the initiatives are specific to the individual initiatives, and any relationship these indicators may have to the overarching goals and objectives in the Strategy is not apparent. For example, one of the metrics TRANSCOM uses to monitor its Active Radio Frequency Identification (RFID) technology initiative is the cost to procure an RFID tag. While this is a useful metric as it tells TRANSCOM if the organization is reducing the item cost for RFID tags, it is unclear whether this is also a useful metric for determining how the department is progressing towards achieving any related goals and objectives for improving asset visibility. DOD officials agree that there needs to be a process for assessing progress towards meeting the overarching goals and objectives in the Strategy. Assessing, and refining, the existing performance measures as needed to help ensure their alignment with the goals in the Strategy, would better position DOD to develop the most relevant performance metrics and to analyze and monitor performance data. Until DOD implements a process to monitor performance and progress towards achieving goals in the asset visibility area, it may lack the tools necessary to effectively assess the results of the initiatives. Our high-risk criterion for demonstrated progress calls for agencies to demonstrate progress in implementing corrective measures and resolving the high-risk area. When assessing agencies’ corrective actions, consistent with GAO’s criteria for determining high risk, we assessed the effectiveness of DOD’s corrective actions to address existing materiel weaknesses. In this regard, we considered factors such as whether the proposed remaining corrective action plans are appropriate and whether effective solutions will be substantially completed in the near term, which is generally considered to be within the 2-year period covered by the term of the Congress to which a high-risk update report is addressed. In December 2004, we found that DOD’s efforts to achieve total asset visibility, which hinged largely on individual initiatives, were unlikely to succeed without a long-term strategy that established outcome-oriented goals, timelines, and performance measures. Therefore, we recommended that the department develop a strategy for total asset visibility that included, among other things, goals and performance measures to gauge improvement. DOD’s January 2014 Strategy represents a positive step, and the preliminary efforts to develop and implement initiatives to improve asset visibility look promising. Further, as indicated in the Strategy, it will be updated annually and include new SEPs outlining initiatives that have been developed by the components. The Asset Visibility Working Group encourages components to continue to develop new initiatives. Several initiatives are being developed and may be included in the next annual update to the Strategy. For example, the Air Force is developing a new initiative that will track the location and status of aircraft, vehicles, ground support equipment, and aircraft parts in real time. Also, the Marine Corps is developing an initiative to leverage passive RFID and Global Positioning System advances to provide, among other things, improved equipment accountability and enterprise data sharing. While the components are implementing initiatives intended to improve asset visibility and are working to identify new ones, it is too early to tell whether the implementation of these initiatives will result in measurable outcomes and progress toward meeting the goals and objectives in the Strategy. Further, DOD has a process for continuing to identify new initiatives. However, it is too early to tell whether these combined efforts will result in measurable outcomes and progress in realizing DOD’s goals and objectives for improving asset visibility. Further, the combined efforts may not be substantially completed in the near term or within the 2-year period to demonstrate sustained progress in resolving the high-risk area. Until DOD demonstrates that implementation of these initiatives will result in measurable outcomes and progress towards achieving the goals and objectives in the Strategy, it may be limited in its ability to demonstrate sustained progress in implementing corrective actions and resolving the high-risk area. Moving forward, the removal of DOD’s asset visibility from our High-Risk List will require that DOD meet all five of our high-risk criteria and achieve related actions and outcomes. DOD’s leadership commitment with the Strategy and implementation plans for improving asset visibility represent positive steps toward meeting our high-risk criteria. However, without transparency on what resources and investments are required to implement its asset visibility improvement initiatives, DOD cannot be sure that the department will have the information it needs to make well- informed decisions about asset visibility, including setting budget priorities. Additionally, establishing clear linkage between these improvement initiatives and the goals and objectives in the Strategy as well as a process to monitor performance and assess progress towards achieving the goals and objectives in its Strategy will be an important step to determining what, if any, effect these initiatives are having on achievement of those goals and objectives. Until DOD demonstrates that implementation of the initiatives will result in measurable outcomes and progress towards achieving the goals and objectives in the Strategy, it may be limited in its ability to demonstrate sustained progress in implementing corrective actions and resolving the high-risk area. We are making four recommendations to help improve DOD’s asset visibility. To demonstrate the capacity to implement the initiatives intended to improve asset visibility, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics, in collaboration with the components, to include information in subsequent updates to the Strategy and accompanying SEPs about which elements—such as human capital, information technology, and contracts—were used in developing cost estimates for resources and investments. To implement a corrective action plan that defines the root causes, identifies effective solutions, and provides for substantially completing corrective actions, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics to clearly specify the linkage between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy. To develop and implement a process to monitor performance and independently validate the effectiveness and sustainability of corrective actions, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics to assess, and refine as appropriate, existing performance measures to ensure the measures assess the implementation of individual initiatives as well as progress towards achievement of the overarching goals and objectives in the Strategy. To demonstrate sustained progress in having implemented corrective measures, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics, in collaboration with the military services, to continue the implementation of identified initiatives, refining them over time as appropriate, and demonstrate that implementation of initiatives results in measurable outcomes and progress toward achieving improvements in asset visibility. We provided a draft of this report to DOD for review and comment. In its written comments, reproduced in appendix II, DOD concurred with all four of the recommendations. DOD also provided technical comments on the draft report, which we incorporated as appropriate. DOD concurred with our first recommendation to include information in subsequent updates to its Strategy and accompanying SEPs about which elements—such as human capital, information technology, and contracts—were used in developing cost estimates for resources and investments. DOD stated that the update to its Strategy to Improve DOD Asset Visibility, which is under development and expected to be issued in the third quarter of fiscal year 2015, will include a requirement to delineate costs associated with implementing SEPs and specific elements considered in developing the cost estimates will be included. DOD also stated in its letter that SEPs contained in the current 2014 edition of the Strategy will be updated in accordance with the new cost requirement. In response to the second recommendation, DOD agreed to clearly specify the linkage between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy. Specifically, DOD stated that a matrix diagramming the relationship between the goals, objectives, and SEPs will be included in its 2015 update to the Strategy and will be used for monitoring progress in implementing the SEPs and improving asset visibility. DOD concurred with our third recommendation to assess, and refine as appropriate, existing performance measures to ensure the measures assess the implementation of individual initiatives as well as progress towards achievement of the overarching goals and objectives in the Strategy. DOD stated that subsequent to the publishing of the 2014 Strategy, the Department implemented the "Life-cycle of a SEP" process. This process requires the Asset Visibility Working Group to, among other things, review and concur that a SEP has met its performance objectives and document an "after action report" for each SEP to include outcomes, lessons learned, and performance measures. DOD stated in its letter that the 2015 Strategy will expand on this and include a process as well as metrics which will allow the Department to assess and demonstrate how these individual efforts are supporting progress toward achievement of its asset visibility goals and objectives. In response to our fourth recommendation, DOD agreed to continue the implementation of its identified initiatives, refining them over time as appropriate, and demonstrate that implementation of these initiatives results in measurable outcomes and progress towards achieving improvements in asset visibility. DOD stated that its 2015 Strategy will document the "Life-cycle of a SEP" process that not only enables monitoring continued implementation of individual efforts but also includes a mechanism and measures to ensure each SEP supports the achievement of the overarching goals and objectives in the Strategy. We are sending copies of this report to the appropriate congressional committees and the Secretary of Defense. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5257 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 determine the extent to which the Department of Defense (DOD) has a comprehensive strategy and implementation plans for improving asset visibility, including in-transit visibility, we reviewed DOD’s Strategy for Improving DOD Asset Visibility (the Strategy) and its implementation plans. Specifically, we reviewed the Strategy and plans and assessed whether they included, partially included, or did not include the elements of a comprehensive strategic plan, as outlined in our prior work. We determined that the Strategy and plans “fully included” an element when the plan described the entire element, and “partially included” an element when the plan described some, but not all, parts of that element. When a plan did not explicitly cite any of the parts of an element, we determined that the element was “not included” in the Strategy. We then discussed our assessment with officials from the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration to confirm our understanding of the documents and gain more insight, including whether any elements were addressed in other departmental documents and whether there were any plans or actions under way to update the Strategy or address any of the missing elements. Additionally, we discussed with officials from the Joint Staff, Defense Logistics Agency (DLA), U.S. Transportation Command (TRANSCOM), and each of the military services their roles in the development of DOD’s Strategy and our preliminary analysis of the Strategy. To evaluate any improvements made to asset visibility that would meet criteria for removal from the High-Risk List (referred to as high-risk criteria), we reviewed DOD’s Strategy and the supporting execution plans (SEP), and we discussed with the components the initiatives they had implemented or were in the process of implementing to improve asset visibility. We also reviewed updates to those initiatives that the components provided to the Asset Visibility Working Group. We assessed these actions against GAO’s criteria for assessing agencies’ actions and determining whether performance and accountability challenges merit our high-risk designation. Further, we evaluated DOD’s actions to improve asset visibility against each of our five high-risk criteria for removal from the high-risk list (referred to as the “high-risk criteria”). We also shared with officials our preliminary assessment of asset visibility relative to each of the criteria and discussed actions that DOD had taken, is taking, or plans to take to fully address the criteria in each of those areas. To help ensure that our evaluation of improvements made relative to the high-risk criteria were consistent with our prior evaluations of Supply Chain Management and other issue areas, we reviewed our prior high-risk reports to gain insight on what actions agencies had taken to address the issues identified on GAO’s past high-risk lists. We also shared with officials our preliminary assessment of asset visibility relative to each of the high-risk criteria and discussed actions DOD is taking to address any shortcomings in each of those areas. We conducted this performance audit from August 2014 to January 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, Carleen C. Bennett, Assistant Director; Richard Burkard; Elizabeth Curda; Nicole Harris; Joanne Landesman; Amie Lesser; Carol Petersen; Greg Pugnetti; Mike Silver; Sabrina Streagle; Susan Tindall; and Jose Watkins made key contributions to this report. Defense Logistics: A Completed Comprehensive Strategy is Needed to Guide DOD’s In-Transit Visibility Efforts. GAO-13-201. Washington, D.C.: February 28, 2013. High-Risk Series: An Update: GAO-13-283. Washington, D.C.: February 14, 2013. Defense Logistics: Improvements Needed to Enhance DOD’s Management Approach and Implementation Item Unique Identification Technology. GAO-12-482. Washington, D.C.: May 3, 2012. Defense Logistics: DOD Needs to Take Additional Actions to Address Challenges in Supply Chain Management. GAO-11-569. Washington, D.C.: July 28, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. DOD’s High-Risk Areas: Observations on DOD’s Progress and Challenges in Strategic Planning for Supply Chain Management. GAO-10-929T. Washington, D.C.: July 27, 2010. Defense Logistics: Lack of Key Information May Impede DOD’s Ability to Improve Supply Chain Management. GAO-09-150. Washington, D.C.: January 12, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. DOD’s High-Risk Areas: Progress Made Implementing Supply Chain Management Recommendations, but Full Extent of Improvement Unknown. GAO-07-234. Washington, D.C.: January 17, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. DOD’s High-Risk Areas: Challenges Remain to Achieving and Demonstrating Progress in Supply Chain Management. GAO-06-983T. Washington, D.C.: July 25, 2006. High-Risk Series: An Update. GAO-05-350T. Washington, D.C.: February 17, 2005. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001.
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GAO designated DOD's supply chain management as a high-risk area and in July 2011 found that limitations in asset visibility make it difficult to obtain timely and accurate information on assets that are present in a theater of operations. In 2013, GAO found that DOD had made moderate progress in addressing weaknesses in its supply chain management and identified several actions that DOD should take to strengthen asset visibility, including completing and implementing its strategy for coordinating efforts to improve asset visibility across the department. This report examined the extent to which DOD has (1) a comprehensive strategy and implementation plans for improving asset visibility; and (2) made improvements in asset visibility that meet GAO's criteria for removal from the High-Risk List. GAO reviewed DOD's 2014 Strategy and initiatives for improving asset visibility and evaluated DOD's actions to improve asset visibility against GAO's criteria for determining and removing high risk designations. In January 2014, the Department of Defense (DOD) issued its Strategy for Improving DOD Asset Visibility ( Strategy ) and supporting execution plans (SEP), which included five of the seven key elements of a comprehensive strategic plan and partially included the other two elements. For example, the Strategy fully includes a comprehensive mission statement; a problem definition, scope, and methodology; goals and objectives; activities, milestones, and performance measures; and organizational roles, responsibilities, and coordination. However, 4 of the 22 SEPs, which outline initiatives intended to improve asset visibility, did not address resources and investments and key external factors. DOD officials told GAO that this information would be added during regular updates to the Strategy . Since the Strategy was issued, DOD components have begun updating the SEPs to include informationsuch as costs and key external factorsthat had been missing from the SEPs included in the Strategy . DOD has taken steps to improve its asset visibility, and GAO's assessment is that the department has fully met one of the five criteria for removal from the High-Risk List—leadership commitment—and partially met the other four, as shown below. GAO recommends four actions to improve DOD's management of asset visibility. The actions include, among other things, that DOD include information in its S trategy and SEPs on elements used to develop cost estimates; clearly link performance measures for the initiatives and the Strategy's goals and objectives; and demonstrate that the initiatives are resulting in measurable outcomes and progress toward meeting the goals and objectives in the Strategy . DOD agreed with all the recommendations.
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